alternate investments

I spent most of Saturday listening to an investment presentation by some oil guys from Texas and Oklahoma. I come in contact with them on a previous deal. At that time I had shown their investment presentation to my CPA (who usually turns down every investment I show him) and he was so impressed, he decided to fly out and meet them. He’s become their accountant and is investing heavily in their current deal.

Incidentally, in the previous deal where I came across the oil guys, they were also investors like me in a gas pipeline deal in Texas. It was a pretty sweet deal and we should’ve gotten cashed out with a 30% profit after a year. Unfortunately our partner, Grant Wilson III, decided to swindle us out of the profits. After spending over a year with this jackass, subsidizing his travel and living expenses he just decided that he deserved all the profits and he’s disappeared. Luckily we got all our principle back.

We talked to a lawyer about our legal options. Apparently it’ll cost $25,000 to get a judgment against this crook and if he’s spent the profits, we won’t be able to collect anything. Spending $25,000 to maybe get around $60,000 doesn’t sound very appealing. Anyway, if you come across anyone called Grant Wilson III in Houston, who’s lived in Southern California and is originally from Boston, you should definitely keep your hand on your wallet at all times! The only positive thing in the whole deal is that I learnt a very important lesson about trust in business, and luckily it didn’t cost me much money.

But back to the original discussion about the oil men. Unlike Grant, who’s background is swindling people, oops, I meant to he was a lobbyist in Washington, these people actually have worked for decades in the oil industry. One of the principals has several patents and they all are extremely knowledgeable in various aspects of off-shore and on-land drilling and exploration.

They’ve basically put together a partnership deal where they find under-valued oil & gas producing properties with at least 10-12 years of production left. Usually its a distressed situation like an estate sale, lawsuit or defect in the title where the production has been stopped.

In the current “fund” (its called a fund but its really a partnership), they have 19 producing wells and will drill 2 more infill wells.

In normal deals that are “securitized” (sold as a security and governed by the SEC), dealer-brokers are involved and usually 30% of your investment goes to overheads like commissions, fees and marketing. Since only 70% of your investment actually gets invested you typically get low returns – in the range of 7-10%.

However, if you get an opportunity to invest directly with in a fund like this, where they aren’t paying any broker commissions, you can get a much better return. Assuming oil stays at $65 and gas stays at $6, my CPA thinks we can get a 24% annual return. If oil goes up, our returns go up too! And since about 40% of the return is considered return of principle, its not taxable. (Although it does lower your basis in the investment).

Unlike my other investments which have taken quite a while to start producing, this is supposed to start generating income with 60 days. Of course, I’m not holding my breath. But the fact that my CPA is investing alongside me and I felt I could definitely trust them gives me a lot of confidence.

I let you know how it goes.

If you’ve ever wondered how much money the vending machine guy at your office makes, here’s an excellent post by GeniusTypes on how he got into the vending machine business.

It all started with having an open mind and buying a route from someone who had lost interest for well below what it was worth.

You’ll see this theme repeated in many successful investment stories.

Every so often you’ll see ads in the local paper about the company that sells large office-type vending machines holding a presentation. Apparently, the charge $1000 each and it takes a long time to recoup your investment. Most of the buyers give up and sell them for $100-$200 each and the second owner usually has better luck.

GeniusTypes kept his initial investment low by understanding how to value the business to begin with. He thus guaranteed his success by keeping a large margin of safety. He was constantly following sales of vending machines and vending routes on ebay and when he saw a good deal, he pounced on it.

He immediately saw where he could cut costs to increase his net income. He also followed up on some leads and expanded his route and thus the value of his business.

Also note how he takes the positive aspects from Robert Kiyosaki’s books and doesn’t dwell on whether the book is based on fact or fiction. That’s an important virtue in successful people – they don’t spend too much time maligning others, they just focus on getting their own work done.

Click on this link if you’d like to see what vending machines and coin-operated business are selling for.

Yesterday, I bought some more Canadian Income Funds, also called Royalty Trusts or Canroys. As I mentioned before, I recently refinanced a property and I managed to pull some money out (totally tax-free!).

Rather than spend the money on an SUV or a big-screen TV, I opted to divide the money into 3 parts. The first 1/3rd went towards replenishing my emergency fund which was drawn down by vacancies in my rental properties. The second 1/3rd went towards future investments in summer just in case there’s a pullback in the stock market and the last 1/3rd went to building up my passive cash-flow.


