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8:30 AM EST Wednesday, November 29, 2006: Yesterday I received a check for $267,750. This represents a 76.5% return of the monies I had invested in a real estate syndicate I was part of. The money came because we, the owners, refinanced the property, i.e. borrowed more money from the bank and then used the money we got to repay the old loan and then pay the owners, i.e. ourselves. What's stunning about this refi (my first) is:

+ We owners still own 100% of the property. Each investor's share of the property remains exactly the same. But my rate of return on my remaining investment in the property will dramatically increase -- if only because I've now got much less invested, but my quarterly dividends are not likely to change significantly -- they might actually increase in the long-term. (More about that in a moment.)
+ The re-financing is not a taxable event. I don't pay taxes on the money. All we've done is to borrow more money. I haven't made a "profit," though it sure feels like one.
+ I can take the money and invest it in another property. And presumably do the whole re-fi thing all over again.

We were able to borrow more money from the bank -- called refinancing -- because the property over time had become more profitable. Rents had risen faster than expenses. And the NOI -- net operating income -- had risen. Banks as lenders, I'm told, are only interested in cash flow. They look at something called DCR -- debt coverage ratio. They look for a cash flow that will cover the needed payment to them by at least 1.3 times.

If your property's cash flow goes up, the banks will lend you more money. As your cash flow continues to rise over the years (assuming you're doing a good job of managing the property and have tenants with rising rents, etc.), you can re-fi again and again, taking more and more money out of the property. A friend told me yesterday that "in the good old days," he had taken as much as 300% of his original investment out of the property. At that point -- since he no longer had any money invested in the property -- his annual return (paid in quarterly dividends) was, of course, infinite. I'll take "infinite" any time. Puts even my occasional excellent investments of 30% and 40% to shame.

Re-fi is the holy grail of investing in real estate. In this case we switched the old amortizing debt to an interest-only debt. So while our debt increased by about 40%, our annual debt service expense will rise by only 10%, putting not much of a greater burden on my quarterly dividend checks. My dividend was averaging 9%. If my cash dividends (and my math) hold up, that will mean I'll suddenly be receiving a 38% dividend on my remaining monies. The funny thing is that if we had waited a little longer -- for our rents to rise a bit more and for our profitability to improve even more -- we could have re-fied 100% of our investment. And then our ongoing rate of return would truly have been infinite. But the timing was right to do it now.

Re-fi is especially great when interest rates fall -- when you're financing at a lower rate than what you originally borrowed at. Imagine your original loan was at 9%. Now you're re-financing at 6%. The mind boggles at the math. This is far more interesting than second guessing the irrationality of publicly traded companies.

As a potential "perfect" investment, real estate properties with solid rents have several major pluses:

1. Your rate of return is paid by the rents, not by a prayed-for rise in stockmarket value.

2. You can positively affect the outcome of your property -- by improving the property, raising rents, cutting expenses, etc. There's absolutely nothing you or I can do about improving the value of our Costco stock, except shop there. And I seriously doubt that my miserly shopping can make any difference to Costco's bottom line.

3. Re-fi doesn't happen with equities. Once in a blue moon you might get a decent dividend (like Microsoft did). But it's rare and, worse, taxable.

4. The cushion on falling real estate prices in a property with rents is determined not by speculation (think what's happening in the housing market today), but by those rents, expenses and the building's basic profitability as a flourishing business.

5. When you go to sell your property you probably won't pay taxes on your profit because you'll organize to buy into another similar ('like-kind") building or two and effect what the IRS calls a 1031 exchange -- one of the greatest tax breaks ever given to any industry.

You wonder why, given all this, you'd want to ever sell your property? Surprisingly, this was my first re-fi. But I've participated in many real estate syndicate sales in recent years -- some with IRRs as high as 40%. Why not re-fi? Why sell? And the answer: In some parts of the US -- Greenwich, CT, New York City, Beverly Hills, CA, etc. -- the demand for properties has been so strong that people are willing to pay huge multiples for cash flow, though the cash flow has not risen substantially. Hence re-fi was not an option. Taking advantage of the frenzy -- who knew how long it would last -- was the option.

The moral of this story? Always check the cash flow. It's the cash flow which determines the value of the building. And it's what your bank is looking at.

My friend, Ed, has participated in real estate syndicates for the past 14 years. He's never lost a nickel on one of them. Ed actually has 12 deals paying him "infinite" yields. One of his hedge funds (call it dumb diversification) is down 38% in 2006.

Continuing the dumb-down style of investing. On Monday (click here) I wrote about my autopilot method of investing in equities, with special emphasis on Vanguard funds. In the same vein, Glenn Cullen, a reader, sent me a link to this MarketWatch article. Great minds think alike and all that...

Three mutual funds that end the guesswork.
Simple, low-cost stock and bond portfolio has been high achiever
By Jonathan Burton, MarketWatch

SAN FRANCISCO (MarketWatch) -- Can it be this simple? Can just three mutual funds handle all your savings needs?

The idea may not be for everyone. But the formula is easy enough: One index fund to cover U.S. stocks, another for the international markets and a third for the U.S. bond market. Together, this trio has rivaled U.S. stock returns over one-, three- and five-year spans, and with more stable returns year to year than the broad market.

With thousands of fund options, it may seem hard to believe that a portfolio which doesn't even try to beat the market can do a better job than most professional money managers. But in this case, less is more.

