2/22/15: New Tax Regulations Every Real Estate Investor Must Know

It’s said the only things which are certain are death and taxes.

We think this could be modified to DEBT and taxes….especially when you consider the relationship between the two.  BUT…we’ll put our tin-foil hats in our lead cased fire-proof safe and focus on the tax…er, task…at hand.

We were out in the Phoenix area to visit Robert Kiyosaki and decided to pay a quick visit to a nearby friend and tax guru.  We’d heard there was a new regulation all real estate investors need to know about…

Talking taxes in the top of office to Tom’s tower…

  • Your regular host, Robert Helms
  • His irregular co-host, Russell Gray
  • CPA, best-selling author and Rich Dad Advisor, Tom Wheelwright

Let’s face it…taxes are NOT the most titillating topic.  After all, we’d all much rather focus on MAKING money, than spending dozens of hours and thousands of dollars tallying up how big a slice to send to the tax man.

And of course, just when you think you’ve got everything dialed, the tax man changes the rules of the game and hopes you’re not paying attention.  It’s a constant and unproductive game of cat and mouse.

SO…

If you decide to play, you’ll need to find a way to keep up on the changes.  And then organize your activities to utilize EVERY deduction you’re entitled to.  That’s why you want a great tax advisor on your team.

Robert Kiyosaki makes a lot of money.  The guy he depends on to minimize the tax bite is Tom Wheelwright.

Tom Wheelwright CPA is the author of Tax Free WealthTom’s a bit of a nut job.  He actually LIKES taxes.  Weird.  But there’s no accounting for taste.

But thankfully, guy’s like Tom are out there.  And he pays attention to all the things that affect real estate investors.  So when he called and told us about some new tax regulations, we wanted to learn more.

Of course, we brought along our microphones and captured the conversation…because that’s what we do.

Keep the Main Thing the Main Thing

When it comes to taxes, it’s so easy to focus our efforts on paying LESS.  Sounds good, right?

Of course, the easiest way to pay less tax is to make less money…so be careful what you wish for.

Tom says your focus should be on MAKING MORE MONEY…and that’s also true when selecting an advisor.  That is, your advisors are investments…just like your real estate…and you should select them based on their potential to MAKE you money.

It’s a subtle, but important difference.  Otherwise, the temptation is to think of them as an expense…hire the cheapest, and get costly results.

The goal is to INCREASE the amount of money you pay for advisors, taxes, interest and insurance…and have those investments decrease as a percentage of your income.

To Change Your Tax You Must Change Your Facts

This is no different than the person who buys a horrible property in a terrible area and rents to the tenant from hell…then shows up at some poor property manager’s doorstep with a problem they need fixed.

In other words, if you want the property’s performance to improve, the conditions and circumstances need to change.  A property manager can only do so much with a bad situation.

The same is true for your taxes.

To get a beneficial tax result, you need to create better factual circumstances.  But it’s much harder to rewrite history, so it’s wise to understand basic taxation principles in ADVANCE, and then conduct your affairs in such a way that you create the most favorable tax result as you go along.

Obviously, this means getting an education and working closely ALONG THE WAY with your tax advisor.

Duh.  But knowing you need to do it and actually doing it are two different things.  So DO IT.

This Promises to Be a Crazy Tax Year

Tom tells us there are a number of items which are making tax filing a little more…taxing…this year.

The biggie is the new repair regulations.  Without getting lost in the weeds, the short version is that the IRS has issued new regulations designed to clarify a specific area of tax law which affects ALL real estate investors and most small business owners.

It has to do with how certain expenses are classified and whether they are treated as capital or ordinary expense.

Yeah, we don’t get it either.  That’s why you need a guy like Tom.

The point is that if it affects you…and if you own investment real estate, it probably does…then you’ll have to file one (or more!) of Form 3115 Change of Accounting Method.  So be sure to ask your tax advisor before you file for 2014.

The Affordable Care Act is making things more complicated for individuals and small businesses this year also.  But that’s been all over the news, so you’re probably aware of it.  If not, your tax advisor will help you.

A couple of other items Tom says to keep an eye on are President Obama’s proposal to charge capital gains tax at death (yes, it’s true…death and taxes together again);  and a proposal to change the “carried interest rule”, which would effectively cause real estate developers to pay ordinary income tax on certain items which are currently classified as long term capital gains.  Ugh.

So listen in to CPA Tom Wheelwright and find out what’s happening and how it affects you!

Listen Now: 

  • Want more? Sign up for The Real Estate Guysfree newsletter and visit our Special Reports library.
  • Don’t miss an episode of The Real Estate Guys™ radio show.  Subscribe to the free podcast!
  • Stay connected with The Real Estate Guys™ on Facebook!

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.

12/28/14: Ask The Guys – Insurance, Taxes and Measuring Success

For our final broadcast of 2014, we take on a flurry of challenging questions from our loyal listeners.

