Where would you deploy $50k of idle cash if you had it? How about $150k? Or just $30k? Welcome to “Biotech or Brick?”. In this series, we’ll pit biotech options trading strategies against competitive real estate investment markets in side-by-side scenario analyses. I intend to both teach and learn about writing options as a means of achieving financial freedom. Rental property ownership is often touted as the best way to accumulate wealth. I’d argue it’s informationally more accessible, but it may not be the best wealth accumulation strategy. Head to Bing and you’ll find “Real Estate Investing” has 6-8x more links than “options trading”. It’s easier to talk with family and friends about rental property investment than options trading investment. Whether you’re a seasoned investor or just getting started, we’ll explore distinct, sample investment scenarios that might not only meet, but exceed your financial goals. Along the way, we’ll make options trading seem less dauting.
Investment Option #1: Rental Property Investment in A specific region
In the real-estate scenario, I’ll give an overview of the region and outline the assumptions. We could evaluate a borough in the Baltimore market, Nashville, Waco or Miami-Dade. We can narrow our focus to zip codes because long-term value is highly correlated with location. Here are some data that I’ll track down to build a story:
Housing data:
· Aggregate value of recently sold homes (maybe 10 or 20, not a general index)
· Rent estimates
· Metro area population growth
· Job growth
· Historical price trends over the past 1, 3, and 5 years
· Price projections over next 3-5 years
· State taxes
· Interest rates
Investment inputs:
- Initial costs and financing options
- Operating expenses
- Maintenance
- Taxes
- Insurance
- Vacancy rate
- Property management fees
- Appreciation
- Rental base and growth
ROI Calculation:
Formulas to use:
Cash-on-cash return: (Income – expense) / initial investment
Cap rate: Rental income – expenses / value
IRR: Simple calculator to give longer-term view of rate of return
Pros and Cons:
Benefits and drawbacks of the regional real estate investment will be captured in this area. I’ll demonstrate this in a chart. We’ll touch on liquidity, risks, ideal holding period, expectations, black swans.
Scenario 2: Cash Secured Puts for Biotech/Pharma companies
In the options trading scenario, I’ll give an overview of the company and outline the assumptions. We could evaluate mega caps all the way down to small caps, and everything in between. We can narrow our focus to therapeutic areas, risk tolerances, scale. Here are some data that I’ll track down to build a story:
· Brief history and recent performance of the company
· Primary revenue drivers
· Significant milestones or recent news correlated with stock price fluctuations
· 1yr, 3yr and 5yr price data
· Market cap, P/E ratio, revenue and earnings growth versus peers
· Other ratios, like price to sales, div yield
Investment inputs:
· Starting capital
· Options tables with different probabilities of profit
· Variable time to expiry periods
Expected Returns Calculation:
Formula based on simple investment return calculator
We can map out 6mo, 1 yr and 2yr gains, or match to rental property evaluation period
Pros and Cons:
Same as the real estate scenario. Upsides and downsides of utilizing this strategy and what demands extra attention.
Comparison and Conclusion:
· Side-by-side comparison of the net cash flows from both scenarios.
· Discussion on which scenario might be more advantageous based on current market conditions and individual risk tolerance.
· Personal insights or philosophy related to investment decisions
· Profits adjusted for time invested
There will be no right answer in these scenario analyses, but a sharpened perspective of how to contrast your investment decisions against alternatives. Let’s see where this goes, thanks for learning with me.