"It makes sense to have those three funds," said Meir Statman, a Santa Clara (California) University finance professor who studies investor behavior. "What makes it hard is that it seems too simple to actually be a winner."

Make no mistake: A blend of bland index funds isn't going to provide you with scintillating cocktail-party conversation to dazzle your friends who own hedge funds or hot sector offerings.

"It's a 'cold shower' portfolio," Statman said. "You'll do fine, but you'll not have the biggest house in the fanciest neighborhood."
But you will have a big edge. Almost two-thirds of U.S. stock-fund managers have failed to beat a total-market benchmark index over the past five years. They're victims of poor stock selection, volatile market swings, out-of-favor investment style, high operating expenses, or all of these. Buy-and-hold index-fund shareholders pocket above-average returns by default, an advantage many investors forfeit in an often-futile effort to reach the top rung.

Said Statman: "You can make it really simple, be well-diversified, and do better than two-thirds of investors. For many, that is a sense of relief. Other people think of it as throwing in the towel. There is a competitive streak in them that says, 'I can do better than that,' and being in the top one-third is not going to get you any medals and is not going to make you rich."

The three-fund strategy is simple without being simplistic. Wide exposure to the world's stock and bond markets removes a key investing concern known as "specific" risk -- the chance of losing money if a company's business implodes. Eliminating company risk leaves you with market risk, those unexpected and unwelcome events that can torpedo a portfolio.

Market risk can't be avoided; it's part of being a stock or bond owner. But diversification tempers the adverse impact of market upheaval, since your money is spread among investments that tend not to rise and fall in step with each other. Of course, diversification can limit upside gains, but it also protects against unpalatable losses that can take years to recoup.

Ultimately, as studies have shown, achieving long-term investing goals depends mostly on allocation across investment classes and styles, along with a patient time horizon and keeping costs low. Stock selection and furtive trading is not so effective; it's difficult at best to predict where the right place is at the right time.

"There may be better investment strategies" than owning three funds, said John Bogle, founder of The Vanguard Group and president of the mutual-fund giant's Bogle Financial Markets Research Center, "but the number of strategies that are worse is infinite."

To see why the three-fund portfolio can be so powerful, consider the results from two investment allocations using Vanguard index funds as proxies.

More aggressive shareholders could divide a portfolio of 85% stocks and 15% bonds this way: Put 65% of assets in Vanguard Total Stock Market Fund (VTSMX), a proxy for the MSCI U.S. Broad Market Index. Add 20% to Vanguard Total International Stock Index Fund (VGTSX). Finally, commit 15% to Vanguard Total Bond Market Fund (VBMFX).

A $10,000 investment in this allocation in October 2001 would have been worth $15,828 five years later, while the same amount in the Standard & Poor's 500 Index (SPX) , reflecting the performance of larger U.S. companies, grew to $12,096, according to investment researcher Morningstar Inc.

This portfolio also would have outdone the S&P 500 in the three years through October, with $10,000 worth $14,381 compared to the S&P 500's $13,840 value. It also edged the index over a one-year time frame, valued at $11,686 versus $11,634. Moreover, these funds together achieved better overall results with less volatility -- the violent swings that can drive investors to abandon ship.

Meanwhile, a 60-40 stock-bond mix of 50% U.S. stocks, 10% international stocks and 40% bonds produced slightly lower returns than the 85-15 blend over both one year and three years, and also finished shy of the S&P 500. That's expected from a portfolio with only modest stock exposure during a bull market.

But this conservative strategy blew away those two comparisons over five years, which counts the last two years of the vicious bear market. With strong support from its bond-market anchor, that $10,000 would have been worth $18,720. Plus, the portfolio held its own against the bear's thrashing. While the S&P tumbled 22% in 2002, this 60-40 allocation shed just 0.4%, Morningstar reports, and it trounced the benchmark in 2004 and 2005.

"That three-pronged approach is going to beat the vast majority of the individual stock and bond portfolios that most people have at brokerage firms," said Mark Balasa, a financial adviser with Balasa Dinverno & Foltz in Itasca, Ill. "There is a certain elegance in the simplicity of it."

And since index funds --Vanguard's in particular -- generally boast rock-bottom expenses, the cost of owning these portfolios is a fraction of the average diversified U.S. stock fund's 1.41% expense ratio -- about $25 a year over a decade, rather than the $200 annual price tag on a typical fund. Moreover, since index funds trade infrequently, they're highly tax efficient.

In addition to Vanguard, all-market U.S. stock-index funds are available from Charles Schwab & Co. (SCHW), with its Total Stock Market Fund (SWTIX) and Total Bond Market Fund (SWLBX). And T. Rowe Price Group Inc. (TROW) offers Total Equity Market Index Fund (POMIX).

A three-fund strategy doesn't take any special expertise. It won't grant you bragging rights. Even Bogle, the father of the modern index fund, keeps more than three holdings in his personal account. About 80% of his retirement plan, he said, is given to several Vanguard index funds, with the rest in Vanguard's actively run Windsor (VWNDX), Wellington (VWELX) and Explorer (VEXPX) funds.

For the entire MarketWatch article, click here.

The virtues of marriage

Two guys from Hawkinsville are quietly sitting in a boat at a pond in Pulaski County Georgia fishing and sucking down beer when suddenly Bubba says, "I think I'm going to divorce my wife. She hasn't spoken to me in over two months."

Earl sips his beer and says, "You better think it over. Women like that are hard to find."

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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