In the studio saying good-bye to the old year and preparing to welcome the New Year:

  • Your libacious host, Robert Helms
  • His old lame sighing co-host, Russell Gray
  • Father time himself, The Godfather of Real Estate, Bob Helms

It's time to Ask the Guys!Ending one year and beginning the next is a GREAT time to ask questions….about the past, about the future, about the big picture and about what’s happening inside us.

Not sure what all that means, but it sounded mystical.

Instead, we sent Walter down to the email room to hustle up a new batch of questions for us to wrestle with on this edition of Ask The Guys…

As always, we have to remind you that we’re not lawyers, accountants, or investment advisors…we’re just three old dudes who’ve seen and done a lot.  So anything we have to say shouldn’t be construed as professional advice for your particular situation.  It’s just our personal opinions and some ideas you can check out with your own professional advisors.

But we’re sure you already knew that.

Some of the questions we get into for the episode of Ask The Guys:

What’s the difference between an independent contractor and an employee?

This was specific to hiring an on-site property manager, but it’s a great question for anyone hiring anyone to do anything.  And the reason it’s important is not just because of payroll tax, withholding and reporting…but it also affects your liability and insurance coverages.

It’s also important to know that just because you and the employee / contractor agree on what their status is doesn’t mean the taxing authorities or insurance carriers will.

So rather than guess and hope (an all too common strategy), we recommend you detail the role and responsibilities, then consult with your tax advisor and your insurance attorney. (Yes, there are attorneys for insurance too…and if you’re not familiar with what they do or why you need one, check out this past episode of The Real Estate Guys™ radio show.)

And speaking of insurance…

How do insurance and entities like LLCs work together to protect landlords?

Another great question (which is why we picked it)…

Attorneys always want you to have an entity to create a liability shield.  The problem is that lenders will seldom, if ever, make a loan to an entity on a residential property 1-4 units.  So unless you’re paying cash, using an LLC is problematic.

Does that mean you have to leave your assets hanging out in the open?

Not necessarily.

First, you can safeguard your non-real estate assets in entities.  Talk to your asset protection attorney about how to do this.

Next, you can set up a firewall of insurance policies to fund your defense against attacks…and to pay any judgments or settlements that arise.

But be aware that your CONSUMER policies (like your homeowner’s policy and any umbrella liability policy you may have) probably will DENY any claim for a commercial venture…like a rental property.

So go and listen to the aforementioned past episode on insurance and talk to your COMMERCIAL insurance agent about Commercial General Liability insurance, Directors & Officers insurance…and maybe even Errors & Omissions insurance for YOUR management company.  And then talk to your professional property management company about THEIR policies…and how they protect YOU.

Of course, as interesting as all THAT was, the reason you do it is because you’re using real estate to GROW YOUR WEALTH…otherwise, there’s nothing to worry about protecting.

So even though we answer more questions in the episode, for the purpose of this blog, we’ll wrap up on this one…

How do you measure how well your portfolio is doing?Portfolio analysis is fun!

There’s a LOT of different metrics people use to measure portfolio performance.  And if you’re a finance whiz, a stats nerd, or just an obsessive compulsive number cruncher, you can quickly get lost in the weeds.

To complicate matters, most financial analysis is done by measuring net worth in dollars.  The problem with this is that as a unit of value the dollar is constantly fluctuating.  And though it’s had a recent run UP, it has a 100 year history of going DOWN.  That’s why a penny candy from 1965 costs 50 cents today.  But you still only get ONE piece of candy.

So to us, there’s just a couple of things to focus on, which can tell you how you’re doing and keep your accumulating units of value…and not just dollars.

In other words, would you rather have 1 house that goes from $50,000 to $250,000….OR would you rather have FIVE houses…not matter what the dollar price is?

The argument for the latter is that in any economic environment, measured by whatever the currency de jour is, five houses are better than one.

So when you develop dollar equity in a property (something that is happening to more investors right now), you’re actually falling behind.  You’re better off, if the cash flow will support it (VERY important consideration) to extract equity from an appreciated property and use it to either enhance your cash flow and/or accumulate more properties.

Think of it this way…

Imagine you have a $150,000 property (call it Property A) with $100,000 equity in it.  A let’s say it produces annual net operating income of $3,000.  This means you have a 3% cash flow on equity.

If Property A appreciates five percent, or $7,500 in a year, you have an equity growth rate of 7.5%.  That’s because $7,500 growth divided by $100,000 of equity is 7.5%.  Make sense?

Of course, this is only nice on your financial statements…like when your stock holdings go “up”…but it’s really useless until you access the equity by refinance or sale.

Are you with us so far?  Take a breath…it’s only math.Do the math and the math will tell you what to do

Now, let’s say you pull $50,000 of equity out of Property A at a cost (interest rate on the loan) of 5% per year.  Your fully amortized (and largely deductible) payment is $268 a month or $3,216 per year.  So now you’re “negative” by $216 a year (the $3,000 you have coming in before less the $3,216 you have going out on the bigger loan).

Sounds bad, right?

BUT…you have $50,000 in cash (the proceeds from the new loan).

