Wednesday, May 28, 2014

Real Accidental Estate

 At Investing by Accident, if you comment, I will publish. In that spirit, here is the most recent Accidently Asked Question:

Where in Israel do you think home and land prices are rising the fastest to “flip” houses or purchase for rental income? Are homes more profitable across the line east of Modiin?

Before answering these questions, I must confess that I may not be qualified to write about this topic because I am somewhat of an expert. Here are my actual qualifications:

1. I bought a co-op apartment in Riverdale in 2002 and sold it at the height of the market in 2007. You may be interested in the sale prices, but unfortunately for you, I am Israeli and will absolutely not tell you. However, we can discuss personal details about family planning as much as you like.

Actually, I am also American. I bought it for $270,000 and sold it for $450,000. Wow!

2. I own an apartment in Modiin which makes me a real estate investor by accident.

3. This is not actually a qualification, just an important life note: never buy an apartment. I learned this the hard way by owning the co-op. Your neighbors will make too much noise, you will have to pay for fixing the building as it falls apart, and the people who run the building are insane.

I never learn a lesson, which is I bought another apartment. Thankfully, this time around it’s working out much better. My neighbors are wonderful and the building is brand new and fairly well built. Still, you can’t have everything. The person running the building is insane. I suppose we deserve that much. After all, we elected him by accident.

Real Estate by Accident

Investing in real estate is fairly straightforward. Basically, you buy a property (“real estate”), often by borrowing a large amount of money to do so (“leverage”). You rent out the property (“operating income”) and use the money to pay your expenses like borrowing costs and maintenance (“carrying costs”). Whatever is left, you put in your pocket (“$”). Finally, when the time is right, you sell the property for a lot more than you bought it for (“$$”).

As you can see, real estate is an attractive investment because you not only make money from the rental income (“yield”), you also make money from the capital appreciation of the property (“$$$”).

Rental Yields

I am a big fan of looking at rental yields when considering if real estate is a good value. I decided to sell our apartment in Riverdale when I noticed that rental yields were declining. At the time, I understood this as a sign that more and more investors were starting to speculate in the market.

From the time we bought until the time we sold, here is what the calculations looked like:

2007 (Sold)
2002 (Bought)
Home Price
Rental Gross
Rental Net
Rental Net / Year

In the case of co-ops, the owner pays the monthly maintenance charges. After excluding this from the calculation, I observed a declining yield, 7.1% to 6.4%, which I took as an indication of increased speculation in the market.

The lower the yield from rental income, the less money there is to pay for the carrying costs of the property. Investors should only be willing to give up this income if they think that the property will appreciate significantly. Their thinking is that they will be able to make enough money when they sell that it doesn’t matter if they don’t receive significant income while they hold the property.

Admittedly, even in 2002, the rental yields were already borderline from this perspective. Rental yields should really be 8% or higher for the investment to be considered sound. Otherwise, there tends to be little excess from the rental income after paying off mortgages, maintenance and other expenses from owning the apartment.

Yields in Modiin

I ran the same calculation on my apartment today, and here is what I am seeing:

Home Price
Rental / Year

Basically, this is insane.

To illustrate how insane this is, just consider: if you borrowed 70% of the value of the apartment, a 30-year fixed mortgage at 5% would cost you 8,700 shekel per month. This is more than the rent!

Why would any investor buy at these prices? I am not entirely sure, but I can think of three ways it possibly could make sense.

Way #1: Property Values Continue to Rise

The most obvious way to understand this situation is that investors think that the rate of appreciation that we have seen in recent years will continue for years to come. To illustrate, here is how the property will increase in value if the rate of increase continues to be about 10% year-over-year:

Home Price

In this forecast, after you sell the property in 2019, you would have made 1.5 million shekel. Considering that you only invested 750,000 shekel (30% of the 2.5 million), you actually have a total return of 200% on your investment!

Even after taking into consideration closing costs on both sides of the sale, and even assuming that you lost 1,000 shekel per month on the difference between the rental income and your carrying costs, you still made a tremendous amount of money.

You really have to be quite insane to think that prices will appreciate this much, but this level of insanity has happened before (“America”) and could be happening again.

Alternatively, it could be that something else is going on.

Way #2: Rents are Going Up

Investors may be thinking that rental prices will be increasing sharply in the years to come.

