Mail order scams: Collectible coins

I found myself the recipient (though thankfully not sucker) of what I considered to be a mail order scam. While the situation outlined below may not be illegal I consider it to be unethical and have given it the title 'scam' for that reason.

I received a letter in the mail from 'Macquarie Mint' (see their website) offering me the chance to buy a $10 coin for only $10 which celebrated all Australian soldiers and the sacrifices they had made for Australia. When I first glanced at it - it seemed like a great deal - I had collected coins when I was younger and I knew that when you buy coins from a mint they are almost always at a premium to the face value. Then I realised that I'd never actually heard of the 'Macquarie Mint'. There are only 2 mints in Australia that are allowed to produce legal tender - the Royal Australian Mint and the Perth Mint so I was immediately suspicious.

I looked at the offer document more carefully and realised that it had many of the classic signs of a scam:

• Created the illusion of scarcity: 'Only 150,000 would be available to households with only one per household sold'

• Incorporated information that, while not false, gives the wrong impression: The document had a graph of the silver price over the last few years and said that the coin was silver. On the website as at 28 March 2012 it provides that the coin is 10g of '50% fine silver'. This implies a silver content of 5g (0.176369oz). At the silver price on 28 March 2012 of US$32.57oz (A$31.173/oz) this implies an intrinsic value of the coin of ~$5.50. On silver content this is therefore a terrible investment so putting a graph of the silver price is a moot point.

• Put the relevant information in tiny font while emphasising the useless: Macquarie mint says that the coin they are producing is legal tender in Kiribati. I admit that I had never heard of Kiribati so decided to look them up - apparently it is a small pacific island which uses the Australian dollar as their currency. So either a) they are lying about it being official currency because the AUD is their currency or they have done some deal with the government or Kiribati to send a commission per coin back to them. You may think that this means it isn't really a 'scam' because they disclose this fact. I would argue that given it has Australian soldiers on the coin that this is a point advertised much more loudly than the fact that it is from Kiribati that it is very misleading and designed to dupe people. Actually there is a larger argument around the official legal tender point.

• If this is in fact legal tender in Kiribati and the Kiribati dollar is tied to the Australian dollar on a parity basis then there is the potential to make money by waiting for the 'exchange period' to end (see below) buy the coin for the silver content (A$5.50 - see above) and then exchange it in Kiribati for Australian dollars. While this is theoretically possible, it is premised on the fact that this coin is actually official legal tender and the Kiribati government will continue to recognise it as such past the redemption date.

• The coin is 'worth A$10': I was actually wondering how they could support this particular claim as 'collectible' coins like this rarely ever are 'worth' what they are sold for. In fact they came up with a rather ingenious solution: 'Macqurie Mint' will buy the coin back off you (as long as you have the receipt) for $10 for the next 3 years. After this point the coin is (presumably) worth nothing more than it's silver content as I tried having a look but couldn't find a great market for Kiribati coin collectors.

Ok there are several more points that I would like to cover but I'll leave them for another time. The basic premise of this post is that this 'deal' is misleading to prospective purchasers and therefore I consider it a scam. I decided to try and find out who was behind it (not expecting much luck) but I was pleasantly surprised:

• On the Macquarie Mint website their ABN (Australian Business Number) was: 46 097 060 663. If you go to the ABR website you can look this company up: It comes up as Downie's Coins Pty Ltd trading as Downie's & Sherwood
• Further if you do a whois domain search on Macquarie mint the you (strangely enough) come up with exactly the same result.
• Downies Coins is a coin dealer with several offices around Australia (http://www.downies.com/) and surprise surprise the head office is in the same suburb (Abbotsford) as the return envelope address for Macquarie Mint
• I also went into the Downie's coin dealer closest to me and asked about the coin and the man behind the counter somewhat reluctantly admitted that Macquarie Mint was a 'sister company to Downie's but operated only as a mail order business'

Anyway this whole thing smelled fishy to me so I reported it to the ACCC's scamwatch. They probably wont do anything about it given the loss per person is relatively low and the offer letter is worded in such a way that it is correct and legal (although misleading and in my opinion unethical). If you would like to object too please report it to scamwatch and hopefully something will be done.

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The real cost of car ownership - unpredictable expenses

This post will be a short addendum to my previous post on how owning a car is actually a much more expensive proposition than many people expect.