So let’s talk about CASH FLOW…because this is the SINGLE MOST IMPORTANT indicator of your portfolio health.  It’s like your heart beat.  If it stops, then NOTHING ELSE MATTERS.

If you spend the $50,000…you’ve given your portfolio a cancer called negative cash flow.  Do NOT do this.

However, if you INVEST the $50,000 in another property…call it Property B…and let’s say it’s a $150,000 property…and you realize a 10% cash on cash return…NOW you have $5,000 a year coming in on the $50,000.

This is MORE than enough to handle the new net negative of $216 per year on the refinanced Property A.

It may SEEM complicated.  But it’s basically simple.

If you can conservatively invest money at a rate higher than it costs to borrow it, then you can make a profit on the spread.  It’s called “arbitrage”.

And the 10% cash-on-cash return on Property B is obviously TWICE the 5% cost of accessing the equity from Property A.  That’s why the math makes sense.

Okay…moving on….

Now that you’re comfortable with the CASH FLOW in your new arrangement, let’s take a look at the Equity Growth Rate (EGR) of Property A…

You now have $50,000 equity remaining in Property A (you started with $100,000 and pulled out $50,000).  And let’s say Property A goes up $7,500 just like before.

But this time, $7,500 growth on $50,000 equity is a 15% EGR.  That is, you DOUBLED your EGR by REDUCING your equity in the property.  That’s LEVERAGE.  And as long as the CASH FLOW makes sense (which we’ve already covered), it all works.

But MOST IMPORTANTLY, you now own a SECOND property (Property B)!More properties is better than more equity

So let’s take inventory…

BEFORE:

You own ONE property (A) valued at $150,000 with $100,000 of equity and $3000 annual positive cash flow.

Assuming $7,500 annual appreciation, your equity growth rate is 7.5%.

AFTER:

You own TWO properties (A and B).  The combined value is $300,000 and you still have $100,000 of equity.

But NOW, your annual positive cash flow is $4784 ($5000 less $216).  So you went from $3000 positive cash flow to $4784.  That’s a $1784 improvement on the previous $3000 cash flow…or a 59% pay raise!

Good job.

Now, assuming each property appreciates $7500 (a total of $15,000), your equity growth rate is 15% ($15,000 on $100,000).  So you’ve increased your equity growth by 100%!

Good job again.

Plus, you’ve diversified your income and equity growth over TWO properties…so not only do you get richer faster, you do it more safely too.

Good job again…again.

All this to say…

Measure the health of your portfolio based on CASH FLOW.  Once you know it’s POSITIVE across the portfolio, measure how hard your equity is working by CASH FLOW on equity.

Measure your wealth in units of real assets…and don’t be deceived into thinking that equity is real.  More properties is better than more equity…even though more properties will create more equity.

See?  It wasn’t that bad.

Listen Now: 

  • Want more? Sign up for The Real Estate Guysfree newsletter and visit our Special Reports library.
  • Don’t miss an episode of The Real Estate Guys™ radio show.  Subscribe to the free podcast!
  • Stay connected with The Real Estate Guys™ on Facebook!

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.

11/30/14: Deep in the Heart of Texas – The Real Estate Landscape in Dallas

The Dallas real estate market, just like the Dallas TV series and the Dallas Cowboys, just won’t go away.  It’s one of the most resilient, tenacious, dependable real estate markets in the world.Dallas has proven to be one of the best real estate markets to invest in

To find out what’s doing in Dallas, we pay a visit to two of our boots on the ground team.

  • Hosting the hot talk, Robert Helms
  • His tenacious temporary co-host, Russell Gray
  • Returning contributor, Jay Hartley
  • Special guest, Pam Blanco

Our expert guests for this episode are both active Dallas Metroplex real estate professionals with a long history of residential brokerage and property management.  They were there before Dallas caught the world’s attention…and they’re there now.

And because they both deal with investors from all over the world as well as tenants right there in town, they have a perspective that just can’t be found simply reading headlines, charts and graphs.

Most investors buy local and don’t see the big picture.  That’s a great way to get blindsided by things like bond market collapses.

Some investors are big picture only.  They study a market from afar, decide it’s the one for them, and then throw a dart at a map and buy whatever it hits.

That’s a great way to become the proud owner of a huge problem on a bad street.

We think you need to have both a big picture perspective AND a strong local market team who can help you find the right neighborhoods, properties and tenants.

Pre-recession, Dallas was a pretty ho-hum appreciation market.

While markets like Las Vegas, Phoenix, Florida and California were shooting to the moon…Dallas plodded along with a great economy, solid employment, good cash flows…. and boring stability.

Then, when the sub-prime bomb detonated and all those high-flying appreciation markets imploded….

Dallas just sat there.

Sure, there was an increase in foreclosures, a decrease in values and a decline in job growth.  But compared to the rest of the country’s pneumonia, Dallas only caught a cold.  And it quickly recovered.

Long time listeners know that this is when Dallas caught our attention.

Just like in human relationships, your relationships with markets will be tested.  And when the chips are down, you find out fast who your friends REALLY are.