This may have some actual basis from what seems to be happening in my neighborhood right now. The demand for rentals is way out of pace with the available supply. I hear story after story of people who just give up and look in a different neighborhood because they simply cannot find any apartments available for rent.

If so, we may just see a sharp rise in rental prices in the next couple of years. Here is what the yield will look like on the 2.5 million shekel apartment with 10% increases in rent year-over-year.


Also here, you have to be somewhat insane to think that people will be willing to pay over 14,000 shekel per month to live in a 5 room apartment. Although Modiin is the best place in the world to live, unless incomes rise sharply, it is hard to see how anyone could afford this.

It could be that investors are anticipating some amount of increase in both real estate prices and rents in a combination that somehow makes sense. 

Or, it could be something else is going on.

Way #3: Something Else is Going On

Perhaps this has nothing to do with investors at all. Actually, the fact that there are so few rentals available may indicate that most of the homes in the area are occupied by owners. If that is the case, people may be buying homes less for an investment and more to simply live in them.

This could explain the prices we are seeing, as people will tend to spend as much as they can afford to get the home that they want. In the past 5 years, we have been in a period of extremely low interest rates which has enabled people to borrow much more than if rates were at more normal levels.

If this is the primary driver of prices, we should expect them to remain high (and climb higher) as long as borrowing costs remain low, demand remains strong and supply is constrained. In practical terms in my neighborhood, it would mean that these prices are not moving as long as people want to live here, no one wants to move and the Bank of Israel keeps interest rates low.

If you are investor, your risk is that any of these things could change. The rental yield is very low, which means your investment succeeding depends on rents rising, real estate prices increasing, or both. You would basically be betting that none of these factors will change.

An Accidental Answer

If you are planning to invest in real estate in Israel purely as an investment, I think you should look carefully at the rental yields and find an area where the numbers make sense. I don’t know where this is, but it is not in Modiin.

However, if are planning to invest in real estate because you need a place to live, that is entirely a different matter. In fact, it deserves its own treatment in next week’s blog.

Wednesday, May 21, 2014

The Situation in Ukraine

Many of my loyal readers – and especially those named, “Anonymous” – have asked me to analyze the financial impact of the situation in Ukraine. This is no longer a topic that we can ignore.

Ukraine by Accident

You can go anywhere on the internet to learn about the situation in Ukraine, but only at Investing by Accident can you get this accidental summary:

Years of corruption and unrest led to a rebellion (“coup”) which was followed by an intense dispute about the succession of Crimea from Ukraine and its accession to Russia (“Putin”). Let’s just say, turmoil (“situation”).

Actually, now that I reread this summary, maybe you should go to the internet and find a geo-political non-expert to explain the situation to you. I stopped listening to the news many years ago when the Department of Homeland Security began making it depressing (“fuchsia”). Since then, I’ve been getting all of my news from my wife’s status updates.

As far as I know, the most significant thing that has happened in the past several months is that many, many people agree that I am a second rate husband. But I am ok with this because it means that expectations should be lower.

“Global Economic Impact”

You should care about the situation in Ukraine not only for the obvious reason that it impacts many human lives, but also because of the “Global Economic Impact.” By this, I mean of course, the impact that the situation will have on the accidental Israeli investor.

To understand this important ramification, I turned to the website for the Ukrainian embassy in Israel where I found this actual list of what is imported to Israel from Ukraine:
  • grain (50.6%)
  • non-precious metal (18.2%)
  • aircraft (6.9%)
  • food industry byproducts (5.8%)
  • oil seeds and oleaginous fruits (3.3%)
  • fats and oils of animal or vegetable origin (1.5%)
  • electrical machinery (1.2%)
  • nuclear reactors, boilers, machinery (1.1%)
This list raises three important questions:

1. What about the other 11.4%?

2. Would you fly in a Ukrainian-made aircraft? I’m not saying that I wouldn’t. It just seems like something we should talk about.

3. What about the dogs? 

My Friend told me that his daughter’s day care teacher has a side-business importing Ukrainian-bred dogs. Or, at least he thinks that she is Ukrainian. She may just be Russian. He is an American child of the ‘80s and really can’t tell the difference. To him, the entire region just looks like a chapter of Animal Farm. 

Oh, yeah… and I almost forgot: Nuclear Reactors!?