In the last few days I have discovered how large and unpredictable car expenses can come all at once. In the previous post I said that I normally expect to spend ~$800 per annum on servicing costs. This was based on a basic service at ~$400 twice a year as I have car in reasonable condition that wasn't really giving any problems.

I gave my car in for servicing last week only to discover that I needed to replace my headlights (this one I knew I had coming), replace the battery (no sign) and the brake pads (no sign). I got told I didn't have to do the battery immediately but wait for it to run down and then call road side assistance to replace it however this is a much more expensive proposition and while I had the cash for this service it blew out my expectations. This service cost me $1,100 and I still expect there to be another this year for $400 resulting in a total servicing cost of double what I originally expected.

My intention with this post (other than to vent my frustration at my personal expenditure budget getting blown out again) was to illustrate that unless you know a lot about cars (or even a little bit - I don't know very much at all) these unexpected large expenditures will creep up on you.

If you can afford a car acknowledge that it will cost you far more than originally think. If you don't own one - go through my list and car related expenditures and see whether you can actually afford it.

Investing in real estate: Real estate versus other investments

This is part 3 in my series on investing in real estate. In this part I will cover the differences and similarities between investing in real estate and other asset classes and the relative pros and cons.

You may be wondering why this is part 3 and not part 2 as it may seem to make more sense to decide whether you are going to invest in real estate before doing all the research behind it. I take a totally different point of view. I believe that only once you have the knowledge about what real estate investing involves / what your local market is like and what can you afford can you then really evaluate whether real estate investing is for you.

This part attempts to answer the question "should I invest in real estate or shares or keep my money in the bank".

Real estate versus shares

Both these investments have relative benefits and disadvantages versus each other. In my opinion they both form part of a balanced investment portfolio. In weighing up the relative merits of investing in either of these asset classes you need to consider the following

1. The time you have to invest: Perhaps counter-intuitively real estate investment requires much less time on an ongoing basis. This is because with shares you should be constantly keeping up with all your investments filings / reports / press releases / competition / market environment. Real estate on the other hand tends to be very time intensive when you are looking for the property and then buy it and have to renovate and get it up to an appropriate standard. Once you have a tenant in place though and the cash flows start to come in, especially if you have a property manager (I swear by mine) the time commitment is very low.


2. How much you have to invest: Buying a physical investment property is a big investment. For the moment I am going to ignore unit trusts. The deposit is (in Australia) typically ~20% of the property value (more for commercial properties) and then you are stuck servicing a relatively large loans whether you have cash inflows or not. Shares on the other hand can be bought in small parcels when and if you have the cash to invest. You can build up shareholdings slowly through dividend reinvestment plans or regular savings plans


3. Time frame for your investment: While these are both inherently long run investments you will be penalised less with shares if you need your money in the short term. This is because a share trade should not cost more than ~$30 a trade in any jurisdiction however if you try and sell out of your property you are going to incur very high transaction costs including taxes, agents fees, advertising fees.


4. What the market is like: There are a million cliche's that are going to disagree with me here including 'don't try and time the market' and 'it's time in the market that counts' and while they have some truth to them - I believe it is easier to make money by being a contrarian investor. That is - invest where it is not popular. If shares are going gangbusters then perhaps look at property which may be cheaper and vice verse.


5. Tax implications in your jurisdiction: There is a very common line that I hear all the time - the tax consequences should not be a reason for your investment - and while this is true it should form part of your decision making process. The availability of negative gearing can effectively reduce the cost of funds associated with an investment to a very low amount meaning that even small capital returns can increase your return on equity substantially. This is not available in all markets so you need to check this carefully


6. Your personality type: I have never seen this one written in books but I found it to be very true. If you're the type of person the gets worried when you see the value of your investments falling and cant get to sleep at night because your portfolio dropped 5% in one day then property could be a better class of investment for you. Because the market is (relatively) illiquid and no two properties are identical it is so much easier to ignore what is happening to the value of your investments on a day to day basis. Some may consider this sticking your head in the sand but if it gives you the 'sleep at night factor' and helps you stay the course in investing then it is something that should be considered.

Conclusion

Although I've presented the information above as an A versus B type proposition I think a healthy portfolio should have both shares and property. Too often people become skilled in only one investment (that is they spend the time only learning about one) and then believe that they can and should only invest in that but I believe that your portfolio and investment performance would be much better if you can master both and invest in each at the appropriate time for you

Investing in Real Estate: Doing the research

This is Part 2 of the Investing in Real Estate series which I'm posting on this site. Part 1 was a brief overview of real estate investing.