Long time readers will realize that I haven’t made any effort display my net worth or any goals of net worth.
That’s because I feel its a meaningless number. If I had a $1 million dollar net worth and it only generated $25,000 a year in income (like Cd’s did a few years ago) that’s pretty sad. On the other hand, if I owned a $1,000,000 car-wash that generated $125,000 that’s pretty significant.

My goal is to generate passive income. Its your passive income that provides financial independence, not your net worth. If you have $3,000/month through various passive income streams, you’ve got your basic food and shelter taken care of and you won’t starve if you lose your job. That is my short term goal. My longer term goal is generate $10,000/month in passive income so I can travel the world without worrying (or working).

I’m currently not even at 50% of my $3,000/month goal so at least 1/3rd of all future investments must take me towards that goal. That’s why I bought some Canroys yesterday. I bought Harvest Energy (HTE) and Canetic Resources(CNE). They generate revenue from oil and gas production and refining. The noteworthy part is that they payout around 12% dividend per year. Since the selling of oil and gas leads to a depletion of reserves, its important that they keep some of their revenue for future acquisition of new properties and for drilling new wells. Both of them have a payout ratio of under 80% which isn’t bad considering they have proven and probable reserve lifespans of 9.5 years.

There are Canroys with lifespans of 6-7 years and payout ratios of 95% that yield 15% but I’m suspicious of their longterm viability. These two seem like pretty safe bets. If oil prices rise there’s a chance of increased payout and also capital appreciation. If not, I’m still getting my 12% yield.

The only issue I have is that the Canadian Government takes its 15% tax straight out of my account. But even considering for that, my yield is still just over 10%. Besides, I get a US tax credit for that amount, so its not a total loss.

I also bought some units in Prism Income Fund(QSR.UN) which owns and operates nearly 500 fast-food franchises in Canada (Taco Bell, KFC, Long John Silver and Pizza Hut). Their stock has been pretty stable compared to other Canroys following the whole Taxation issue. Its also currently yielding 12% and while I don’t expect much capital appreciation, I don’t expect it to drop in value or its dividend to fluctuate with the price of oil and gas.

So now I’m one step closer to my goal of $3,000 in passive income. This brings my total passive income from Canroys to $300 per month. I’m also getting $300 from a loan to a developer at 2% per month. And I average around $300/month from my various online ventures. (Even though my online ventures aren’t passive, I enjoy pursuing them and I have geographic independence. Thats why I’m counting it).I’m also making around $150/month from my direct oil and gas drilling investments, so I’m almost 1/3rd of the way to my goal!

When I get the money back from the developer, it’ll be redeployed at a much lower rate. But I expect the cash flow from the direct oil drilling program to increase enough to cover this short-fall.

Prosper.com has now started giving out $25 referral fees if you sign up through an affiliate link!

It doesn’t matter whether you’re a lender or a borrower, you still get the $25. Don’t know when it started but it ends on August 31st 2007.


Borrow Money From People. Low Rates. No Banks.

Great time to join if you already haven’t. I’ve been lending out money at around 18%.

In the wake of the commodities boom, the Canadian currency has appreciated almost 50% against the U.S. dollar since the beginning of 2002. In the last three months alone, strong economic data, inflows from mergers and acquisitions, buoyant commodity prices and above-target core inflation resulted in a rise of the Canadian dollar (CAD) of about 8%.

I’m really happy since I own a lot of Canadian Income Funds which pay out monthly dividends in Canadian dollars. So as the Loonie appreciates, my monthly dividend increases too!

Will the Loonie ever achieve parity with the US Dollar though? Some analysts are predicted it to hit $0.96 = C$1.00 which is awfully close.

What do you guys think?

I’ve been wanting to send in the paperwork for the Everbank Marketsafe Japanese REIT CD for nearly a month. Since I used my Coporation’s 401k and Profit Sharing Plan (PSP) to invest, I had to open a business account and fill out extra Trustee paperwork, in addition to supplying a copy of the original 200 page 401k & PSP documentation.

Anyway, I got it all filled out and signed by the co-Trustee (my wife) and fedexed it to Everbank. April 17th is the last date to get in on this investment.

