With The market already down more than 10%, the coronavirus-triggered plunge may turn into one of the fastest bear markets to hit U.S. stocks ever. But, believe it or not, a passive investment in the S&P 500 may be the best way to ride out and ultimately profit from the storm.
The global contagion is slowing international travel. Oil is plunging as traders anticipate falling demand for jet fuel from airlines. Energy stocks like ExxonMobil are trading at lows not seen since the 2008 crisis. Stocks of brick and mortar retailers, malls, movie theaters, cruise ship operators, amusement parks and airlines are also plummeting as investors forecast people hunkering down at home.
As coronavirus spreads, the problems at these companies will worsen and cyclical sectors that track closely with global gross domestic product growth will also suffer. This morning, the industrial and materials sectors went into the red, posting negative returns for the past 12 months. They joined energy, down 30% over the year, as the only sectors to lose money. The S&P 500 is still ahead 7% year-over-year.
Here’s the good news: Your index fund already predicted all of this.
Even before the coronavirus became a global crisis, the S&P 500 was under-weighted in the types of stocks that were most vulnerable to the outbreak and it was heavily over-weighted in the software, internet, online retail and social media companies that are likely to either weather the storm, or thrive.
The Coronavirus Plunge
Coronavirus caused the quickest 10% market correction since the 2008 financial crisis.
Almost a quarter of the S&P 500 index is comprised of the ten biggest companies in America by market capitalization: Microsoft, Apple, Amazon, Facebook, Berkshire Hathaway, Alphabet (Google), JPMorgan Chase, Johnson & Johnson, Visa and Wal-Mart.
These companies have pristine balance sheets and strong long-term growth prospects to manage through the outbreak. Some may also see increased sales as people stockpile food and health safety products, or benefit from people staying at home. About half of the overall S&P 500 is in information technology, healthcare and communications stocks —all unlikely to see major long-term disruptions due to the outbreak.
On the other hand, the types of businesses that are in free-fall, such as energy and retail, hardly make a dent as a weighting in the S&P 500. For instance, the entire energy sector entered 2020 at about the same weight as Apple alone. Thus energy’s 20% plunge over the past month is causing relatively minor pain. Retailers like Macy’s, Gap and Nordstrom that may struggle further are also minor weightings, in addition to small-sized drillers like Cimarex Energy, Helmerich & Payne, Cabot Oil & Gas and Devon Energy.
While holders of the S&P have sidestepped the worst stock implosions since the outbreak, they’re also big holders of potential beneficiaries.
Johnson & Johnson, United Health Group and Procter & Gamble are about 1% index weightings and they could see an uptick in sales as people all the world prepare for the virus’s spread. If more people begin to work from home, companies like Microsoft will benefit as demand spikes for its suite of cloud products including email and remote working services. Wireless carriers like Verizon and cell tower giants SBA Communications and American Tower will benefit from rising smartphone and internet activity.
Any surge in online sales will help ecommerce companies like Amazon and logistics warehouse operator Prologis as well as another S&P 500 member Equinix, one of the largest data center real estate investment trusts. Streaming services like Netflix and internet giants like Google and Facebook will also see a boost in eyeballs from masses of homebound Americans.
You guessed it. Each of these companies has high weightings in the S&P 500.
Your Index Fund Picks Winners
The biggest weights in the S&P 500 are also the largest and most successful companies in America.
The index is well-prepared for the coronavirus because it is designed to track changes in the economy, which may actually be accelerated by the outbreak. The S&P 500 weights companies by market capitalization, meaning it increases exposure to companies with improving business prospects and rising stock prices, and it decreases exposures to those with worsening fates.
Already, people have been avoiding department stores and brick and mortar retailers, and driving more efficient vehicles, cutting back on oil and gas consumption. Movie theaters are being made obsolete by streaming media services. By design, the S&P has done a near-perfect job keeping up with these changing economic trends and consumer habits.
Investors, meanwhile, have spent the past decade bidding up the stock values of cash-generating software and internet companies, and have been abandoning stocks in companies with heavy debts and large pension obligations, or those exposed to economic cycles. Here again, the S&P 500’s algorithm has been trimming holdings in burdensome industrial companies and auto manufacturers. Information technology, the most heavily weighted in the index has fallen about 5% over the past month, but is still up 23%-plus over the past year.
In 2007, at the outset of the financial crisis, Berkshire Hathaway’s Warren Buffett famously predicted an ordinary investor in an S&P 500 index fund would beat just about any hedge fund on Wall Street. Buffett offered a $1 million bet—payable to charity—to anyone who thought they could pick hedge funds that would beat the index over the ensuing decade.