The first thing an investor who is not experienced in real estate should do is get out and do as much research as they can. There are 3 core steps in this research process (and each of them answers a separate question):

1. Is real estate the investment I am looking for?


2. What are the characteristics of the market I am looking to invest in?


3. What sort of property am I looking for?

1. Is real estate the investment I am looking for

In researching this topic you are really thinking about your whole investment strategy. Things that need to be considered are things such as where your skills lie, where your interests lie and what your investment portfolio currently looks like and what you want it to look like.

At this point in the process ignore the real estate specific investment books / websites / information (and also ignore books dealing specifically with stocks or starting your own business). You are looking for generic investment information and any book that covers real estate investment as part of a broader portfolio should be included in this first stage of your research.

Note that some of the core benefits of real estate investment (in some jurisdictions) are tax / legislation driven. For that reason if you are an Australian investor ignore all investment books written for the American market and conversely if you are American / British the tax and regulatory regime in Australia is very different to your home market.

2. What are the characteristics of the market I am looking to invest in?

Related to the point above. Once you have decided that real estate is the type of investment you are interested in the next thing to do is get specific real estate books that relate to your home market. The real estate markets in different countries (and even different regions within countries are very different)

For example in the United States real estate is primarily a yield investment characterised by relatively low capital growth, high capital expenditure and a high level of involvement by the landlord. Conversely in Australia investing in real estate is a low yield, high capital growth and (potentially) low level of involvement by the landlord. The above comparison is over-simplified and there are variations within any market but it serves to illustrate the point that you should not be looking at information outside your target market.

There are some great research facilities available. For Australian investors the somersoft property forums are one of the best research tools available. Take what they say with a grain of salt because for the most part they are pure property investors who believe the market can never go down but when discussing the relative merits of investing in different areas the information is invaluable. No doubt there are similar websites available for other markets as well (even if you're not from Australia I recommend visiting the site to see what a quality property investment forum looks like).

3. What sort of property am I looking for?

In evaluating this question and looking to research individual properties you need to consider what your budget / personality and skill set is like.

If you are a handy person who does not have a great deal of available funds you may want to consider a cheaper property that requires extensive renovations. If, however, you are like me and are useless with your hands and no real interest in managing your property you want to get a property that does not require much maintenance, that will rent easily. Your free cash flow / tax situation will also determine what sort of properties you are looking for. Negative gearing allows higher earning individuals to buy more expensive properties which have the potential for higher growth but which earn a very low yield in the meantime while lower earning individuals who do not get the same tax break may want to consider a cash flow positive property with lower capital growth potential.

How does the above affect the research you do? It affects it in 2 ways:

1. It affects the types of materials that you research. If you're not a handyman and useless at renovations then don't research things relating to this. If you can't stand the process of building a house then don't get into development. You need to research the type of property that works for you


2. In looking for individual properties look for the ones you identified above. If you are going for high growth / low yield then look at inner city areas etc.

Summary / Warnings

Given the amount of money you are likely to commit to a physical investment property do not skip on the research - it will save you money and there is a lower chance of unexpected surprises. All of the research steps above are necessary and should not be considered optional.

My big warning is beware of spruikers. For some reason the property industry seems to be full of them. Beware of people that tell you that the property market is always going to rise and that they will show you how to make 'risk free' money or how to 'reduce your risks'. Also beware those that tell you techniques that work in other markets will work in yours too. The golden rule in all finance is especially true in the real estate market: there is no such thing as a free lunch

Investing in Real Estate: Overview

For anyone who regularly reads this blog they will know that, currently, my largest single investment is a rental property which I bought in 2010. I have decided to do a series of posts outlining the various things I learned during the research / search / purchase / ownership phase of investing in real estate.

The first thing to know is that you do not have to buy an investment property to get exposure to the real estate market. This is because there are enough listed REITs (real estate investment trusts) out there so that you can invest in one through the stock market. Often they come with the added benefit of trading at a discount to their market value. This is a separate class of investment which I will cover at a later point.

First we need to consider the reasons why an investor would consider investing in physical real estate. In my opinion it comes down to several reasons

1. Banks will loan you more against real estate (at reasonable rates without things like margin calls etc) than any other investment class.


