Real estate vs derivatives part 1; ICON a deep value?; and things to read

Trading a cash position via defined risk and probabilities vs. single family real estate cash flow part 1

I did some back of the napkin math while eating lunch today.

On the real estate page, you can see that I clear a 19% gain on the rent/mortgage with my single family rental.

To keep it as close to an accurate comparison as possible we’ll account for the leveraged nature of the mortgage.

I am leveraged roughly 1:4 on the equity built and value of the property.

Let’s include the 19% gain on cash each month. Or what amounts to a %0.13129 monthly and %1.5755 yearly dividend on the underlying balance. For comparison Heineken yields a %1.57 dividend as well. Disney, for the non-beer drinkers out there, yields %1.42.

Owning this rental is loosely (very loosely) similar to owning ~$157k of Heineken stock on margin at %4 that is now appreciated to ~$172k. The margin comparison is definitely not apples to apples. This is just napkin math as stated previously.

I am not telling you to buy stock on margin.

What spread on the SPX is required to get that dividend every month?

The farthest OTM spread I can find with a bid and expiration ~30 days out is a vertical at 2200/2205 $0.05 limit returning %1.01 before commissions and %0.5 after commissions.

Probabilities are 83% that it expires OTM with max loss of $495 per contract and max gain of $5 per contract.

A couple of obvious points:

  1. No appreciation is gained from the underlying when selling derivatives
  2. Commissions destroy any sort of gain on selling options like this.
  3. Rent is on a contract, options premiums fluctuate wildly on numerous variables from trade to trade.
  4. We are comparing options and real estate yield. Sort of silly.

There are a few ways to evaluate this as an investment:

Monthly Cash Flow % Annualized Yield Total Net Cash Flow Total Principal Paid By Tenant Total Paid By Tenant Total Personal Investment Total Principal Paid by me Return on Principal Return on Totals Paid Loan Value Home Value Remaining Principal Home Equity
$207.36 18.89% 1.59% $1,357.32 $1,675.73 $9,135.00 $                             27,833.82 $                               5,843.85 28.68% 32.82% $ 156,900.00 $ 171,000.00 $                 149,380.52 $   21,619.48
$207.36 18.89% 1.59% $ 156,900.00
$188.52 16.89% 1.44% $ 156,900.00
$188.52 16.89% 1.44% $ 156,900.00
$188.52 16.89% 1.44% $ 156,900.00
$188.52 16.89% 1.44% $ 156,900.00
$188.52 16.89% 1.44% $ 156,900.00


At its most basic, having this rental home is like buying $156.9 worth of Heineken stock and paying $27.8k out of pocket with the rest on loan at 4.25% . Then loaning that Heineken stock to someone for 18.89% cash/mortgage per month for a 1.59% annual yield on cash. Today I could sell the home and walk away with $14.1k cash. Obviously holding it longer will lower the cost basis for the initial amount put into the home.

The totals in the table are over the life of the loan. It has only been rented out for the last 7 months. The longer it is owned the more favorable the ratio turns.

This was all done on my phone, so I hope the format is digestible.

Stocks I am evaluating

I canned the GLBL write. Not a good value play for now.

However I like ICON more and more.

I still expect Nat Gas to touch the 1.7-1.9 range and rebound through the late summer and fall on into 2018.

Things to read 

GDP Adjustment

The Negative Effects Of Vouchers 

Ignorance is not bliss 

ISIS and Asia 

What is fire and why does it burn
Five things to start your day 



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