On investing

Long time since the last blog! So, here I am, writing another one in hopes of resuming and hopefully reducing the boredom. Feels good already!

For past few weeks, folks around me have been talking about investing. Actually, this is quite popular a topic among us these days. One choice of investment that caught my eye was: real estate. Real estate in SF bay area has been a good investment in past 10 or so years. However, started declining in the past 1 or so years. I have personally invested money in real estate and this is the reason I started thinking about the question: should I invest more? what would be the returns etc. 

While it is not a sure shot return option, it is definitely safer than the stock market. To be exact, the option that was kept in front of me was - lets buy a run-down property, renovate it (as cheaply as possible) and then either 1) sell it or 2) rent it. Here we call it "flip" the property. This is not a bad idea, especially if the property is in areas like Berkeley where the rental market is good given the university is around. For me personally, I don't like this as the best way to utilize my money. And here is why. 

Flipping the property requires some amount of skill and time investment. Do I have the skill? Somewhat. We (Nikita, my wife and I) bought out house and did significant improvements and love the house now. The process taught a lot and we have friends who have gone through the same process. So, I think I have the starting skill set. Do I have time? If one is engaging with a cheap contractor, this will mean more time investment (even with the basics like plumbing and electrical), let alone interior design. I don't personally want to devote that much time to that kind of work. Specifically, I don't see any selective advantage in I doing this work vs someone else. The reasoning I have heard here is that not a lot of people work with contractors and almost always they want a hassle free house. So, we, the flippers, are making premium by providing our acquired skill in dealing with contractors and knowledge on how a house is generally built. This is essentially being a project manager and the investor at the same time.

Given my background of s/w engineering, I feel my time that I would be spending arguing with contractors, can be better spent in learning skills and networking with folks that can open wider set of opportunities. Given our age profile (30s), we can take more risks with our money and invest it on ourselves and the payout can be much larger. For e.g. 100K invested in a well research IPO/your own startup can mean 2-3x in payout. Of course, research needs to be mine and I think I am qualified to do so. But if I keep my time for my contractor, I think I will be missing on it. I can may be make 20% payout in a year at best. 

Another good thing about research is the knowledge learnt can be used to increase the payout in the future years. But here, the payout remains about the same. At best, we will have 10s of houses to flip in a business where payout remains 20-30% annually. 

However, I do think flip is a good option especially when you don't want to risk all your money. E.g. 20% in flip while 80% in a well research business opportunity. Also, as my risk profile will shrink in next 10 years, I would probably try to grow money through other venues like flipping. But today, I will use the money to grow me and then eventually itself.