Some Investment Ideas Sound Better Than They Really Are

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When the stock market goes down, people look for additional investment ideas. Everyone wants to discover the next big thing or an old idea that has been overlooked. You have heard the expression: “All that glitters is not gold.” Some ideas sound great, yet it’s important to understand the drawbacks.

1. Owning rental property. There are many reasons in favor of this idea. People will always need someplace to live. Rents can rise with inflation when leases are renewed. In simple terms, the annual rental income divided by the purchase price of the property can look better than many fixed income instruments.
You need to understand: You are a landlord. You have responsibilities to your tenant to maintain the property. This can be outsourced to a property management company, but that costs money. If a tenant leaves, the property sits vacant until it is re-rented. You still need to pay your mortgage, insurance and property taxes. Sometimes tenants stop paying rent and you need to go to court.  

2. Buying diamonds and precious stones. This sounds like a good idea if you watch lots of crime dramas on TV. The thieves often steal diamonds, rubies and emeralds. They are expensive when you shop in jewelry stores. They are an “investment” you can wear and enjoy, then perhaps sell in the future.
You need to understand: The markup on diamonds can be high. According to Chron, when a diamond is sold to a customer by a retail jeweler, the markup is 1.6 to 3X the original cost. Quality and size are key determining factors in a diamond’s value. Put another way, you need to try to buy the best.

3. Buying a timeshare. The logic is you “own property” without the headaches of “owning property.” This might sound attractive if you consider buying into a hotel room in Manhattan or a beach resort in a great location. You think about renting it out when you are not using it.
You need to understand: The secondary market is not what you would expect. Put another way, they can be hard to sell. In the meantime, you are responsible for annual maintenance fees set by the timeshare operator. These can go up over time. You often discover the carrying costs for your timeshare can be similar to the cost of renting a hotel room in the same location for the same time period.

4. Buying original art. Few of us understand art. I do not. When you look at contemporary art setting record-breaking auction prices you often think: “How tough could it be to invest in art?” As with many things in life, there is a small subset of collectible art and a large amount of art that is not collectible.
You need to understand: Works by the really great artists who are in demand are sold through dealers representing the artists or auction houses selling consigned items. There are few “entry level” pieces. Most are very, very expensive. The BBC produced an excellent documentary that is also entertaining, “The Banker’s Guide to Art.” It’s available on YouTube.

5. Flipping houses. You see programs about it on TV all the time. It seems so easy. You buy the worst house on the best block. You fix it up quickly and sell it for a big profit. Why isn’t everyone doing it?
You need to understand: The investor needs to buy the right house at a very low price and get the renovation work done within a tight budget. On some programs like the BBC’s “Homes under the Hammer,” the buyer often has a crew or workers or a very large family that can get the work done quickly while keeping costs down. You are paying the carrying costs (mortgage, insurance and property taxes) from the time you buy the property until it is sold.

6. Buying wine as an investment. There are indexes tracking the fine wine market. The numbers are impressive. The most collectible wines have appreciated in the past. A major reason is because they are in short supply. Why not walk down to your local wine store, buy a few bottles, and resell them later?