2. Control - some investors like being able to actually alter the outcome of their investments. Real estate is about as hands on as you can get without actually owning and running a business of your own


3. Psychological benefit of a lack of a liquid market. A lot of investors get very 'antsy' when their investments are losing money. This is especially true in the stock market when one can check exactly how much money they have made / lost every minute of every day. For some investors there is a real benefit of their money being in an investment that they do not know the value of but they believe will appreciate in the long term. I think this is an underestimated benefit of real estate investment

However there are many myths that circulate about real estate investment and it all depends on how the market is going. In Australia there is a belief that you can never lose money through real estate investment and in the long run property prices will always increase. In markets where the real estate market is depressed like the US there is a view that real estate is inherently risky and you can lose your shirt through real estate investments.

My idea behind this series of posts is to strip away a lot of the hype (both positive and negative) and hopefully provide an objective view of real estate investment and how it can fit within an investors portfolio.

Investor Book Review - Damn It Feels Good to be a Banker

I have finally uploaded my latest book review to my Investor Book Review website. Check it out:

Damn It Feels Good to be a Banker by Leveraged Sell Out

Once again this site seems to have 'fallen through the cracks'. I think there are a few reasons for this.

1. I am devoting much more of my time to this blog and tracking my personal financial journey
2. In my new job I am finally 'doing what I want to do' and am involved in investing decisions and research every day so my desire to read books on the subject has been somewhat limited
3. The last book I started reading 'Guns, Germs and Steel' has defeated me in a way that very few other books have. I find it really interesting though extremely dense so I can really only read one chapter at a time (compared to other books which I just fly through)

Anyway hopefully I will be able to find more books to write about in the near future. I may even tackle some technical books which I actually use more frequently but are not for your 'average punter'

The real cost of car ownership

In trying to break down why my personal expenditure kept going so far over my limit I started examining my major expenses. One of the biggest expenses I have (other than rent) is my car. I compiled the annual expenses of running a car and then broke it down by month and I was amazed what it came to!

It is really an exercise worth doing if you want to keep track of everything you are spending. So the annual expenditure for my car (a 2003 Mazda with only ~60,000 km on the clock which I bought for ~$19,000 in Jan 2010) is:

• Insurance: $1,100 p.a. ($91.66 per month)


• Servicing: $800 p.a. ($66.66 per month)


• Fuel: $2,340 p.a. ($195 per month)


• Cleaning: $360 p.a. ($30 per month)


• Registration: $676.50 p.a. ($56.38 per month)

The variable costs on owning a car therefore come to $5,276.50 per annum or $439.71 per month.

Further this does not include the effective ownership cost of your car. The newer (or higher priced) your car is the worse the depreciation effect and effective cost is higher. For example I did a quick check and my car could currently sell for ~$13,000. So for 26 months of ownership I have paid $6,000. This works out to an extra $230.77 per month giving a total ownership cost of $670.48 per month!

It really is worth doing the math yourself to see how much your car is costing you!

Expenditure Tracker - February 2012

As a reminder to the readers my monthly expenditure goals are as follows:

• $3,300 increase per month in my share investments


• $1,600 increase per month net increase in my loan offset account


• $1,500 increase personal expenditure allowed per month

In February 2012 this whole system seemed to go haywire. The main problems were around my personal expenditure (again) and as mentioned last month, if this continues into next month I will need to consider whether I've underestimated the amount I require to live on. I realise that many people would say that $1,500 per month is more than sufficient however as argued in my new years goals - I do enjoy some of the nicer things in life and I want to be realistic when setting my expenditure goals.

Below are my monthly performance numbers along with the over / under expenditure associated with them:

• Share Investments: +$1,125 ($2,175 under)


• Home Loan Offset Account: +$2,888 ($1,288 over)


• Personal expenditure: $2,748 ($1,248 over)

On a cumulative basis (January 2012 - February 2012) the accounts are as follows:

• Share Investments: +$6,125 ($475 under)


• Home Loan Offset account: +$2,597 ($603 under)


• Personal expenditure: $5,451 ($2,451 over)

In this month my personal over-expenditure cut into my investment programme significantly. On a cumulative basis however I am only ~$1,100 behind which isn't that big of a problem. The biggest problem I foresee for the next month is that based on my credit card expenditure I am already very far ahead of my personal expenditure cap (I believe March 2012 will be the largest credit card bill I've ever received). As a consequence both my share investments and home loan offset account will suffer.