Expert: Phil Nicols - 2/19/2009

Question
Hi Phil I was wondering if the possible investment 'm going to talk about is possible.

If I buy real estate call options, is it possible to finance the purchase of the options with a loan or a bridge loan? Or would this be too risky especially with the cost of carry and illiquid aspect of real estate? My rational is that option calls gives me immense leverage ut using a loan to such as a bridge loan would be risky if I couldn't sell the house quick enough, I could sink into debt, any advice or thoughts.

Thanks Tony

PS: I'm twenty right now and am looking to become immensely wealthy so I'm just looking at all my options (no pun intended LOL)


Answer
ok Tony, theres good news and bad news...

the good news is that there has not been a better time to buy real estate in the last 10 years. Things were going crazy but now, you can actually get a good deal -- and "next to not" financing as well!

the bad news (in this case) is that I specialize in commercial real estate - I couldent tell you about houses. Never turned my crank to sell houses. I couldent care less if its a 100k fixerupper or a 100 million dollar MaraLago. I just cant get to emotionally into houses.

Your options are of course, to buy something, rent it and wait for the values to return.

of course there is risk involved in everything. there is even risk involved with getting up in the morning. I mean you could slip in the shower, or cut yourself shaving or get the phone cord wrapped around your neck, or get your fingers stuck in the toaster and not be able to shut it off or .... ok enough of that.

Personally, if I have to borrow money for a down payment to get involved in real estate, I wouldn't.  You talking about financing the first mortgage, as well as financing the deposit which means 100% -- if not more.  If you can't find a tenant or worst you find a tenant and they don't pay you are still responsible for the loans in the meantime.

See you are talking about houses which means one tenant, which means if one tenant moves, you have 100% less income.

If you are in position to invest in a large commercial Plaza and you lose one tenant, it's not the end of the world.  It's only a percentage of income.  In your case you are talking about a single house with a single tenant -- that's different.

or the other thing you can do is invest in a REIT -- "real estate investment trust" these are generally large conglomerates that own the entire portfolios of real estate.  You can buy stocks in the company and also benefit from the increase in value without having the management headaches -- AND you still retain your liquidity because it's much easier to sell the stocks then it is to sell the property.

At 20, if you put in very little money -- and just forget about it it should grow especially now because we are near the bottom of the market [actually, I think theres another year left of decline but noone has a crystal ball right? -- at least a working one]

of course if you just want to invest, you could invest in a mutual fund which is diversed over many different sectors of the economy. I'm sure there a lot of stockbrokers around right now that would love to talk to you. You might even save one from jumping!

best, Phil