First of all, if you are trading nuclear reactors, is that really something that you want to write about on your website? I guess the answer is “yes” because I am writing about it on my website.

But, more importantly: how exactly are “boilers” and “nuclear reactors” in the same category?

Does this mean that I could have installed a safe and clean Ukrainian-made nuclear-powered hot water heater when I built my apartment? This seems to me like a terrible missed opportunity.

About Grain

Nuclear reactors and second rate husbands aside, my biggest concern here is grain. I did some more non-expert research on this topic and I discovered the disturbing reality that Israel is dependent on imports for its grain supply.

Most of Israel’s grain comes from the “Black Sea Region,” but fortunately, Israel has taken steps to diversify. I know this because the USDA is carefully watching Israeli grain production in order to predict how much grain Israel will buy from the United States. I’m not sure what is more incredible about this: the fact that someone is actually doing this analysis, or the fact that I find it by searching on the internet.

In any case, the important point here is that I should still be able to get my Friday rugalech even if grain exports from the Black Sea Region are disrupted.

An Accidental Call to Action

If foreign dependency on grain were just a national security issue, you would not need a non-expert like me to discuss it. 

You need me because this is also a messianic problem. I made my own list of the goods that Israel should be producing in surplus based on Deuteronomy 8:8, and it goes like this:
  • wheat
  • barley
  • wine
  • figs
  • pomegranates
  • olive oil
  • date honey
Using careful conjecture based on what I am able to find on sale in the supermarket and/or pick directly from the trees in public parks, I believe we have achieved the required level of surplus for all items except for grain.

Readers, we need to find a way to grow grain in the desert. Stop messing around finding ways to make the plastic bags even thinner and start working on a real problem. If it would help, you can borrow some of my nuclear-powered hot water.

Wednesday, May 14, 2014

Investing by Accident at the Movies

I was recently in America on business, and I had the opportunity to screen several movies during the long flights. I am an intellectually sophisticated elite, so I was naturally attracted to films which would broaden my perspective on life. Several of these films stood out as pertinent to my field of non-expertise (“investing”); so naturally, I thought I would share my reviews with you.

Movies by Accident

One great film for the investment-minded is Moneyball in which Brad Pitt shows that people are really stupid and that geeks will always do a better job. In this case, the geek is Jonah Hill who brings business analytics to baseball. In retrospect, it is quite surprising how long it took for this shift to happen. For years, we have seen that geeks with a computer can figure out much better how to invest your money than the sleek businessman with a touching sales pitch.

Another good movie that I watched by accident was Jack Ryan: Shadow Recruit in which a young Captain Kirk goes to work for the CIA. He discovers a sinister plot to destroy the U.S. economy by selling off treasury bonds and the only way to keep everyone safe is to drive an exploding truck off a bridge in New York City. If you have no idea how that makes any sense, you are not alone. Kevin Costner doesn’t understand it either and he is in the movie. The lesson here is clear: do not buy treasury bonds.

The major downside of this movie is that Keira Knightly doesn’t appear anywhere near as much as she should; and also, that she talks funny with an American accent. I recommend that we do this movie over again in England with more Keira and less Kirk. We can keep Kevin Costner, but I don’t see any reason why he needs the stray dog. Also, what have movies come to if the scariest plot we can think of revolves around selling treasury bonds?

Finally, if you have way too much time until the plane lands, you may want to see The Wolf of Wall Street. This is an incredible film with an absolutely stunning performance by Leonardo DiCaprio who teams up with Jonah Hill to teach us that we should never buy any financial products if someone wants to sell them to us. Although, to be honest, we pretty much knew this already.

The only reason to avoid this film is that it is severely challenged in the “family friendly” category. Unless, you are looking for an exploration of some of the essential characteristics of human males that eventually lead to families. In that case, this film is extraordinarily friendly.

Donny Ryan: The Modiin Identity

All this movie watching made me realize that I may be missing the mark by just writing a blog and that I need a movie to really reach people. That is why I started writing my own script for a movie that I call Donny Ryan: The Modiin Identity. It is a semi-fictional semi-auto biographical action-thriller that goes like this:

The movie opens with our hero, Donny Ryan, at an ordinary desk job where we see his Outlook calendar full of meetings. We then see our hero going home from work only to meet his Friend on the train, completely by accident. They engage in a humorous discourse about how Israelis always eat ice cream while waiting for a train. To illustrate the point, the Friend picks up a discarded ice cream wrapper, but inside he finds secret codes. Using free Wi-Fi on the train, our hero and his Friend use the codes to break in to an international super computer system.

