Investing for ssnlers: my 3 year anniversary gift to ssnl

[snowbank]

Investing for ssnlers:

I just realized I have been on 2+2 for exactly 3 years today: Reged: 04/26/04

I never did any of the pooh-bah/carpal tunnel type posts, but figured with the new changes in ssnl trying to make it a better forum, and since I’m taking tonight off from poker, I’d try and make a good post that would benefit ssnlers. I started thinking of some good things I could talk about that would benefit the players who frequent this forum. Unique strategies, new lines, etc... Greg(mynameizgreg) just made a real good thread the other day on his thought processes through an interesting hand, and it’s still getting feedback, so figured I’d go with something a little different. Was going to do something on my thoughts about the future outlook of online poker, and several ideas I have on what will happen to certain sites, future earning potentials for players, etc..., but didn’t think it would be that great of a benefit to the posters here. Just an interesting read maybe, if that.

I talked to a couple ssnlers before I started making this post to see if there was interest, and the guys I talked to thought it would be a good topic for ssnlers, and something they could benefit from, so I decided to do it. I could make a post like this in the business/finance/investing forum, but ssnl is my forum, so I’m going to gear this post towards “small stakes” investing. I’ll talk about pretty basic things for the most part, but will hopefully open up new ways of thinking for investing for some of you. I know that some ssnlers are probably making good money, and maybe don’t have any idea on investing. I’m not an expert by any means, but have read/experienced a decent amount with investing. I’ve also networked with quite a few investors, and tried to learn from them. I wouldn’t recommend one certain type of investment to any one person, basically invest in what’s best for you, and what your goals are. There are obviously some investments where you can make a lot of money(real estate, businesses, etc...), but may have to put some work in to make it a successful investment(active investing), and some that you won’t make a lot of money(savings accounts, bonds), but you also won’t have to do anything, and your money will grow by itself(passive investing), allowing you to do other things with your time.

First when investing, you need to decide what type of investing you want to do. Do you want to actively invest, putting in a little work to make your money grow, or do you want to passively invest, sitting back and watching your money grow without having to manage your investment at all. That’s something you definitely need to think about before you decide to jump in.

The ultimate goal for investors for the most part is to become a passive investor. The reason I say that is, because you can’t really retire if all you do is actively invest. When your passive income exceeds your expenses, you can retire if you wanted to. Many people’s incomes come from jobs, and they invest what’s left over passively, and they retire when they are old. Pretty standard for the most part. A number of people in this forum will have the opportunity to retire pretty young if they invest wisely starting now.

Let’s talk about some of the different types of investing. You can obviously put your poker earnings in the bank, and maybe get around a 4% return on them.(note: rough figure, don’t know the current rate, just using it as an example.) The return you will get from your bank will be very low in comparison to other investments you could make. This is an investment that will not lose money. It’s insured and safe, but you aren’t going to make very much of a return. Another investment along the same path is bonds. The rates will be a little higher, the difference is you may have them for a certain length of time(6 months, 12 months, 2 years, etc...) Your return will be a little higher than your bank, maybe around 5.5%.(again, rough number, as I haven’t looked at the current rates) You can invest in stocks. You can probably expect your return in stocks to be higher than either of the previous options. You might expect returns to be 8-10%.(again, estimate, not exact number) With the stock market, the big difference between this and a savings account or bonds, is that the return is not fixed. So you could have an annual return of 20% or more one year, but you could also potentially lose money. Also, you may have fees if you use a broker. I wouldn’t advise picking your own stocks. It may not be worth it to use a broker though, as they will charge you fees for using them, and 95% of them won’t be making you any more money than you could make yourself just putting it in a Vanguard or something along those lines. There is a joke that they are called stock”brokers”, because they are broker than you are. If they could really make a lot of money trading, they would probably not be a stockbroker.(note: to any stock brokers reading, please don’t take offense, not talking about all stockbrokers) Mutual funds are another option. They are a longer term investment for the most part, and diversified to reduce risk.

On to some active investments. These investments will produce higher returns if done correctly, but will have more risk. Kind of like poker. If you play small stakes you know what type of money you will make, and for a lot of you it won’t be very risky. If you try some higher stakes to make a lot more money, you may lose, but the potential for greater returns are there.

One active investment is obviously starting your own business. If you start a business, and it becomes successful, you can definitely make a lot of money. You could do this on a small scale, maybe just buying and selling things for profits, or on a much larger scale. There’s a million different types of businesses you could start, so I won’t get into all of that. If you do start a successful company, and decide you would like to do something else, but still want to keep the business, you could always hire someone to run your business, turning it into a more passive investment. Many ssnlers are going to school and playing poker, or working and playing poker, so could take a good amount of time to build a big business from scratch also. Internet businesses are often a good way to get started, often using a lot less money to get started, and instead using your own personal time as your main investment to build your business.