If you think the Yen is going to appreciate against the dollar and Japanese Real Estate is going to appreciate, its worth a gamble. This CD is FDIC insured and has no downside risk! You can read more
about it at Wealth Building Lessons.

Since I’m investing through my PSP, I don’t need to worry about taxes. If you want you can invest in a ROTH IRA at Everbank too!

Everbank has a lot of unique products like its principle-protected Gold CDs. Also its President, Chuck Butler is available by phone/email to answer your economy or investment related questions. When was the last time the president of Bank of America answered one of your emails?

I had an afternoon lunch meeting with an LA business owner. He was trying to raise money for his “Audio Erotica” business. He figured that audio books were growing at a ferocious pace and no one was servicing the needs of Erotica fans(over half of which are female!). So he’s tied up with several synergistic partners – well known porn stars(like Jenna Jameson), a publishing house, an audio recording company and is has already created several audio erotica short-story sets. Very interesting concept! He was meeting with me because he wanted to raise some more money. He’s issuing an 11% convertible dividend and expects to double or triple the investment in 3 years. The only issue I have is with his valuation, which at $4.2 million is a tad too high. I may not invest but I believe he’ll make money in his venture.

After that I skipped out of work and went sailing! That was fun. We docked at a harbor restaurant had a few drinks and went back! Then it was time for dinner and a real estate meeting. Quite a busy day. But it was fun!

As a follow-up to my Invest In Porn post, I actually did invest in a small start-up company that provides the technical website generation and templates to would-be porn-trepreneurs (I just made that word up!) – so basically it provides the technical framework and the ability to integrate data feeds. The deal is to get back 100% return in 18 months and still keep a small equity stake in the company. I’ll let you know how it goes. Incidentally, that post is the 2nd link on google.com for the search ‘invest in porn!’.

Making Our Way has a great post on how people think they can start a personal finance blog and expect to make enough money out of it that they can quit their jobs!

Unless you getting 50,000 hits a day, thats not going to work out for you. And unless your a marketing expert, SEO guru and a great writer with interesting content, that really isn’t going to happen.

Instead you should try to make $200-$500/mo from it and consider that to be one of your multiple income streams. If you can develop a dozen income streams each paying you $500/month, you’ve set yourself up for financial freedom. It may not be enough to live luxuriously, but at least you won’t starve if you lose your job, or want to take a year off to pursue your passions.

Other examples of income streams can be paid off rental properties, stocks that pay a dividend, Canadian income funds (also oil & gas funds), actual oil & gas projects, equity stakes in a business, trust deeds backed by real estate, and micro loans(like prosper.com).

The more diversity you have, the safer your total income will be!

1. Don’t lend money to people to get cars.
Anyone with a pulse can get a loan on car. If they sell the car, wreck it or it otherwise gets repossesed, their motivation to pay off the loan will drop to nil.

2. Don’t lend to people who are terminally ill or very old.
That sounds cruel but unless you’re in it for charity(and I admit, I’ve made one loan like that which surprizing hasn’t defaulted!) I suggest skipping this class of people.

3. Avoid people with a large number of delinquencies.
People who’ve had a dozen in the past 12 months are not good candidates for lending money!

I spoke to my uncle’s friend today. Apparently he had a few liquor shops and recently got into the hotel business.I’d been wondering what the numbers are in that business and I actually got some concrete numbers today.

Ideally you should pay 4 times the gross income or less. The bank requires you to only put down 20% of the purchase price. If you buy a chain (instead of running a mom & pop joint), the bookings are done through a central reservation system so its NOT a cash-based business. This means you can hire a manager or a management company to run it for you and be sure that you’re not being robbed. Normally hotels should net you atleast 15% cash on cash or better.

Sounds like pretty good numbers to me. He’s promised to include me (with my puny investment capital) in his next investment. Hopefully I will have free capital at that time.

I’ve heard of hotels in San Diego being sold for 7 times the gross and I guess making money on your investment isn’t always the criteria for investing!!! But, there are a few people who pay CASH for their multi-million dollar hotels and so whatever they make is a profit to them.

Anyway, if I can buy a hotel in partnership this year, I’ll be very happy. I might even put together a Private Investment Fund for investing in a hotel.