In the Great Recession, Dallas demonstrated its dependability.  Suddenly, boring was beautiful.

Over the last five years, we’ve discovered a whole new sexy side to Dallas.  It’s been one of the leading appreciation markets coming out of the Great Recession.

It turns out that we weren’t the only ones who suddenly got interested in Dallas.  Wall Street hedge funds got heavily involved.  So did Mom and Pop real estate investors from all over the world.

The lesson is that solid fundamentals will almost always leads to a solid trend.

The bigger lesson is that if you focus on fundamentals…the inner beauty of a market…and not just the glamorous make-up of a hot trend…you can catch a rising star.

Today, Dallas is hardly a secret.  Investors worldwide know Dallas real estate is a great place to store and build wealth.  So it’s no surprise that 11% of the home sales are to foreigners…or that hedge funds have bought up thousands of properties.

Does that mean that the deals in Dallas are done?

Not necessarily.  But they’re harder to find.

So getting into the deal flow in ANY market is essential…and even more so in a high demand market like Dallas.

The key to getting into the deal flow is having great relationships with well-connected people in the local market.  The closer to the street they are, the more likely they are to find the opportunities others overlook.

So listen in to this episode to hear from two real life pros who live in the trenches in the Dallas Metro…and if you decide Dallas is a market you’d like to explore, make plans to join us for a fun-filled field trip!

Listen Now :

  • Want more? Sign up for The Real Estate Guysfree newsletter and visit our Special Reports library.
  • Don’t miss an episode of The Real Estate Guys™ radio show.  Subscribe to the free podcast!
  • Stay connected with The Real Estate Guys™ on Facebook!

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.

10/19/14: Creative Financing for the 21st Century – Alternative Methods for Finding Funding

Globalization is affecting how money and opportunity flow around the globeTechnology, laws and globalization are all changing how money moves into and around markets.

In the last quarter of the 20th century, creative financing largely consisted of assumable loans, owner carry back financing and equity sharing.

Fourteen years into the new millennium, there are alternative funding methods which didn’t even exist in the 20th century.

Here to explore strange new worlds of funding, seek out new sources of financing, and to boldly go where no broadcast has gone before…

  • Your charismatic captain of conversation, host Robert Helms
  • His pointy-eared logical sidekick, co-host Russell Gray
  • Special guest, immigration attorney Mona Shah

Science fiction writers like Jules Verne, H.G Wells, Isaac Asimov and Gene Roddenberry have all thrilled readers and audiences with their sometimes prophetic visions of the future.

When you think about pocket communicators that flip open, cars that drive themselves, ships that can sail underwater or fly through the air, it’s amazing how fantasy has become reality.

While not quite as glamorous, today’s real estate investors live in a brave new world of opportunity that’s being affected not just by technological change, but by the inevitable social and political changes which occur as the human race works out its affairs century by century.

Right now, technology has opened up entirely new methods of commerce.  And globalization is changing where, how and why people invest.

So even though all of the 20th century creative financing strategies are still around, 21st century investors are enjoying a grand new era of funding possibilities.

In past episodes, we’ve covered how technology platforms are coming on-line to facilitate the matching of investors with opportunities.  And with the easing of onerous restrictions on promotion, more real estate entrepreneurs are looking to crowdfunding as a way to get deals funded.

In fact, the modifications to the general solicitation rules for promoting private placements to accredited investors has given rise to our very own Investor Registry.

In our main stage presentation at the 2014 New Orleans Investment Conference, we explained to the audience how the JOBS Act is finally beginning to open up non-Wall Street deal flow to private investors.  There are lots of reasons for investors and entrepreneurs to be excited right now.

In this episode, we focus on a little known law which entices foreign investment in the United States.  And it’s something every active and aspiring real estate investor should be aware of.

Mona Shah is an immigration attorney who helps investors and entrepreneurs utilize the United States EB5 programMona Shah is a New York immigration attorney and an expert on the United States’ EB5 program.

Simply stated, the EB5 program allows a foreign investor to earn a residency visa (green card) for an investment of at least $500,000 into a U.S. enterprise which can be demonstrated to create jobs.

Mona explains that those jobs can be “direct” or “indirect”.

A direct job is one created by the investment itself.  So if a real estate developer builds a hotel, shopping center or apartment complex, every construction worker hired is a “direct” job.

An “indirect” job is one created as a by-product of the project.  So if a newly constructed apartment building results in a laundry mat or daycare center opening to service the residents, each of those employees is an “indirect” job.

Now the foreign investor doesn’t have to invest in real estate, but it’s a very popular option because it’s a real asset.

That is, if a business is started and fails, the investor may take a total loss.  But with real estate, the property itself has intrinsic value, so as long as the property isn’t lost to foreclosure there is some residual value even if the business or management fail.

Of course, any time you’re dealing with a government program you need to allow for extra time and hassle.

Why would a real estate entrepreneur try to raise EB5 money?

First, it’s available.  In a world where bank lending still isn’t readily available, sometimes you just have to go where the money is.

But it’s more than that.