The next investment I’ll talk about is easily the topic I can talk most about: Real Estate. Like having your own businesses, you can make a LOT of money in real estate. Along with the ability to make a lot of money in real estate, you can also lose money if you make mistakes.(done that too) Many of the other topics(savings accounts, stocks, bonds, etc....) people at least know a bit about. Real estate is one aspect I don’t think a lot of people here know about. It’s something you can build your money with a lot faster than most of the other investments, but is a lot “scarier” to get involved with since a lot of people don’t know much about it. I’ll give a lot of examples to explain some of the different types of investing in real estate. In real estate you can invest actively or passively.(note: even passively, like business, doesn’t mean you will never have to do anything. You still want to know what’s going on with your properties even if you are investing passively) Active investing is often referred to as investing in properties to fix and flip, etc... You buy a property for $100k, hire contractors to fix it up for $20k, and sell for $150k, and make a little money.(note: you wouldn’t make $30k on this deal, because there are a lot of other expenses involved- taxes, realtors fees, closing costs, insurance, title, holding costs etc...) “Flipping” as it’s often referred to is getting a lot harder to do these days. You can still find deals to make money from like this, but it’s definitely not easy to do like it was 5-10 years ago. This is often what people do to build capital in real estate. That was my original plan, to flip a few houses, and then invest the profits into an apartment building for passive income, and then repeat. I have since changed my plan a bit, since I have different financial goals, and different ways I want to do things.

One thing that can happen during a flip, is it can take longer than you initially thought, and the market can change. I was lucky enough to run into both of these things on a house I bought late last year that I intended to flip. I bought the property for $240k. The guest house was completely gutted. I planned on putting about $15k into doing the guesthouse. After talking to a handful of realtors, and reviewing comps, I thought I could sell after it was completed for about $300k. After all expenses, holding costs, and realtor fees($18k), I hoped I could make $15-20k. Well, the fix-up took a little longer than I had hoped, and the market softened a little bit more since I bought the property. With the increased holding costs, and the lower sales price I would sell at, I would barely make anything at all if I decided to flip it. If I was lucky I would have made $5k. Maybe I would have made nothing. I decided to hold the property and rent it out since it’d be around breakeven cashflow. I’ll probably hold the property for a couple years, and sell it once the market picks up again. So despite this example of what turned out to be a not so great flip, it will not turn out to be a bad deal at all for me since I bought right. The tenants will be paying my mortgage for me on the property, while slowing paying down some of it, and I’ll get tax benefits worth a few thousand dollars each year. Also, since I’m in no rush to sell it, when I do decide it might be a decent time to sell it a couple years down the road, I can talk with some other investors, or advertise to homeowners myself and save around $20k on realtors fees. So if the house appreciates some over the next couple years, some of the mortgage is paid down, etc... I could make a good profit(maybe $30-$50k if I sell without a realtor+ all tax benefits I receive while I own it that save poker profits come tax time) without a whole lot of work on my end.(note: not exactly passive, because it can be a pain to rent it out if doing it yourself)

Another property that I bought late last year, would have been a great flip, even though the market was slow. I got a great deal in a nice neighborhood. I used a “bird dog” to find this property.(Think poker tracker for real estate investors)- not really but kind of. A bird dog is someone who finds good deals, but isn’t going to invest in the deal themselves for whatever reason.(maybe not enough money, not enough time, etc...) The bird dog I used had too many deals going on at the time, and didn’t live in the area, so threw me the deal. If I closed, I paid him $1,000 for the lead. Well, did my homework on the deal, turned out to be a steal, so closed it right away.(actually drove 2 hours in the middle of the night to meet the owner to sign a contract with her before someone else got it, then 2 hours home- soooo worth it) After some expert negotiating, I bought the house for $170k. The house was worth about $215k. It only needed about $5k worth of work, if that. Real simple stuff, that could have been finished in a week or so without much trouble. After the $1k I paid the bird dog, realtor fees,etc...I could have easily made $10-$20k, in a couple weeks time. Well, I liked the neighborhood so much I decided to move in. So decided against flipping it for the time being, but will realize the profits when move out and decide to sell.(note: might not be actual “profits” left when I move out, since I’ll be paying my mortage while living in the house, and not having renters pay my holding costs for me. Depends what the market does)- but I need to live somewhere, so it’s all good.[img]/images/graemlins/cool.gif[/img]

I’m currently talking with an investor I know about partnering on a deal that would be on a much larger scale than the two I mentioned, and we could potentially be looking at making 7 figures on that one deal.(obviously no guarantee, we’re just starting to look at everything involved with it) It would take a couple years to complete, but could be well worth it.(it would be a deal where we are adding value to some commercial property) The possibilities are really endless with real estate. I’ve obviously only invested in smaller deals up to this point, but once you learn, and are comfortable with the risks involved, there are much bigger deals out there, and much more money to be made if you find real estate is something that you like.

