Diamonds are not forever but Real Estate Is … Make Wise Investing Choices!

Would you ever think to compare diamonds and real estate? At first glance, they seem like two completely different things.  However, they are both hard assets that are cost-prohibitive to acquire for the average US worker.  However, you can sell both “assets” quickly and not realize their full value in the marketplace.    Let’s first compare the similarities and then differences from an investment perspective.

Real Estate is a better long term investment than diamonds

Similarities

Hard Assets:

  • Both Diamonds and Real Estate are Hard Assets similar to other commodities
  • Negatively correlated with bonds and stocks, so when stocks crash both appreciate in value

Long Term Investments

  • Suitable for investors who are not looking for fast returns on their investment
  • Risk losing money if you try to “flip” your investment too early or didn’t acquire at the right price below market value

Additional Utility

  • Provide the investor with enjoyment and value
    • Diamonds are pretty to look at and make the person or people associated with the diamond have better social value 
    • Real Estate provides rental income and in the case of short-term rentals – owners can enjoy the property and generate revenue when not in use.

Differences

As investors, we all know that not all hard assets, such as real estate or diamonds, have the same return on investment.  In fact, ROI performance varies greatly even among real estate classes:  residential property, commercial real estate, agricultural property, etc.  Financial crises prove time and again that real estate is a highly volatile asset.   Diamonds are a closed market that is stable and less risky.  However, there are still differences among the rate of returns on diamonds such as the colored diamonds are less risky.

  • Maintenance Fees
    • Diamonds don’t have a maintenance fee … you’re ROI is based on the price you paid upfront for the diamond
    • Real Estate requires maintenance and repairs and possibly property management fees.  All these factors need to be carefully considered before acquiring property and affect your return on investment.
  • Portability
    • Several millions of dollars can fit in your fist and transport in a pocket … the irony for not being the rarest stone they have the highest size to value ratio of the natural resource category.   This is how historically (since the silk road trail) wealth was transported long distances and across borders.
    • Real estate can’t be moved. Real estate is not physically portable and the value does not transfer easily either.  However, 1031 exchanges are a great way to transfer appreciation as you sell your property.

At REI Capital Resources, we prefer real estate investing to diamonds.  In fact, diamond prices are extremely volatile – shooting up 249% from 1978 to 1980 before falling 77% by early 1986 – but the value of diamonds has also long been propped up by a number of artificial sources.   Real estate can be utilized and provide rental income.  As the number of cloud and work from home startups rise, commercial real estate is increasingly valuable to investors to provide “server farms” to meet bandwidth demands.

We are not saying diamonds aren’t valuable or important – especially as emergency currency and making your future or current spouse a little happier this valentine’s day.  We’re saying don’t buy a diamond as an investment with the idea of retained value.  If you look at diamond prices since the 1970s, there has been “Too Much Price Volatility & Demand Uncertainty To Be Considered Investable” by numerous sources.  Also, the use of diamonds as a symbol of a woman to be married is only about a 100-year-old custom.  There are numerous other stones considered rarer.  Thank you, Madison Avenue for making weddings a thing to save money for and cause the intelligent investor to consider generating a new stream of revenue.

We love this quote by Milton Friedman, “The speculator is looking for hidden weak spots in the market,” and acts as “the advance agent of the investor, seeking always to bring market prices into line with investment values.”   Diamonds don’t provide an adequate hedge against inflation, and most people would be better off with more practical financial planning, than investing for catastrophe purposes.  The diamond while a modern symbol of one’s love and commitment to another is expensive and ranks low when compared to value stability.

Diamonds vs. Gold vs. S&P 500

YearGold ROI  %Diamond ROI  %S&P500 ROI  %
2004000
200536-110
200657323
200797291
200811911-22
200917619-7
2010254507
20112763915
20122182437
20131852061
2014172873

*Data courtesy of the Rappaport Diamond Index, Kitco, the World Gold Council and Yahoo Finance. Diamond prices reflect monthly averages based on a 1-carat diamond. Gold prices are based on average annual London PM fixed prices. S&P 500 prices reflect average monthly adjusted closing prices. ROIs are cumulative.