A hedge fund investor named Ted Seides took up Buffett’s wager. It wasn’t even close. Seides conceded a loss in 2015, waving a white flag of defeat before the decade was over. The S&P returned 8.5% annually over that ten-year stretch, while the average hedge fund failed to deliver half that return.
The reality is as follows: Market corrections like the current one are frightening. But sometimes, the smartest play is also the easiest. With an investment in the S&P 500, the house is on your side.
I’m a staff writer at Forbes, where I cover finance and investing. My beat includes hedge funds, private equity, fintech, mutual funds, M&A and banks. I’m a graduate of Middlebury College and the Columbia University Graduate School of Journalism, and I’ve worked at TheStreet and Businessweek. Before becoming a financial scribe, I was a part of the fateful 2008 analyst class at Lehman Brothers. Email thoughts and tips to agara@forbes.com. Follow me on Twitter at @antoinegara
Tej Kohli’s name is up in lights in Paris, flashing on the walls in giant, bold type inside the new high-ceilinged headquarters of French e-sports Team Vitality, a 20-minute walk from the city’s Gare du Nord train station. Some of Europe’s top video game players, influencers, journalists and sponsors have arrived on this November day to buoyantly pay tribute to Kohli, a U.K.-based, Indian-born entrepreneur, now heralded as the lead investor in the e-sports team. Team Vitality has raised at least $37 million and scored partnership deals with Adidas, Renault, telecom firm Orange and Red Bull, with a stated goal to become the top team in European competitive gaming.
E-sports, Kohli proudly tells Forbes, “encompasses the entire spectrum of business … [and is] not very different from other things we do in technology.” His wavy mane of dark hair stands out in the room like a beacon, as he beams amid the buzz and recognition.
London is home to 55 billionaires, with more on the outskirts, and they generally fall into two camps: those who completely shun publicity, and those, like Richard Branson and James Dyson, who enthusiastically embrace it. Kohli, who lives in a multimillion-dollar mansion in leafy Henley-on-Thames, aspires aggressively to the latter. In April, Kohli told the FT’s How To Spend It supplement that, “Sometimes in business it’s important to show you can sell yourself by way of your lifestyle.” His website describes him as “Investor, Entrepreneur, Visionary, Philanthropist,” with photos of an apparent property portfolio, with about half a dozen apartment buildings in Berlin, one in India and an office tower in Abu Dhabi. He claims to be a member of two exclusive London private clubs, 5 Hertford Street and Annabels, and publicly gives tips on “foie gras … roast chicken” and places where “the steaks are huge.”
Kohli has employed a large coterie of PR consultants and actively courts the media, pushing grand visions that back up this image. In a 2013 article he wrote for The Guardian, he offers advice on how to get a job in the tech industry (“Learn to code”). In 2016 he told a Forbes contributor: “The one mission that every entrepreneur has, as a person rather than as an entrepreneur, is to extend human life.” And his Tej Kohli Foundation Twitter bio brags that “We are humanitarian technologists developing solutions to major global health challenges whilst also making direct interventions that transform lives worldwide.” A press release issued in mid December boasted of more than 5,700 of the world’s poorest receiving “the gift of sight” in 2019 at Kohli’s cornea institute in Hyderabad, India.
Kohli also aspires to be validated as a billionaire. Over the past two years, his representatives have twice reached out to Forbes to try to get Kohli included on our billionaires list, the first time saying he was worth $6 billion—more than Branson or Dyson—and neither time following up with requested details of his assets. (Kohli’s attorneys now claim that “as a longstanding matter of policy,” Kohli “does not, and has never commented on his net worth,” suggesting that his representatives were pushing for his billionaire status without his authorization.)
There may be good reason for his reticence. It turns out that Kohli—who in a July press release describes himself as “a London-based billionaire who made his fortune during the dotcom boom selling e-commerce payments software”—has a complicated past. Born in New Delhi in 1958, Kohli was convicted of fraud in California in 1994 for his central role convincing homeowners to sell their homes to what turned out to be sham buyers and bilking banks out of millions of dollars in loans. For that he served five years in prison.
Kohli then turned up in Costa Rica, where he found his way into the world of online gambling during its Wild West era in the early 2000s. He ran online casinos, at least one sports betting site, and online bingo offerings, taking payments from U.S. gamblers even after U.S. laws prohibited it, according to seven former employees. He was a demanding, sometimes angry boss, according to several of these employees.