It’s also inexpensive.  In fact, it can be cheaper than any other source of capital because the investor is more concerned with getting the visa and not losing money.  So even a modest return is considered acceptable.  ROI is almost an afterthought.

Here’s the best news:  You don’t have to become an expert in EB5 or try to figure it all out on your own.  There are lawyers and consultants who can help.  Your job is to put together a profitable deal because there are people who can help connect you with the investors and navigate the bureaucracy.

If you’ve got more opportunities than money and are looking for a creative source of funds, get to know the Eb5 program.  You can start today by listening to this exciting episode of The Real Estate Guys™ Radio Show!

Listen Now:

  • Want more? Sign up for The Real Estate Guysfree newsletter!
  • Don’t miss an episode of The Real Estate Guys™ radio show!  Subscribe to the free podcast!
  • Stay connected with The Real Estate Guys™ on Facebook!

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.

3/2/14: Orlando – Not Just a Mickey Mouse Market

What do you think of when you hear “Orlando”?

For old guys like us, we think of tying a yellow ribbon ’round an old oak tree. (Google it if it didn’t dawn on you what we’re talking about.)  ;-)

But for most people, Orlando is a one trick mouse.

But there’s a bigger story in Orlando that starts with Florida and involves demographics, economics and an appeal that transcends Disneyworld.

To muse on making a Magic Kingdom made up of little green houses for you and me…

  • Your magic host, Robert Helms
  • His mouse of a co-host, Russell Gray
  • Regular contributor and big brain, Ryan Hinricher

The great thing about magic is it often surprises you. And it’s almost always astonishing.  So when we heard about what’s happening in Florida…and Orlando in particular, we jumped on a jet to go see it ourselves.  It would have been more comfortable to ride inside the plane, but we got there safely.

Real estate investing in Orlando can be profitable and fun!Of course, we never show up in a market without a guide.  And in this case, we knew we were in good hands with Ryan Hinricher.

Ryan’s a true blue real estate entrepreneur.  But he also has a Wall Street background (though we don’t hold that against him), so he likes to research, analyze and interpret data.

We first met Ryan in Memphis, where he and his partners have been investing for years.  And if you haven’t been paying attention to Memphis the last few years, it’s been and continues to be one of the great real estate investment markets in the country.

But once the operation in Memphis was up and running, Ryan headed to Orlando because the data said it was poised to become one of the happier places on earth.  At least as far as real estate investing is concerned.

So what’s the big deal about Orlando (besides the Mouse)?  We’re glad you asked!  And we think you’re going to like the answers.

First, it’s in Florida.  Yes, it’s the same Florida that tanked in the recession, but as often happens… the farther they fall, the higher they bounce.  But we’re not talking about real estate prices (though they’ve been moving up nicely).  We’re talking about the critical pillars that make a real estate market work.

Did you know that Florida went from bleeding red ink to a budget surplus in these last few years?  Maybe California and Washington DC should take notes.  In fact, we’re told the budget surplus is so big that the government is actually returning a big chunk of it to the taxpayers.  What a concept!

But there’s more…

Did you know that the unemployment rate has dropped from the mid-9’s (percentage) to the mid-6’s.  In fact, in 2013 Florida ranks only behind Texas to be the #2 state for job creation!  Now we like Texas a LOT, but when you’ve got billions of barrels of gas and oil under the ground, you’ve got a strong foundation for job creation.  Florida’s had to do it the old fashioned way…by attracting people and businesses. Not to say that Texas doesn’t, because it’s great for business too.

As one of only 7 states with no state income tax, there’ an obvious reason for people and businesses to move to Florida.  And they are!  In fact, Orlando is in the top 5 fastest growing cities in terms of population.  And last time we looked, since people generally like to live, work, shop and recreate in real estate…more people is a good thing for the demand for real estate.

And just in case you were worried about how Florida could pay it’s bills without an income tax, did we mention they have a big budget surplus?  Hmmmm….Washington DC should definitely be taking notes.

But it isn’t just the great climate for business, investment (and weather) that makes Florida popular.

It’s location makes it accessible and desirable to both Europe and South America.  And a weak dollar makes U.S. assets seem cheap to foreigners who have a stronger currency.  Plus, even though a lot of people in the U.S. are concerned about the U.S., it’s still considered one the safest places to live and invest.  So wealthy foreigners are busily moving money into the U.S., including U.S. real estate.  Florida is definitely a beneficiary of some of that.

Of course, Orlando is a big convention town.  In fact, it’s the biggest convention town in the U.S.  So between tourism and conventions, lots of people come to Orlando to visit…in addition to all the people permanently relocating.

We could go on and on (can you tell?)…because there are lots of things to like about Orlando.  But listen in to our interview with Ryan Hinricher and hear it for yourself.  And your reward for reading all the way to the bottom (or listening all the way through the show) is Ryan’s free report on Orlando.  Click here to request yours now.

Meanwhile, if you’re feeling an urge to investigate Orlando, ask not for whom the bell tinkers.  It tinkers for you.  At least we tink it does.

