Ch. 14 Reflection: The Basic Tools of Finance

Have you considered the trade-off between risk and return when making an investment? Most definitely, just about every time I make an investment of time or money. Most recently, my investments have been in real estate and have involved mostly time and a little money. In 2016, I decided to move back to my hometown. When I was looking for housing my mom asked if I would be interested in purchasing a house with her help and fixing it up together. This ignited a fire in me that I didn't know existed, I quickly developed a hobby for real estate investing. My grandma loaned us the money to buy the house with cash. My mom and I fixed up the house using some of grandma's money and some of mom's money. I put it more time than mom and we agreed to get a "cash-out refinance loan" to pay back Grandma with interest, and mom and I agreed that when we sold the property that we would split the profits down the middle. Two years later we ended up selling the house for a $30k profit and each made $15k on our investment. It was a lot of work, but I learned a ton, including some tips and tricks from my mom's experience and I, was able to pay off some debts with the proceeds. 
Did it change your investment? Yes, each time I consider the trade-off between risk and return it changes the way that I invest. For instance, last summer, mom and I decided to invest in another fixer-upper property in Colorado. This time she got a loan to purchase the house as a rental with the agreement to rent it to me and my brother and to inherit the house to us when she dies. This was a different type of risk and reward. For instance, if my mom and I have a falling out, she could change her mind and decide not to give the home to us as an inheritance. Now normally, I wouldn't be concerned with this type of  verbal agreement with the family, but unfortunately, I had a bad experience several years ago renting a house with land from my Dad and the verbal agreement changed and left me in a lot of debt and left me forfeiting thousands of hours of labor that I had invested on his land. In learning from that situation, I had to have a hard conversation with my mom, telling her my needs to have ownership in this new property. Although there wasn't a way for me to co-sign the loan with her, she was able to add my brother and me to the title of the property so that when she dies, my brother and I will each own half. That gave me the security I need to gladly contribute my labor to the remodel of the house. Therefore I am building equity via sweat in the project!
Do you expect a risk premium related to the level of risk? Yes, I expect a higher rate of return with riskier investments. For instance, venture capital investments are investments in startups. If I were to invest money in a startup, I would expect a higher interest rate on a debt style loan or a sizeable amount of equity or percentage ownership in the business related to my initial investment. Venture capital investments are riskier than buying stocks, but their potential return is much greater.
Why is the present value of a dollar more valuable than its future value? In most cases, a present dollar has more value than a future dollar because of compounding interest. However, that is only the case if the interest rate is higher than the rate of inflation. For intance, if I receive 5% interest on my present dollar, but the rate of inflation is 6%. Than the future dollar is more valuable.

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