A spokesman for Kohli confirmed that he ran an online payments company, Grafix Softech, which provided services to the online gambling industry, between 1999 and 2006—and that he acquired several distressed or foreclosed online gaming businesses as a limited part of the company’s portfolio. “At no point was any such business operated in breach of the law,” Kohli’s representative said in a statement.
Though his representative claims that Kohli has had nothing to do with Grafix since 2006, Forbes found more than a dozen online posts or references (some deleted, some still live and some on Kohli’s own website) between 2010 and 2016 that identify Kohli as the chief executive or leader of Grafix Softech—including the opinion piece that Kohli wrote for The Guardian in 2013.
Even in a world of preening tycoons, this juxtaposition—the strutting thought leader who actively gives business advice while he just as actively tries to stifle or downplay any sustained look into his business past—proves eye-opening.
According to Kohli’s back story, he grew up in New Delhi, India, and he has told the British media that he’s the son of middle-class parents. Per his alumni profile for the Indian Institute of Technology, Kanpur (about 300 miles southeast of New Delhi), Kohli completed a bachelor’s degree in electrical engineering in 1980 and developed “a deep passion for technology and ethical and sustainable innovation.”
At some point, he wound up in California, and set up a “domestic stock” business called La Zibel in downtown Los Angeles. Kohli still uses the Zibel name for his real estate operations today. By the end of the 1980s, Kohli was presenting himself as a wealthy real estate investor who purchased residential properties in southern California to resell for profit. The truth, according to U.S. District Court documents, was that from March 1989 through the early 1990s Kohli, then reportedly living in Malibu, had assembled a team of document forgers and “straw buyers” to pull off a sophisticated real estate fraud.
Kohli and his coconspirator Charles Myers (also known back then as Loren Ferrari) would buy residential properties from homeowners with a combination of cash and promissory notes using a sham entity. Kohli and Myers recruited and paid fake buyers to purchase the home in a second bogus transaction, and had other coconspirators forge documents to make the fake sale look real and inflate the sale price. Kohli and his team would then take out loans in the name of the fake buyers using fraudulent paperwork, diverting the loan proceeds to themselves. The original sellers didn’t get the money they were promised.
By 1993 the game was up. Kohli and Myers pled guilty—Kohli to ten counts of mail fraud and one count of conspiracy in 1994. According to court filings, Kohli and Myers took out $7.5 million in fraudulent loans from banks, pocketing $2 million, and stiffed homeowners on $4 million in promissory notes. He was sentenced to 80 months in federal prison and ordered to pay $5 million in restitution to his victims. Kohli appealed his sentence in 1997 but lost. Richard Steingard, who represented Kohli while the federal criminal case was pending, says his client was legally obligated to make his victims whole, but doesn’t believe he ever did. “To my knowledge, as his former attorney, the restitution was never paid,” says Steingard. A spokesman for the U.S. Department of Justice said it does not comment on restitution payments. A spokesperson for Kohli had no comment on the conviction, prison sentence or restitution.
Lavkumar Barot, 67, was one of Kohli’s victims. In 1989, Barot responded to an ad in the Los Angeles Times from Argent Alliance Corp., where Kohli was the CEO, promising investors a 14% to 20% return in 6 months to a year (minimum investment: $10,000). Barot invested $100,000 and lost all of it. One check he got from Argent Alliance—for an interest payment of $1,500—bounced. He had to work six days a week to make up for the lost funds. Even today, as Kohli promises millions to others as a philanthropist, Barot hopes for some financial restitution from Kohli. Dennis Mahoney, 75, now lives in Honolulu. Mahoney, according to court documents, lost $446,800 to Kohli’s escrow scam—after he agreed to sell his house. Mahoney claims that he received no restitution from Kohli and only got $25,000 from a state fund that helped victims of escrow fraud. He lost his home in California and blames himself. “Naturally you look in the mirror and say—how stupid could I be,” he tells Forbes, “But that naivety was a good learning experience.” Talking of Kohli, he adds: “What you see isn’t always what you get.”
Chris Painter, a cybercrime expert who was an assistant United States attorney in Los Angeles in the 1990s, says he remembers trying the case and the “sophistication of the fraud … defrauding just about everyone, from the sellers of the properties to everyone in between.” Altogether Kohli and his cohorts scammed banks and homeowners out of more than $13 million, according to court filings.
Kohli’s alma mater bio says that in 1997, Kohli “plunged into entrepreneurship and established his own company Grafix Softech,” which specialized in e-commerce payments. The timing seems off—he was in prison until 1999.
Regardless, sometime before the turn of the millennium, Kohli headed south to Costa Rica and tells Forbes he “focused on payment solutions … interfaces and payment gateways.” Asked about the exact source of his wealth, Kohli chuckles. “We were at the right time in the right place,” he says.