Like all super computer systems in movies, it has a really nice user interface which he can control easily with gestures without every encountering a bug. In there, they turn off the air conditioning on the train which is too cold and also find an algorithm that can predict where the next major archeological find will take place. Using the GPS on a touch enabled device provided by a large technology company that paid us for product placement, the dynamic team tracks down the exact location which turns out to be in the center of Modiin. This is very convenient because they are on the train anyway.

Except that when breaking into the super computer system, our heroes accidently triggered a failsafe that was programmed years ago by an off-the-books secret government agency that had been training a pack of wolves to attack their enemies by first pretending to be adorable puppy dogs. The wolves are unleashed, and our heroes have no choice but to start a dangerous high speed chase using a company-leased car that is full of groceries in those wonderful reusable shopping bags that will be provided by any supermarket chain that will pay us for product placement. They drive the car straight into the Mediterranean Sea to save themselves and the world before time runs out.

I think the plot has a lot of potential. I even included a prominent semi-comedic supporting role so that Jonah Hill can have a part. Right now the script is family friendly, but if necessary, we could have all of the female characters take off their clothes at various points in the film if that would help it sell better. 

Contact me if you want to option it.

Wednesday, May 7, 2014

I-Pray for Samach until Tav ploos Bio Techs

In this final installment of my research notes, you may laugh or you may cry. I really don’t care as long as you invest. I have a retirement to save for.


סנו. Sano is one of Israel’s premier manufacturers of household necessities that are a source of constant annoyance for you every day. Like the plastic sandwich bags. How do they get them so thin? I don’t know, but as my Friend has astutely observed, this is clearly irrefutable evidence that Israelis are experts in plastics.

ספאנטק. Spuntech is a “leader in hydroentangled fabrics.” Want to know more? I know you do. Here is what it says on their website about how their products are used in the medical field: “Spuntech offers low grammage fabrics to replace the traditional gauze-woven materials, thus taking advantage of the superior absorbency capabilities of the hydroentangled, low-lint spunlace.”


פולירם. This company manufactures “thermoplastic compounds.” Maybe that’s how they get it so thin.

פוקס. Fox is a clothing retailer with really colorful stores, and everyone in my family (except for me) has one of their fleeces. They have also expanded into some other brands, including Laline, which apparently appeals to the ladies although my wife has never heard of it. Think of them like the Gap, just that the clothing is more likely to fall apart in the washing machine.

פרשקובסקי. This small residential builder made the I-PRAY index because I asked friends of ours who bought a house from them, and they told me that they “do not hate their builder.” Wow.


קסטרו. This retailer sells very hip clothes that I would never wear, but many other people apparently do.


רמי לוי. Rami Levi is a hot-shot supermarket chain. The key features of their business model is to not have enough customer parking and to have mozzarella as the only cheese that they will grate for you. Contrary to what you may think, they do not do this because they hate customers. Actually, it is part of a complex strategy to cut costs. It must be working because my family keeps going back every week even though we can never find any place to park. Also, it is awesome how they entered the cell-network business which is no place for a supermarket, and I’m holding out hope that they will one day open a bank which would make equally little sense. I want to be a shareholder when that happens, even if it means that I have to grate my own parmesan.


שיכון ובינוי. Shichun U’binui is a mammoth developer. I don’t think they are a PFIC because most of their revenue comes from commercial construction projects (domestic and abroad) rather than real estate investments.

שנפ. Shnapp is a small company with an electrifying marketing presence. Just visit their website and you will get excited about stuff. They manufacture batteries and things related to electricity. I don’t know what kind of growth to expect, but I enjoy being a shareholder because every time I drive by one of their signs at a garage, I roll down my window and thank everyone there for buying my batteries.

The Bio Techs

Rounding out the I-PRAY index are these three Bio Tech companies: אבוגן, מזור טכנולוגיות and קמהדע. These companies are either saving the world or stealing your money. It’s hard to say exactly which way it will go.

Will You I-PRAY Too?

That is all I have to say for now about I-PRAY. Now, it’s your turn. Post your comments or send in your feedback. We’re already open for nominations for I-PRAY II.