Listen Now

  • Want more? Sign up for The Real Estate Guysfree newsletter
  • Don’t miss an episode of The Real Estate Guys™ radio show! Subscribe to the free podcast
  •  Stay connected with The Real Estate Guys™ on Facebook!

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed. Visit our Feedback page and tell us what you think!

The Great Debt Ceiling Debate – Part 1

This is part 1 of a multi-part series on the “great debt ceiling debate” written as an accompaniment to our radio show broadcast and podcast, “Raising the Roof – How the Great Debt Ceiling Debate Impacts You”.  You can download the episode on iTunes or find it on our Listen page.

As the debate rages on about whether and how to raise the U.S. debt ceiling, it’s hard not to have any discussion of the topic degrade into political diatribes.

But as real estate investors, we’re not too concerned about what the policymakers SHOULD do (since we don’t have any direct control anyway).  Instead, we’re much more focused on what IS happening, what is LIKELY to happen, and what we can do in response to avoid loss and/or create a profit.

In short, we refer to discussions about opinions about what should or shouldn’t be done (or who’s to blame) as “political” discussions.  After all, politics is a pretty “shouldy” business.  But you already knew that, didn’t you?

We prefer that our discussions be more practical in terms of what’s likely to happen and developing a plan A, B or C to react to it.  We may have political opinions (some of which leak out from time to time), but you know what they say about opinions: Opinions are like armpits.  Everyone has them and most of them stink.  We don’t have to like each others’ political opinions to enjoy a healthy conversation about what’s happening and how it affects real estate investors.

Since the debt ceiling debate is a complex, polarizing topic with huge global economic consequences, we thought it was worthy of a bigger discussion than our regular broadcast blog.  So strap on your reading glasses and get ready for a big discussion.  And be sure to listen to the podcast on this topic also.  It doesn’t replace this article, but it will help if you’re new to all of this.

We STRONGLY encourage you to plow through it all because the discussion of the U.S. debt and financial system has a DIRECT impact on interest rates, availability of loans, job creation (the best tenants have jobs), wages and the value of your real estate – Just a few things that are probably pretty important to you.

In a Rising Tide, All Ships Rise and Vice-Versa

We all found out a few years ago that no matter where or what kind of real estate boat you were floating, when the MBS (mortgage backed securities) money drained out of the tub, values dropped.  Really astute investors paid attention to the macro trends BEFORE this happened and drained their own equity while the tide was still high (back in 2005 we did some shows on “equity hedging strategies”, which you can find in the Backstage archives).  The rest of us learned (the hard way) that we better pay closer attention to the big picture for next time.

The big question is: will there be a next time?  That is, will real estate values rise again?  If real estate is down, never to rise again, then you can still make money, but you need to approach the problem differently.  If the tide of currency (the money supply) rises, then real estate values are likely to rise over time and you would structure your portfolio accordingly.

So what’s LIKELY to happen? And how does the debt ceiling debate impact you?

You could say that prices are so low they can only go up.  Just like at the peak, when people said that prices were so high they could only go down.  Those are nice sayings, but even a broken clock is right twice a day.  What are the economics behind the predictions?  Is it all such a complicated mystery that merely guessing or listening to the loudest voice is the only way to know?

No.

Here’s the good news.  You can understand all this.  In fact, you may be surprised at how easy it is.  So the goal of this series of articles and the accompanying podcast is to give you a basic understanding of “the mechanics of the money”, so you can begin to plot cause and effect, then decide for yourself what you think will or won’t happen.  But keep in mind, the best strategy will consider all possibilities.

At a recent conference, we heard a quote that has become one of our favorites:

“Better to prepare, than to predict” – Henry Brock

So in this series we’ll take a look at what happens if the DO raise the debt ceiling and what happens if they DON’T.

Of course, who can resist the temptation to predict?  So, at the end, we’ll go out on a limb and make a prediction.  Just keep in mind that our prediction is just our own opinion, and probably about worth what you paid for it. ;-)

Ready?  Here we go.

The U.S. Money Supply

First, let’s talk about how money gets into the U.S. system.  When the government needs money, the Treasury either taxes (takes it from the productivity of the people) or borrows (pledge the future productivity of the people).  Since the government has a chronic problem of spending more that it takes in (does that happen?), it’s no surprise that they both tax AND borrow.  In fact, most of the taxes go to pay the interest on the debt.  But no matter how you slice it, the productivity of the people pays the bill.

When Uncle Sam borrows, he writes IOU’s called bonds and sells them in the open market.  Uncle Sam’s bonds are called Treasuries and, at least up until recently, Treasuries have been considered the safest debt you can buy.  After all, they’re backed up by the “full faith and credit of the U.S. Government”, which is really an euphemism to say “the full power and authority of the I.R.S. to tax the earnings of the most productive people on the planet”.

Do you feel any temptation to talk politics?  Stay calm.  Keep your arms and ammunition in the vehicle until the ride comes to a full and complete stop.