Team Vitality merchandise for sale in Paris
David Dawkins
The business empire that, he claims, made him a “billionaire” has variously been described by Kohli, in press releases and on his websites, as operating in e-commerce, online marketing and payments processing. But 12 former Kohli employees told Forbes that Grafix Softech and other businesses operating out of the San Jose, Costa Rica, offices of Grafix Softech, were actually running unregulated online casinos and at least one sports betting site that targeted American gamblers. A spokesperson for Kohli said that any suggestion that his business broke the law “would be wholly false.”
The gaming and sports book entities operated under names like Cool Cat, Cirrus, Virtual and Royal. The websites—some of which are still active (under unknown ownership)—were an online shop front for gamblers, who could place bets from the comfort of their sofa. The biggest target market, according to former employees and executives, was American gamblers.
At first, such marketing represented a gray zone of sorts. Then in 2006 a new U.S. law, The Unlawful Internet Gambling Enforcement Act (known as UIGEA), effectively prohibited online gambling—and put operators like Kohli on a collision course with the U.S. legal system if they continued to knowingly accept online bets from Americans. An archived Web page from 2015 for Cool Cat Casino links to a list of “country restrictions.” There the U.S. is curiously marked green for go: no restrictions for U.S. gamblers. While a “tips” page on the same site simply states: “Cool Cat Casino is the top online casino in the United States!”
Warwick Bartlett, chief executive of Global Betting and Gaming Consultants, tells Forbes that UIGEA put most Costa Rican gambling sites out of business. “Those that remained,” he adds, “had to come up with unique ways to counter banks not wanting to process credit card transactions.” Bartlett cites the British chief executive of BetonSports, David Carruthers, who according to court documents was arrested by U.S. authorities in July 2006 while en route to Costa Rica and sentenced to 33 months in prison as an example of the kind of sentences given to those who broke the law.
Kohli, however, was undeterred by the new legal restrictions, say former employees. Cynthia Paniagua tells Forbes she worked as a human resources consultant for Kohli’s Silver Arrow group between 2009 and 2010 in Costa Rica. She describes online casinos as the beating heart of Kohli’s businesses. “He had around 15 to 25 casino brands,” she says. Who would be the end beneficiary of a $10 bet—placed and lost—on a sports result back then? Paniagua is unambiguous: “To him. His accounts are tied to him.”
“Sometimes in business it’s important to show you can sell yourself by way of your lifestyle.”
Alexis Calderon worked for Silver Arrow and Tej Kohli in customer service between 2012 and 2014, transferring callers to the VIP team that, he claims, helped big money clients wager “literally millions of dollars” at a time on Kohli’s online casinos and games. Calderon says Silver Arrow used Canadian checks to pay gamblers their winnings and would instruct the clients to cash the checks “in small unions that don’t ask questions.”
Another former employee tells Forbes that after the law change in 2006, Kohli “doubled down … because he figured everyone was getting out of the market.” The source adds, “All his competitors were fleeing because regulation hit in, and he was like—great. Like picking money off the ground. It’s gonna be a lot easier now.”
New Zealander Mike Miller was brought in as consulting CEO of BetRoyal (also known as Royal), Kohli’s sportsbook, for ten months between 2006 and 2007. Miller describes Kohli courting him before he decided to join, flying him in business class to London for the interview and putting him up in a five-star hotel. But Miller later soured on Kohli. “He had a slightly flawed view of the online gambling world,” Miller says. “He felt that when anyone deposited money to any of his businesses—and there were 50-80 of them—that money was his.”
Kohli’s sites also failed to pay out winnings in a timely manner, according to four former employees and gambling industry review websites. His Virtual Casino group received industry ratings site Casinomeister’s “Worst Casino Group” award at least three times—in 2002, 2007 and 2008—for slow-payment issues. Bryan Bailey, founder of Casinomeister, wrote in 2007 that the award was given because of its “habitual stalling of player payments” and its unpleasant sounding “September 11th Twin Tower bonus.” One staffer who worked for Kohli from 2008 to 2010 in Costa Rica was tasked with customer service, which included handling complaints about the slow payment of winnings. She tells Forbes that when people called, chasing their winnings, “I did the best I could to help people, but … it was just no, no, no with no reason.”
As an entrepreneur, Kohli was passionate about his reputation in the industry. In 2005, news broke that John Walker, who worked in Costa Rica as the founder of gambling news site Sportsbook Review, was allegedly threatened over an article naming Kohli as the new owner of a sportsbook called Royal Sports. According to Walker, Kohli was angry because “his reputation was so bad for not paying people … he didn’t want people to know he was buying Royal.” Walker says he took the article down from the Sportsbook Review website because he was intimidated by people who appeared to work on behalf of Kohli.
