Asking price=$184,900. I offered 160k, bank countered, $184k, I countered 161k..

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Asking price=$184,900. I offered 160k, bank countered, $184k, I countered 161k..

2012 Apr 20, 3:56pm 23,898 views 42 comments

Looking to buy a SFH rental built 2007. 3 bed, 2 bath 1935 Sq ft in South Puget Sound. Carrying costs $1150/mo at their asking price, $1050/mo at mine. Rent $1500/mo. I probably will walk away if I don't get 170k. Should my walk away price be lower?

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31 Rent4Ever @ 2012 Apr 25, 6:17am

RentingForHalfTheCost says

n companies like Coke that pay a decent dividend I think it works perfect. The dividend (3%) becomes the back-bone for the stock price. As long as they continue to pay it (they have since 1920), the stock hovers around your purchase price. You basically don't need it to appreciate to get the 7% return.

Performing a covered call on a dividend stock that is level pays very little. So you essentially have to sell the call at very near the actual stock price to get any kind of meaningful income. Which means you will likely have the option executed.

Performing a covered call on a volatile tech stock, would pay hansomely even at a strike price far beyond the current price of the stock.

There's advantages and disadvantages to covered calls. The biggest disadvantage is you are giving up a lot of your upside on the stock. (which is where most of your gains come in sudden spurts, like the last 3-5 months) If you are a longterm investor, this is utter nonsense to get involved in. If you are an active trader who knows what you're doing, then it might have a place in your strategies.

Options are scary as hell. Remember, the guy on the other end of that trade is someone 10X smarter than you.

RentingForHalfTheCost @ 2012 Apr 25, 7:31am

Rent4Ever says

Performing a covered call on a dividend stock that is level pays very little.

True if you think 7-10%/yr is little. I tend to think that is all I need. Slow and steady.

33 Rent4Ever @ 2012 Apr 25, 8:44am

RentingForHalfTheCost says

Rent4Ever says

Performing a covered call on a dividend stock that is level pays very little.

True if you think 7-10%/yr is little. I tend to think that is all I need. Slow and steady.

No that's a good return and if you can get that with covered calls, then you're doing something right. They are one of the least risky options positions you can have.

Have you ever had a covered call on a dividend stock called away from you, so you didn't own it over the period of time you had to be holding the stock to collect the dividend?

34 burritos @ 2012 Apr 25, 9:31am

RentingForHalfTheCost says

Rent4Ever says

Performing a covered call on a dividend stock that is level pays very little.

True if you think 7-10%/yr is little. I tend to think that is all I need. Slow and steady.

7-10% is a good return if that's your whole portfolio. Your whole kit and kabooldle is in covered calls?

RentingForHalfTheCost @ 2012 Apr 25, 9:47am

kochevnik says

Everytime you see a 'cant lose' investment ask yourself why isnt everyone doing it

I never said such a thing. I said low-risk, which is not "can't lose". I think housing is much higher risk than buying dividend stocks and selling covered calls to generate income in today's market.

RentingForHalfTheCost @ 2012 Apr 25, 9:51am

Rent4Ever says

Have you ever had a covered call on a dividend stock called away from you, so you didn't own it over the period of time you had to be holding the stock to collect the dividend?

Yes I have and I am glad when it gets called away. It means I already made the 10%. I can dwell on the fact I lost another 10% run-up, but I don't. I just move on and look for other opportunities. The dwelling on missing the 20-40% runup is what gets you in trouble. I shy away from greed at all costs, it comes with too much risk many times.

RentingForHalfTheCost @ 2012 Apr 25, 9:56am

kochevnik says

Go pull up a 5 year chart of KO - now pretend you pulled this stunt at the beginning of 2008 - things are good, not much to worry about, you buy your stock (at around $65) and sell you matching covered calls.

9 months later your calls expire worthless (yahoo !) and you make your $350. And your stock is now selling for $41.

Congrats you just lost about $21 per share on a $65 (+ commissions) investment.

All investing carries with it a loss of principal, even cash carries such a risk, thanks to the Fed.

KO is just one example. The mistake you are making is just looking at the current stock price rather than the dividend. During the time you mentioned KO paid a handsome dividend. If my goal is to make the 3-4% of the covered call and the 3% of the dividend, then why do I care about the price action. If it goes down the dividend payment just bought me some shares on sale, and it also means I didn't get them called away. I think it is a mistake to make your share purchase decisions based on what others value the stock at on that day. Your own view the of the fundamentals of the company should mean more. Beating inflation with dividends and covered calls is fine with me. The issue is if the company is sound, and I don't think anyone has questioned companies like KO, PG, COP, WMT, JNJ, etc. There is no shortage of 3-5% dividend paying companies that are not depreciating like housing.

38 burritos @ 2012 Apr 25, 2:07pm

E-man says

Burritos,

So instead of $1,050, now your obligation is $1,080/month. Your return is about $5k on about $60k investment. It's an 8.3% vs. 9% cash on cash return. You're borrowing at 4.5%, which is positive leverage. When inflation kicks in, you're essentially borrowing at 0%.

Well, unless you think deflation will kick in first then it's a different story.

Learn from your victory. Prosper from your failure.

Yeah. I know. I'll play the waiting game.

39 burritos @ 2012 Apr 27, 2:08am

Property went pending yesterday. Guess I wasn't in the driver seat.