Rodney Johnson | Wednesday, November 13, 2013 >>
I didn’t grow up in a house full of keen shoppers.
Like most Americans, we were payment buyers. The goal was to make sure that whatever we bought on credit – cars, appliances, etc. – resulted in monthly payments that didn’t exceed the monthly paychecks.
Of course, we racked up debt, but hey, the monthlies were affordable.
From time to time this led to purchases that seemed attractive at first, but in hindsight were obvious mistakes.
It took me over ten years of financial education, both personally and professionally, to move beyond this way of thinking and truly gain control of my financial situation. Maybe I’m a slow learner, but eventually I get there.
Once I was in the driver’s seat, things changed rapidly…
I viewed every purchase from a different stand point: utility, possible years of service, alternatives, ways of achieving lower overall cost, etc. This made shopping for big ticket items more of a hassle because we had to do so much legwork ahead of time, but in the end it has paid off in spades, particularly when it comes to big items, like cars.
Years ago we needed a new car, so I went into research mode.
After identifying the makes and models that fit our goals, we went for test drives and eventually settled on one that fit our needs.
Then began the purchase process. Over the next month I located fourteen dealerships that sold the vehicle we wanted and got the contact information for the sales managers.
Then I paid a data service $49 to send me the actual sales information for my zip code as well as surrounding areas for our chosen vehicle.
Armed with this information, I waited until the end of the month and then sent a note to every sales manager outlining the price I would pay for the exact vehicle I wanted. The first one to respond would get my business.
It took less than an hour.
After getting to the dealership, the transaction took less than 45 minutes.
The salesman explained that they view people as “units” or “profit.” Both are goals of dealerships, so if a dealership hasn’t pushed out enough units in a month they are more inclined to sell to people like me.
So if I do my homework, come to the table armed with knowledge, and wait until the seller has a need for a buyer like me, then things work out. Otherwise I run the risk of getting fleeced.
This lesson has been applicable to many things, including investments like bonds.
Often people get persuaded by what appears on the surface. They don’t delve too far into the mechanics of how the investments work.
This is what got the world into trouble with mortgage backed securities (MBS) during the housing boom. Now this same persuasion seems to be happening again… with a different type of bond.
Blackstone is now selling bonds backed by the rental payments made for single-family homes.
Over the past several years large investment firms have been snapping up single family homes to turn them into rentals. Blackstone on its own has purchased more than 30,000 homes across the country.
These firms stepped into a broken real-estate market and used their cash to get good deals. The goal was to buy the homes cheap and create streams of income through the rental payments, as well as cash in on the eventual appreciation in the value of the homes.
Now the whole buy-to-rent trade has grown long in the tooth.
Home values have moved higher in the last two years, but incomes have not. This means that affordability – for both buyers and renters – hasn’t improved. In fact, it’s gone backwards.
At the same time, our economy is facing long-term headwinds that should keep people on the move when it comes to employment.
None of this bodes well for long-term rentals.
And this doesn’t’ even contemplate the operational issues that such a setup would face. Who manages the properties? What happens when properties are damaged or just sit empty? Are the bonds backed by the value of the homes, and if so, what happens if home values and rents fall together?
The entire enterprise sounds like a mismatch. Investors hand over their money for the long term (the time horizon of the bond), but the only visibility they have on returns is short term.
Blackstone is selling $479 million worth of these bonds. I’m sure that when they hit the market they will be a hot item.
Chances are they’ll offer an interest rate that yield-hungry investors of all sizes will find irresistible.
But that doesn’t make the bonds any less risky, just more likely to persuade buyers who aren’t doing their homework.
When it comes to buying bonds backed by rental payments, it looks like investors will end up being the providers of “profit” to the selling investment firms, which is a trade that could look pretty foolish in hindsight.
P.S. I’m a research junkie. I can’t help it. I like to do my homework… to know things. Harry’s the same. That’s why we’d like you to take two minutes to complete this survey because we’d like to get to know you better. Start here.
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