At their peak, Kohli’s casino operations netted at least $1 million a month, say former employees. Under the name Navtej Kohli, he was a director of a Panama-based shell company, Wisol International, which is tied to 642 domain names, many of which are online gambling sites—at least six of which are still live today.
Kohli’s San Jose Costa Rica office, which employed around 100 people, was not a nice place to work, say several former employees.
“There was quite a culture of intimidation. People were afraid of Kohli,” says one former staffer. A high-ranking employee from the early days in San Jose told Forbes, “He had a temper on him that could melt down the office. It was hard. His joy was in making grown men cry … break them down till they were on their knees begging for forgiveness.”
Kohli seemed to have mellowed over time. One long-term employee who worked at Silver Arrow after 2007 never saw anyone receive any physical aggression. This person describes Kohli as often “verbally abusive” but “not to employees, to managers.”
“Show me an opportunity with global potential and I will create an empire.”
A spokesperson for Kohli says, “Like any successful businessman Mr. Kohli is from time to time confronted by false claims from disgruntled ex-employees and competitors. Any suggestion of wrongdoing by Mr. Kohli in any business or other matter are rejected absolutely.”
Kohli’s gambling business in Costa Rica was shuttered in 2016, according to former employees, who were laid off. While some of the executives helped build another business in Prague around 2016 (Kohli does not appear to be involved), Kohli emerged on the social and philanthropy scene in London in a very public way.
Positive clips began with random biographies on the likes of IMDB around 2011 and progressed to more of the same and listicles on little-known publications like The Start-Up Magazine. Kohli then began to appear in laudatory articles on the pages of The Guardian, The Daily Telegraph, Inc.magazine’s website and the Financial Times.
A couple of admiring articles even appeared on the Forbes website. In 2014, a contributor named Drew Hendricks published a post entitled “Top 15 Entrepreneurs Who Give Back To The Community” on Forbes.com, listing Kohli at number two, right behind social media billionaire Mark Zuckerberg. Kohli makes special note of the Forbes article on his biographical page tied to his alma mater. (Hendricks was removed from the Forbes platform for violating editorial standards, and this article was removed from Forbes.com.) Another favorable article, from a different former contributor, remains online.
Based on the available financial information, Forbes estimates Kohli’s net worth to be in the hundreds of millions, not billions. The only U.K. company in his name is a dormant entity called Osac Management with just $129 (£100) on the books as of November 2018. Forbes values Kohli’s personal property in Henley-on-Thames at $8 million based on an estate agent estimate and similar listings in the surrounding area.
It’s very likely that Kohli earned most of his fortune amid the cash-rich gambling business in Costa Rica. Former HR consultant Paniagua told Forbes that while she worked there in 2009 and 2010, Kohli “would clear a couple of million a month. Free and clear. After he paid his houses, after he paid his cars, after he paid his lifestyle–net, net.” One former employee sent Forbes an Excel file with purported financial info for all of Kohli’s casinos for the month of October 2006; the profit for the month: $1.06 million.
“The one mission that every entrepreneur has, as a person rather than as an entrepreneur, is to extend human life.”
Kohli’s wealth has since spread around the globe. In India, where he has a solar panel startup, the government undertook a tax investigation regarding the startup and earlier this year found $21.6 million in assets in a multifamily office tied to Kohli as of December 2016, $20.9 million of which was classified as “long-term loans and advances.” A representative for Kohli did not comment on this matter.
In June, Kohli issued a press release saying he’d invested $100 million into an entity called Rewired, “a robotics-focused venture studio with a humanitarian bent.” Forbes was not able to confirm whether $100 million was really invested. One company mentioned was Open Bionics, a startup creating artificial limbs in Bristol, U.K, endorsed online by Star Wars star Mark Hamill. Open Bionics did not reply to repeated requests for comment. Forbes confirmed that Rewired invested in Aromyx–a Silicon Valley firm involved in producing bio-based scents for use in various consumer products (the dollar amount invested was not disclosed), and that Rewired was a backer of a $3.5 million seed investment round in U.K. firm Seldon, a machine-learning platform for sharing data.
And those nine properties, including the Berlin apartment complexes, listed on Kohli’s website? It’s unclear whether Kohli owns all of them or just a portion. A spokesperson for Kohli says his investments “have lain in real estate.”