Anyways, enough about some of the deals I’ve invested in, just wanted to give some real life examples, good and bad. Here are some things ssnlers might not know about real estate. It’s not as hard to get into as you might think. You don’t have to buy a property cash. You can put a certain % down, and you take out a mortgage on the rest. This is a HUGE factor to consider when investing in real estate. This is why this is one of the main investments I choose to try and get ahead financially, because of the power of leverage. The reason is if you buy a $200k property, you don’t need $200k to invest in it, you can leverage your money and buy more properties. Let me give you an example:

Let’s say carrotsnake buy’s a house for $200k. He’s a baller so he pays straight up cash for this place. He rents it out for $1500/month. Tenants pay all utilities. Carrot’s taxes are around $100 per month, making his total cashflow $1,400 per month, since he doesn’t have a mortgage. Carrot holds the property for 5 years. The property appreciates roughly 5% each year that Carrot owns the property. Carrot finds some very high stakes poker games that he wants to play, and decides he wants to have a good bankroll behind him, so he decides he wants to sell his house. He could just take a home equity line out on the property, but decides he just wants to sell it, since his long term tenants are moving out in a couple months after their lease ends.

Carrotsnake’s investment:

$200k invested
$1300/month= $16,800 per year cashflow
X 5 years= $84,000
appreciation: roughly $50,000

Carrot sells his house for $250,000
Average profit per year: $26,800
He made around a 67% return after 5 years
Roughly 13.4% per year on his investment.

He profited $134,000 from the deal.




Clayton also decides to invest some of his poker earnings. He has $200k to invest as well. He decides he wants to buy multiple properties though. Clayton decides to invest in the same neighborhood as his friend Carrot. He works out a deal with an investor who is getting out of residential real estate, and sells Clayton 10 houses. Clayton puts 10% down on each of his properties. They are worth $200k each. So roughly $20k on each property he has invested. Each of the houses are rented out for $1,500. Clayton has a mortgage on all of his properties, and pays $1,300/month. He also has taxes of $100/month, so he only cashflows around $100 per month. He has 10 properties though, so total he cashflows $1,000 per month. After 5 years, Clayton decides it’s time to sell his houses and buy an apartment complex. Clayton can sell his houses for $250k each, just like Carrot.

Clayton’s investment:

$200k invested
$100/month cashflow per property
X 10 properties= $1000/month cashflow
$12,000 per year cashflow on his houses
X 5 years= $60,000
appreciation per property: $50,000
total appreciation: $500,000


Average profit per year: $112,000
Return: 280% over 5 years
Clayton made 56% per year on his investment

Total profit: $560,000



These are obviously just examples, but you can see how big of an impact using leverage to your advantage in real estate can be. Obviously there is a lot more included in deals like these(vacancies, something in one of your houses breaks, etc...) If someone wants an in depth example of how to break down a deal, based on vacancy rates, etc... I can do that. Just kind of winging this post, and it’s already pretty long so trying not to ramble about every detail and make it really long.

One other huge benefit in real estate is that you can roll over your profits into other deals and not pay taxes on them(1031 exchange.) Meaning in this example, if Clayton decided to buy an apartment complex with the profits he made from these houses, he would not pay taxes on those profits. That’s another HUGE benefit to real estate. You can keep rolling over your profits and not paying taxes on them(LEGALLY.) This is the one of the main reasons, along with the ability to leverage, why real estate is one of the easiest, if not the easiest way to become rich. (I think something like 80% of millionaires in the United States made their money in real estate.) You do have to pay taxes if you do not re-invest your profits.

One case where you can keep the profits of appreciation, AND not have to re-invest is where you live in a property for 2 years.(actual law I think is 2 of the last 5 years) This is one of the reasons why owning is often much better than renting.(definitely exceptions though) When you rent, and decide to move out, you walk away with nothing. Maybe your security deposit back if you are lucky.[img]/images/graemlins/cool.gif[/img] Someone who helped me learn a lot of what I know in real estate actually uses this to his advantage big time. He buys a house, lives in it for a couple years, and sells it. While he’s living in it, he does things to increase it’s value so that when he sells he’ll be able to sell it for more than he paid, regardless of what the market does. He’s also been fortunate enough to own houses in areas that have done very well appreciation wise, so he’s sitting on a lot of extra money these days thanks to the ability to keep his profits from the houses he lives in tax free.