So who buys Uncle Sam’s IOU’s?  Lots of people.  Private investors, banks and foreign governments to name a few.  Over the last several years, China has purchased trillions and is now the largest single foreign holder of U.S. debt.  Recently, there’s been another big buyer whom we’ll talk about momentarily.  But for now, let’s talk…

Interest Rates

If you’re already bored reading all this, just think about how important interest rates are to you.  From your savings account, to your mortgage, to your credit cards, to your car loans and all your investment properties, interest rates affect what you earn and what you pay.  More importantly, interest rates are at the heart of the great debt ceiling debate and the motivation behind much of the Fed’s monetary policy.  So stick with us, even if you’re not sure how the Fed’s policies affect you.  You’ll know before this is over.

Interest rates are the price the lender charges for the risk of making the loan.  That’s why if you have bad credit or bad collateral, the rates are higher.  Common sense, right?

But interest rates are also a function of supply and demand.  This means that when there’s lots of money to lend, but not too many borrowers, rates are low.  The lender lowers the price to entice you to borrow.  Low rates encourages borrowing.  High rates encourages saving.  Think about that one.  But not for too long, because we need to move on.

Conversely, if a borrower wants ( really needs, is desperate, etc.) to borrow, he may have to offer a higher interest rate to attract a lender’s money.  In other words, if there’s a big demand for loans, but not many lenders willing to lend, the interest rate a borrower must offer to a lender will rise until someone wants to buy the debt (make the loan). So far so good?

The Bond Market

Remember: Bonds are debt.  So when someone buys a bond, they are effectively lending to the bond issuer.  So when Uncle Sam wants to borrow, he goes into the open market to sell bonds.  This is elementary to some of our audience, but less so to others, so in keeping with our “no investor left behind” mantra, we wanted to make that clear before moving forward.

Now, let’s talk about that other big bond (debt) buyer we mentioned earlier: The Federal Reserve or “The Fed”.  That’s the private (as in, not Federal) network of international banks (that is, not U.S.) whose leader is  appointed (that is, not elected).  How accountable is the Fed to the United States citizenry?  You don’t want to know.  Let’s just say, not very.

Contrary to popular myth, the Fed does NOT set interest rates – at least not directly for things like Treasury Bonds.  The interest rates the Fed sets are the rates at which the banks do business with each other. There’s two: the discount rate (what banks pay when they borrow from the Fed) and the federal funds rate (the rates banks pay when they borrow from each other).  We’re not going to talk about those now because they have nothing to do with the debt ceiling or Treasuries. Well, that’s not entirely true, since Treasuries are competing with banks for the savings of all the “A” students who produce more than the consume and save the excess.  So if the Fed wants Treasury rates low, the banks better be low too, or people would put their money in FDIC insured savings accounts.

Hmmm….there seems to be a relationship between the Fed, the banks and the bond market.  This would be a fun topic to explore, but we’ll leave that to you for extra credit.  For now, we just don’t want you to confuse the rates the Fed sets directly (the Discount Rate and the Federal Funds rate) with how yields (interest rates) are established in the open market where bonds are sold.

Summary of Key Points

  • Money gets into the system when the Fed purchases U.S. Treasury Bonds
  • Interest are determined in the open market by supply, demand and risk versus reward
  • Private investors, including the Fed, purchase U.S. Treasury Bonds, effectively lending to Uncle Sam
  • U.S. Treasuries are considered the safest of all all debt (so far) and are the basis for virtually all other bond offerings, with higher risk investments paying higher interest rates

In our next scintillating article in this series, we’ll discuss the mechanics of how the Fed affects interest rates on Treasury Bonds and why you should care. Don’t miss it!

3/27/11: Turnkey Rental Property Solutions for Busy Investors

Listen now:

Sometimes people confuse real estate investing with running a real estate business – especially when everyone says you’re supposed to run your investments like a business.  Confusing isn’t it?  That’s why many people simply turn their money over to Wall Street.  It’s painless and easy.  Like a scalpel.  It’s all fun and games until someone loses their net worth.

Real estate attracts people who want to be closer to real tangible investments they can understand and have more direct control over.  But not everyone has the time, talent or temperament to find, fix up and rent out properties.  So before you pick up a hammer and plunger, you may want to look at turnkey rental property solutions as a great way to get in on all the amazing bargain inventory available today.

What is a turnkey property solution you ask? We wanted to know too, so after our wives had us scour the sink, they let us out to scour the country – and we found a guy who’s been in the turnkey rental property business for nearly 10 years.  He called in and our crack engineering crew patched him into the broadcast.

Lending their voices to this sparkling edition of The Real Estate Guys™ Radio Show:

  • Your host and shining star, Robert Helms
  • Co-host and chief scrub, Russell Gray
  • Turnkey Rental Property Purveyor, Practitioner and Pontificator, Terry Kerr

With all the talk about unemployment and real estate entrepreneurship, what if you’re one of the throwback investors who actually have a good job with good income and some investment capital you want to put to work?  That’s where a turnkey provider comes in real handy.  They’re in the business of buying, fixing up, renting out and handing over to you a plug n’ play cash flowing property – complete with long term property management in place.  Now doesn’t that just sound groovy?