This wide array of seemingly legitimate projects offer a way for Kohli to invent an image that belies his past as a con man, a casino boss and convict. That bothers his previous victims—the ones reached by Forbes are still out money. (Forbes could not confirm, with Kohli or elsewhere, whether Kohli paid his $5 million in restitution, and if he did, who got it.) It doesn’t seem to bother Kohli. “Show me an opportunity with global potential and I will create an empire,” Kohli boasts in his online bio for his alma mater. He already created an empire—just not the kind he wants people to believe in.
I am a wealth reporter at Forbes, based in London covering the business of billionaires, philanthropy, investing, tax, technology and lifestyle. I studied at Goldsmiths, University of London and joined from Spear’s Magazine, where I covered everything from the Westminster bubble to world of wealth management, private banking, divorce law, alternative assets, tax, tech and succession. Notable bylines include an investigation into Switzerland’s bi-lateral bonds to the European Union, and a journey through Bhutan – testing the hunger for democracy, and the love for their King. I joined Forbes in May 2019.
… a scalable, accessible and affordable technology solution to end corneal blindness worldwide. VIDEO: Wendy & Tej Kohli Discuss The Mission And Purpose Of The Tej Kohli Foundation https://www.businesswire.com/news/hom…
Too often, entrepreneurs–especially inexperienced ones–take the “luxury” approach to funding, incorporating every bell and whistle into their expansion plan by trying to accomplish all goals at one time. That’s nice, but it’s usually not reality and often forces businesses to be cash strapped because of high debt repayments.
That’s why I suggest entrepreneurs take a three-pronged approach to their expansion planning. This exercise helps businesspeople ruthlessly prioritize their needs and determine what is a must and what is frivolous.
A, then B, then C
Let’s say an entrepreneur believes he or she needs $1 million to make their expansion plans a reality.
Now, write up a plan for that amount. What are you going to do with that million? What are the specific investments you will make? What will your cash flow look like afterward? What does your business, in general, look like?
Now do the same exercise with $500,000. Ask yourself the same questions, as well as anything else that’s pertinent. Can you primarily accomplish the same goals with half the cash?
Finally, do the exercise one more time, this time with a loan of only $250,000. What are the answers to the questions now? Might it be possible to do what you want to do with only a quarter of the original loan?
And the answer is…
No set answer will be correct.
Perhaps your initial inclination that you need $1 million was correct. And there’s a good chance that $250,000 simply won’t get the job done.
But there is a decent probability that the middle option might be feasible, especially if it makes you realize that some of the more frivolous “wish list” things you’d like to do are best set aside for now. Remember, you don’t have to accomplish everything at once, and a scaled-down plan might allow you to better focus on more important things, preventing you from overextending yourself.
Of course, don’t get too stuck on exact numbers. Maybe this exercise will have you realize your plan can go ahead effectively for $790,000. Or $615,000. Or $485,000. Or any other number.
The purpose is to gain some clarity and sharpen your focus–not to mention to allow you to decide what makes you most comfortable and enables you to sleep at night. Don’t underestimate the value of that.
Also, keep in mind the time factor. The larger the loan you seek, the longer it likely will take to receive approval from a lender. The saying “time is money” always rings true, especially in this scenario. You might miss opportunities waiting for lender approval.
Remember, business tends to be more of a marathon than a sprint. You need to pace yourself in all aspects, including financing, to better your odds of finishing the race. Hopefully, this exercise helps you accomplish that.
Trust: How do you earn it? Banks use credit scores to determine if you’re trustworthy, but there are about 2.5 billion people around the world who don’t have one to begin with — and who can’t get a loan to start a business, buy a home or otherwise improve their lives. Hear how TED Fellow Shivani Siroya is unlocking untapped purchasing power in the developing world with InVenture, a start-up that uses mobile data to create a financial identity. “With something as simple as a credit score,” says Siroya, “we’re giving people the power to build their own futures.” TEDTalks is a daily video podcast of the best talks and performances from the TED Conference, where the world’s leading thinkers and doers give the talk of their lives in 18 minutes (or less). Look for talks on Technology, Entertainment and Design — plus science, business, global issues, the arts and much more. Find closed captions and translated subtitles in many languages at http://www.ted.com/translate Follow TED news on Twitter: http://www.twitter.com/tednews Like TED on Facebook: https://www.facebook.com/TED Subscribe to our channel: http://www.youtube.com/user/TEDtalksD…
When investing in multifamily properties, there are other factors outside the cap rate, P&L, rent rolls and cash on cash that you should consider. In fact, the numbers, although highly critical in your analysis, are only a portion of what should dictate the decision to proceed. As you begin your due diligence period, you may want to consider these other potential pitfalls before you seal the deal.