The chart shows when the stock market suffered historic losses, diamonds at best served as a short-term hedge and very quickly fell behind the returns of alternative investments.

Therefore, I would recommend a 3 bedroom house that generates a positive return on investment that you can set aside the money after a year to buy your sweetie her diamond.  If she loves you, she’ll wait a year knowing a diamond is coming.

Bridge that Gap

Sometimes there is a gap that needs to be crossed or bridged temporarily between money going out for a new purchase and money coming in from a home sale. The bridge loan is the funding tool that applies in this multiple house situation.

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REI Capital Resources is a loan originator for select investor single-family residential projects. Our goal is to provide fast closing loans to fund your investment projects so you don’t lose a good deal.

Enjoy your day!

Patrick St.Cin
512-213-2271
Patrick@REICapital.cash

 

Cartoon used with permission

REI Bridge Loan

Although a bridge loan can be used in any business to raise operating capital or buy out partners, for our purposes, it is most often funds lent to cover an interval between two transactions, typically the buying of one single-family dwelling and the selling of another. Buyers (individuals or businesses) take out a bridge loan so they can buy another home before they sell an old one. The loan is secured by the houses.

Fast Financing
The main benefit of a bridge loan is that it is a way to get financing fast. Like a gap loan, it is useful if you have a seller that is in a hurry for some reason or if a buyer places an offer on a new house with a contingent for selling his or her old house and another buyer comes along and makes an offer on the property, requiring the first buyer to come up with the funds to purchase the property and remove the contingency or lose the opportunity to purchase the home to the new buyer.

In a sellers’ market, some sellers will not accept a contingent offer because they have so many offers, they don’t need to. In a seller’s market or in a auction situation having a bridge loan in place before you offer will make your offer more attractive.

Higher Interest Rates Over a Short Term
The main drawbacks to a bridge loan are interest rates, fees, and the risk of having to maintain a loan on two homes if your old house does not sell quickly. The expense of a bridge loan can be acceptable when you know you can pay it off quickly with a lower interest loan. Even though a bridge loan may carry no payments for a few months, interest will accrue and be due when the loan is paid on the sale of the old property. Fees on a bridge loan typically include:

  • Loan administration fee
  • Appraisal fee
  • Escrow fee
  • Title policy fee
  • Wiring fees
  • Notary fee
  • Loan origination fee

A home equity loan is cheaper than a bridge loan, but if your old house, the one with the equity, is on the market, some lenders will not lend on it. The interest rate is lowest for borrowers with excellent credit ratings and lots of equity. The borrower must be able to qualify for owning both houses. Both mortgages are rolled into one for a short time at a high interest rate.

Research Potential Time on the Market
In a seller’s market, buyers are plentiful so the home you are trying to sell might sell quickly unless it is in a totally different market. The answer here is to do plenty of research so you can estimate how long it might take your old home to sell and negotiate that term with the lender with an option for extending the bridge loan. You also want to be aware of any prepayment penalties in the case your property sells quickly.

If the housing market cools and homes are for sale on the market a long time, the number of bridge loans needed may increase to cover this gap between buying new and selling old. If there is a chance your old house will not sell quickly, and depending on your circumstances, it might be safer to wait for the house to sell before you make an offer on a new house or you could be stuck making two home loans.

white metal bridge under the blue sky

Photo by Tino Schmidt on Pexels.com

REI Capital Resources is a loan originator for select investor single-family residential projects. Our goal is to provide fast closing loans to fund your investment projects, so you don’t lose a great deal. This includes bridge loans for the acquisition of property.

Give me a call or send an e-mail for assistance funding your project.

Patrick St.Cin
512-213-2271
Patrick@REICapital.cash

 

References

The balance.com What exactly are Bridge Loans by Elizabeth Weintraub, January 2019.
https://www.thebalance.com/what-are-bridge-loans-1798410

Investopedia, Bridge Loan Definition, by Julia Kagan, April 9, 2019. https://www.investopedia.com/terms/b/bridgeloan.asp

Bridge Loan. https://www.thetruthaboutmortgage.com/bridge-loan/