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.

Thinking Like Your Buyer: Restrictions

As a real estate investor, contemplating houses to buy and remodel, or to fix-n-flip, you need to think like the house buyer you hope to sell to. It is important to do this before you buy an investment property to protect your profits from withering away while the house languishes on the market. Of course, deals come when and where deals come, and you often have to move quickly to snap up the bargain. Under this pressure, it a very good idea to take a breath and research the neighborhood before you commit.

I was actually thinking about real estate sales and roads when I found this tutorial on buying your first home in the online journal Investopedia.com.  But Amy Fontinelle’s tutorial caught my attention with her discussion on neighborhood associations and deed restrictions. The tutorial offers first-time buyers a sensible and interesting mix of things to look at when purchasing a house. As real estate investors planning to buy houses to resell, you need to think like your buyer too.

Neighborhoods Have Rules: Some are Written Down

First, she tells first-time home buyers that different neighborhoods have different characteristics and that you want to pick one that is “the closest fit to your lifestyle and personality.” One of the items she recommends first-time buyers think about is whether there are restrictive covenants in the neighborhood. I hope as I write this that you will not be able to tell whether I am a free-wheeling renegade or a neatnik appreciative of boundaries and rules. Here goes.

Neighborhood associations can be a friend or a nemesis to your buyer. They can impose maintenance requirements on the home owner or forbid certain adornments. As Ms. Fontinelle says, “You might not be able to leave trash cans out past a certain hour on trash day, paint your house blue, or let your grass grow too tall.”

Get the Whole Story

Facts and statistics about the neighborhood are available on real estate websites, but to get the whole story, you may need to talk to the current residents, walk the neighborhood, and visit local Facebook groups. Once you have found out about the neighborhood, ask yourself, who do I think is going to buy this house I am investing in. You need to use your imagination because your buyer may be very different from yourself and have different tastes. Can you picture them and sell a house to them with genuine enthusiasm?

Backyard Chickens and Pit Bulls

When you look at the property you are about to invest in do you picture a buyer who is a bit of an urban farmer who likes freedom and won’t mind a community garden next door and may want to raise backyard chickens, walk a pit bull on a leash, and grow wheat in their front yard?

Are you finding that the neighborhood is so exclusive and restrictive that you are having trouble imagining who would want to live there? As Ms. Fontinelle reminds us, many people appreciate the restrictions and like the tidier appearance that may boost property values.” Others she says, “Find them obnoxious.” Here are a few things to consider:

Are sheds and outbuildings forbidden?

Are you allowed to pasture a cow or a horse?

Are the yards meticulously manicured?

Do the neighbors have extensive gardens?

Is curb appeal a big deal or do the neighbors find the house with a big garden intimidating?

Are pets allowed?

Resales and Loan Request: Why it Matters

As the fix-n-flip investor, these restrictions matter to you in two ways: (1) will you be able to sell the house eventually, and (2) how will these restrictions impact my project’s expenses and loan request?

Let me know if you have found any deals this month that you know you can turn around and resell with enthusiasm. I hope that I can be of help to you this month.

I can be reached at
Patrick@REICapital.cash
512-213-2271
Austin, Texas

References:
Investopedia.com How to Buy Your First Home: A Step-by-Step tutorial. Amy Fontinelle

 

Beautiful Fort Worth House in the News

The home of LeAnn Behrens and David Montague in Fort Worth’s Park Hill neighborhood appears in the Wall Street Journal (wsj) three times, in film, in article, and in photos. I enjoyed all three mediums. The film was made by Rob Alcaraz. The article written by Alina Dizik, and the photos taken by Casey Woods Maddeaux.

Rebuilding After a Fire

David and LeeAnn completed their home in 2017 to replace the one that was lost in a fire when the fire in an outside grill on the deck spread to the house. This house is on the site of the old house. Out of this tragedy, the couple started from a clean slate, with the help of architect Michael Bennett, to build a home where they could display their collections and live and entertain.

A Video Tour

In the video, David leads viewers on a tour of the home from the front door with a welcoming, “Hello I’m David, welcome to our house,” as he opens the front door. The house he describes as a perfect combination for them, combines living areas, art galleries, a library, and museum in 6,000 square feet with 4 bathrooms and plenty of areas to entertain in.

David shows viewers some of the artwork displayed in the house, his collection of books, and some of the building techniques they used on the back deck, like the burned wood siding, a technique he says is from Japan. The burned wood is proper because it reminds them that the original house that stood there burned down. Also, inspired by their survival of the file are the designed-in multiple decks and multiple ways to get out of the house.

exemple_shou-sugi-ban.jpg

“It Makes Sense to Us”

The art and books are all things David and LeeAnn like and have purchased. “It makes sense to us, even if it may not to anyone else,” says David when pointing out some of the art that is paired with one another in the living room. The central gallery space includes more than 20 masks and two Day of the Dead-themed portraits by multimedia artist Dolan Geiman along with a commanding bird sculpture from Africa. Photos of the house can be found at
https://www.wsj.com/articles/a-fort-worth-home-built-around-a-couples-collections/

4,000 Books

Did I mention already that David Montague collects books? His collection of 4,000 books had to be rebuilt from scratch after the fire. The two-story library in his new home includes a fire place with a white plaster representation of the Continental Divide by a local artist and comfortable places to read. In the film tour, David explains that he is collecting some of the original works about the fur trade written by the original mountain men and how that inspired the Continental Divide plaster relief that extends from the first floor of the library to the second floor.

Some of the other interesting features of the house are glass walkways in the upper floor to foster a sense of connections throughout the home, a second-floor coffee bar outside the couple’s master bedroom that opens up to a second floor living room that overlooks the pool in the backyard.

A Red Stove & Day of the Dead Portraits

The pieces that really caught my eye were the red Bertazonni range that gives color to the modern grey-toned kitchen, the 4,000 books (did I say that already?), the two Day of the Dead portraits in the entry hall, and the African Ship sculpture in the living room that is just calling out to be touched.

Okay to Touch

The home does not have a “no touch” policy according to David like a museum would. David says that the art is “pretty much indestructible—they were built for a tribal setting.” As a tactile explorer myself, I am happy to hear that.

Take a look at this beautiful Texas home on the media you like best, or like me, watch, read, and view all three.

This rebuild was way more radical than a standard fix-n-flip, but don’t forget that you too can make a comfortable beautiful home out of a house, one that will hold and display your or your buyer’s treasures. I’m always on the look out for ways to make a fix and flip house stand out.

Let me know if I can be of help to you this month. I can be reached at

Patrick@InvestorsLendingSource.com

512-213-2271

Austin, Texas

 

References:

Dizik, Alina, 2019, A Texas Home That’s Part Library, Part Gallery, wsj

Maddeaux, Casy Woods, 2019, A Fort Worth home Built Around a Couple’s Collections, wsj photo article.

Alcaraz, Rob, 2019, A Home Built to Be a Live-In Museum and Expansive library, wsj video

Photo credit: Caroistda [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)%5D