What To Look For
The pulse of a multifamily investment doesn’t always come from what the books are saying. In fact, if you fail to investigate the day-to-day culture of tenants and demeanor of the current property, you could be in for a big surprise.
Unless you have the privilege of being one of the few investors that can walk into a new property and completely clean house and not worry about cash flow, these indicators may be warning signs of a much deeper-rooted problem that may not be worth the investment.
• Excessive wear of interior of units: Normal wear and tear is one thing, but severe deferred maintenance found amongst a higher percentage of units could be a telling sign of trouble. Outside issues found in inspections, walking each unit is by far one of the most effective ways to determine if this is an issue.
• Consistent negative feedback from tenants: The key here is listing any repetitive, serious issues that keep coming up and being able to discern from the minor issues. Talking to tenants is a great resource for information, and you should capitalize on the opportunity while you are walking each unit. Understanding that tenants have no real incentive to speak anything but the truth typically makes the feedback more reliable and genuine.
• High traffic at night: How a property operates at night is another piece of the puzzle you may want to consider when analyzing a multifamily investment. Typically, during the day, people are at work and there is not much activity. A visit at night can give you the insight you may need to see if the safety of the property is adequate or not. Extremely high traffic at night could be a potential indicator of crime, but, more importantly, it can be a deterrent for future tenants.
• The unhappiness of tenants: Are the tenants unhappy or happy? It might seem like a silly question at first; however, the crux of the sustainability and future of the investment can lie within the answer. Do you see more positive feedback than negative? If this answer is no, you may want to find out why and see if the solutions are in line with the budget and the vision of the investment. Solutions to these issues could be as simple as a more secure entry room door or better lighting outside the walkways. However, if it’s due to criminal behavior or domestic issues in the complex, this can help open your eyes to the entire picture and consider factors the numbers fail to disclose.
As investors scream through the numbers, it’s easy to bypass the human side of the transaction. Where the human component of multifamily should be considered just as crucial to the decision, it’s not uncommon to be an afterthought or one of the lower priorities of the analysis. Focusing solely on the bottom line and not taking this factor into consideration is a recipe for disaster.
The damage that a toxic culture in a property can do is much more impactful because it not only affects the individual, it can spread to the entire community. You can fix a leaky sink, a broken heater or clean up the landscaping, but not addressing these issues can take a major strain on the investment if you’re not prepared.
http://www.biggerpockets.com – The 50% Rule is a great tool for quickly estimating the potential cash flow from a real estate investment. This video will walk you step by step through the math and show you how quickly and easily a cash flow estimate can be – for any size real estate investment.
What Can Be Better Than An Inheritance? A Personal Matching Program
Getting an inheritance can be a good thing – or a bad thing.
While Millennials may wish their inheritance will someday pay for their retirement, that may or may not happen. According to a 2018 Charles Schwab Study, more than half (53%) of young people ages 16-25, “believe their parents will leave them an inheritance, versus the average 21% of people who actually received an inheritance of any kind.”
And, if they do receive an inheritance when they are close to retirement, that may not help them. It turns out that one out of three Baby Boomers who received an inheritance spent it within two years, according to research conducted by Dr. Jay Zagorsky, Senior Lecturer at Boston University Questrom School of Business, based on data from the Federal Reserve and a National Longitudinal Survey funded by the Bureau of Labor Statistics that studied the period 1985-2008.
A Better Option: A Savings Program With A Kick
Wouldn’t it be a better option to help youthful members of the family set up a savings program with a kick to it – a match that you arrange to ignite interest, leverage time and boost returns through compounding?
Let’s say your son “Steve” is a 20-year-old college student who lives at home with you. Steve has a part-time job during the school year and works full time over summer breaks.
Steve hasn’t developed a rule set for saving money. He is not eligible for a 401(k) at work. He is not thinking about a far-off retirement, but he believes he might benefit from a nice inheritance, probably just when he might need the money when he retires.
As Steve’s Mom or Dad, you know better. You’d like Steve to learn how to become financially secure in his own right.
Let’s Make A Deal
Here’s how you can help. You make a deal with Steve:
“For every dollar you save, I will match you dollar-for dollar for five years. But there is a catch. My match goes into a retirement plan for you, a Roth IRA, that you must agree not to touch until you retire someday in the far away future.”
That gives Steve something to think about. If he saved, say $500 a month of his own money, he would have $30,000 of savings in five years. He would also have an additional $30,000 funded by his parents in a Roth IRA that he would agree not to touch. Nothing wrong with that deal. . . But what about the constraint on not using that Roth money until retirement?