Couple other things I wanted to mention before I wrap up this post: Roth IRA- ssnlers should definitely look into this. You do need earned income to be eligible to invest here though.(so poker money doesn’t count) You can invest up to $4,000 a year, and the profits you make on the money from stocks/ mutual funds or whatever is tax free for LIFE. Probably a good idea to look into for many of the ssnlers who maybe have a little earned income from jobs at school, or whatever. Good thing to invest in for retirement. I broke the numbers down for my younger brother one day and figured his Roth IRA would be worth around $2 million by the time he was eligible to start withdrawing for retirement.(based on putting the max in each year: $4k, or a little more as you get older)- compound interest is HUGE. Definitely something to look into. There are also other types of IRA’s for people who are self-employed(poker players). Different types, but HUGE tax advantages, so worth checking out.

Hard money lending: another way to make money passively. You can lend to someone who needs money. You can often earn anywhere from 7-15%(sometimes higher, depending on the deal) Your money is tied to an investment(real estate, a business, a car, etc...) You just need to make sure whatever it is that it’s tied to is worth at least as much as your money, because if they default you get the property, business, or whatever it is that you get. I got an offer from some investors who were in need of capital for 37.5% annual. They needed $40,000, because all their money was tied up in other investments. They would give me $7,500 to use my money for 6 months. I turned it down because they were highly leveraged, and my investment would be tied to a highly leveraged property.

To wrap this up, there are a lot of different ways to invest. I talked most about real estate, because I know more about it than I do the other things, and there’s a lot more to expand about in that too, in comparison with the other things mentioned, especially since many people know a bit about some of the other stuff(stocks, bonds, etc...), and most ssnlers I’ve talked to don’t know as much about real estate. Real estate is my main investment choice right now, but when investing, choose what is right for you. Real estate might not be the best option for you. Maybe you want to start your own business. Maybe you want to just get some mutual funds and not worry about managing your investments too much. Maybe you are interested in doing something I didn’t mention.(day trading) There’s so many ways to invest. I think it’s important for people playing poker and maybe making a lot more money than other people their age, to think now about investments. You can get WAY ahead financially if you start now. Just because most of people don’t retire until their 50's or 60's doesn’t mean you can’t retire in your 20's or 30's. Hopefully I didn’t ramble too much throughout this post. Hopefully it was helpful for some people, and to the ssnlers who haven’t invested, things like Roth IRAs, etc.. are definitely things to look into. To the ssnlers who are looking to make money with their poker profits, hopefully this post at least gives you some ideas of some things you can do. I was pretty basic/general with things, couldn’t really go into tons of details on everything since this post would be way longer than it already is. If you want me to go into detail about something I said, just reply with what you want me to talk more about and I’ll do the best that I can. I’ve learned a lot from 2+2, so hopefully some people can pick up some things from this post.

Happy 3 years on 2+2 to me.

[PBJaxx]

Snow, you rock.

[tozzy]

looks really good, gonna read it later.

[Unknown Soldier]

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looks really good, gonna read it later.

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[Grunch]

Happy anniversary, snowbank, and thanks for the great post. This is something I think a lot of SSNLers could benefit from understanding.

[RiverFenix]

I enjoyed this a lot. Will reread a few more times. The roth ira thing is one of the most important things you can do and cant be reiterated enough.

One other thing I took away is that Carrotsnake is dumber than Clayton.

[barryc83]

Good post. Honestly, I'd be interested in your thoughts on the future of online poker, win rates, etc. because you seem like an intelligent individual.

[Sciolist]

I'll read this again later today. But I have been a bit worried about the RE market: It seems to me a bit like I'd be getting in too late - I've missed the rush. I worry that the people who say otherwise are just "running good" in the RE market, and so naturally I'll only hear from those who have had a good meeting with variance.

As a poker player, could you tell me how you feel about that?

I don't really have the spare money for this right now, but there's no reason why I wouldn't in the next year or so. My savings are about ~$40k, $30k of it earning 5.8 to 6% interest, the rest of it either in my current account or earmarked for a probably risky football betting computer model :]

What kind of money would you need to consider starting in RE?

[Sciolist]

Oh, and good post :]

[Mike MacIntosh]

Morale of the story; Carrotsnake is dumb.