Maximizing Roth Limits While Avoiding Gift Taxes
That $500 monthly ($6,000 yearly) figure is magical.
It is the maximum ($6,000) that can be contributed to a Roth IRA per year, the annual limit for funding a Roth, according to the IRS.
It also happens to avoid a gift tax obligation (the parents’ match is a gift). Since $6,000 is well under the $15,000 annual exclusion, Steve’s parents would not be subject to gift taxes for funding the Roth. (Read “IRS Announces High Estate And Gift Tax Limits For 2020.”)
Will Steve Accept The Offer?
For Steve to see the full potential of the matching program, you’ll want to show him what the Roth can accomplish over the decades between now (age 20) and age 65, a period of 45 years. The Roth will need to be invested for long-term capital appreciation potential. The best way to do that is through a simple S&P 500 Index Fund.
What If The 45 Years Turn Out To Be Terrible Markets?
This is where history comes in handy.
For skeptics, we can look at the worst performing 45 year market periods since the 1920s. For the optimists, we can review the best. While history will not repeat itself exactly, history does provide a frame of reference.
Let’s go back in time to see the worst outcome for a five year program of monthly investments in an S&P 500 Index Fund with a 45 year horizon.
That 45-year period ended with the Financial Crisis (1963-2008).
Had Steve started his five-year, $500 a month program ($30,000 invested) at the worst of times, his age 65 value would have grown to $1,192,643, an average annual return of 9%.
What If The Next 45 Years Turn Out To Be Terrific Markets?
If Steve had lucked into the best 45 year period (1946-1991), he would have had $4,368,046 at age 65 (highest 45-year holding period), an average annual return of 12.4%.
What If Returns Are Just Average?
What about the median return (1931-1976)? Steve would have had $2,421,743 at age 65, an average annual return of 10.9%.
What If Steve Wanted Safety Over Capital Appreciation?
If Steve had been very conservative, he may have considered the safest option, a money market fund that tracked 90 day T-Bills. The best 45-year period for money market funds (1956-2001) would given Steve an age-65 retirement nest egg of only $356,519, a 6% average annual return.
You can see these comparisons graphically in the chart below.
Graph showing ending values of $500 monthly investments for 5 years then held for 40 years (S&P … [+]
Jackson, Grant Investment Advisers, Inc.
The point is this: Steve can’t control what type of market he will experience. But history can give him a frame of reference.
Is Steve Convinced?
To accept his parent’s matching proposal, Steve needs to see the benefit of investing in himself (and having others invest in him through the match). His interest needs to be ignited through the math behind the market, the math that leverages time and boosts returns through compounding.
Your Role As A Parent
As we approach the holidays, there will be opportunities to get together with young adults in your family. Why not impart some sage advice – in fact, not just once, but as often as possible.
Your Advice
Start saving now in a Roth IRA. Fund your 401(k) at work as soon as you become eligible; contribute each payroll period without stopping until you retire; maximize your match. Choose investments based on long-term capital appreciation potential. Take advantage of the math of compounding. And, if a parent or family member is willing to match your savings, go for it.
Survey Question
After reading this post, what is the likelihood that you will make a Roth matching proposal with your child, grandchild, niece or nephew? I’d like to know what you think. Click here to take a quick survey.
Look for my next post on what happens when someone in Steve’s position starts contributing to his 401(k) at work.
I got my start on Wall Street as a lawyer before moving to money management more than 25 years ago. My firm, Jackson, Grant Investment Advisers, Inc. (www.jacksongrant.us) of Stamford, CT, is a fiduciary high-net-worth boutique specializing in managing retirement portfolios. I approach investing with a blend of optimism (everyone can do something to improve their financial situations) and a dose of healthy skepticism (don’t invest unless you understand what can go wrong). These themes describe my “voice” whether on-air (NBC Nightly News, CNBC, NPR) or presenting (AARP, AAII, BetterInvesting) or in print. I began writing in earnest in 1996 (You and Your 401(k), an investor’s view of 401(k)s). Recent books are: Retire Securely (2018), offering concise action-oriented insights for retirees, pre-retirees and Millennials (Excellence in Financial Literacy Award “EIFLE”); The Retirement Survival Guide (2009/2017), a comprehensive tool chest for all financial levels and ages (EIFLE Award); and Managing Retirement Wealth (2011/2017), a guide for high net worth individuals (EIFLE Award). I’ve written over 1,000 weekly columns (Clarion Award, syndicated by King Features). When the time is right, I comment on SEC rule proposals.
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