But (and as always it’s a big one), not all “turnkey” providers are the real deal.  With all the distressed inventory in the market, banks are dumping it wholesale.  That can be good, but just having a property flipped to you doesn’t mean it’s plug ‘n play.  It end up as “pull the plug”.  Not fun.

To help you avoid this terrible fate, Terry Kerr shares his tips for turnkey property investing – and gives us some local knowledge on a low cost, high cash flow market that you’ve probably heard of, but may not know that well.  And pay attention, because we persuaded Terry to produce a special report on this tantalizing topic so you don’t have to take too many notes. ;-)

The Real Estate Guys™ Radio Show podcast provides education, information, training and resources to help investors make money with their real estate investing.

12/12/10: International Real Estate for Resort, Investment or Safe Haven – Pros and Cons of a Changing Landscape

Whew!  That’s a big title.  But it’s fitting for a big topic – one that reminds us that the world is not only getting smaller, but is changing rapidly.

Money, jobs and people are moving around the world like never before. And while fewer people may feel rich coming out of this recession, there are other good reasons many are still looking at international real estate – both as an investment strategy and a safe haven hedge against inflation.

While we were at the International Property Congress in Miami Beach, in addition to talking big picture economics with National Association of Realtor’s Chief Economist Lawrence Yun and Federal Reserve Bank VP Thomas Cunningham (see our 11/21/10 show), we sat down and talked about who’s buying international real estate, where and why.

Behind our well-traveled microphones for an international chat-fest:

  • Your host, the internationally renowned Robert Helms
  • Your co-host and internationally obscure Russell Gray
  • The man who has seen more changing landscapes than a migrant farm worker, the eternally international Godfather of Real Estate, Bob Helms
  • Special Guest #1: International Property Journal reporter, Kevin Brass
  • Special Guest #2: Representative from SECOVI, a Brazilian real estate trade association, Flavio Amary

It’s no secret that every country in the world has it’s own unique strengths and weaknesses.  As the dominant economy in the world, Americans have long enjoyed a uniquely stable and high quality of life.  It wasn’t necessary or commonplace to travel abroad.  Even today, the  majority of Americans do not have passports.

However, the world is changing.  The US dollar, while still the dominant currency, is facing serious challenges.  Job losses, deficit spending, an aging populace and huge unfunded entitlements are all piling up on Uncle Sam.  Meanwhile, other countries are emerging as powerful economies in their own right – most notably China.

But this isn’t an episode about the woes facing the US.  These aren’t the first challenges and they won’t be the last.  Every country has its ups and downs.

This episode is about discovering how and why the dynamics of the world’s economies are changing the way people are approaching real estate.

While we’re more traveled than the average American, we took the opportunity while in Miami to connect with Kevin Brass.  Kevin has been covering the international real estate industry for over 20 years and his articles and analyses have been regular features in the International Herald Tribune and the New York Times.  Today, Kevin writes for the International Property Journal.  His work takes him all around the globe and keeps him connected with many industry leaders worldwide.  In this episode, Kevin shares his perspectives on the changing landscape of international real estate.

We also discuss some recent changes to the once vaunted tax and privacy advantages of Panama, who recently entered into an information sharing agreement with the United States.  Tax and privacy advantages are often a prime motivator for people to acquire real estate and move to a particular country.  Is what happened in Panama a portend of things to come?

Of course, what would an episode on international real estate be without an interview with someone with one of those really intriguing accents?  We were privileged to find someone who not only sounds really cool, but has some very useful things to share with us about the robust economy of Brazil.  If you haven’t been paying attention to Brazil, you may be surprised to hear about what’s happening there.  Hint: not everyone’s in a recession.

Buone Feste, Boas Festas, Felices Fiestas, Frohe Festtage, Wesołych Świąt, Bonnes vacances, Sarbatori Fericite and Happy Holidays!

The Real Estate Guys™ Radio Show podcast provides education, information and training to help investors make money with their real estate investments.

Listen now!
Don’t miss a show – subscribe to the free podcast!
Want More?  Sign up for The Real Estate Guys™ free newsletter!

12/5/10: Best Of Replay – Career Opportunities in Real Estate

BIG MONEY!  FLEXIBLE HOURS!  BE YOUR OWN BOSS!

Sounds like a late night infomerical pitch, right?  Well, not exactly.  You’d have to throw in “NO MONEY, NO BRAINS, NO TALENT and NO EFFORT NEEDED!  Your shoes don’t even have to match!  For just three easy payments, we’ll show you how YOU can become the next Donald Trump!”

Why do these pitches work?  Because people almost universally want big money, flexible hours and to be their own boss.  These are some of the great appeals to real estate as a career.  And when the traditional job market is depressed, even more people look at real estate as way to make money.   Have you noticed that the job market is depressed lately?

Even though for the casual observer, some (most?) of the glitter has rubbed off real estate, the reality is that prices and interest rates are better than they’ve been in years.  These once-in-a-lifetime circumstances are drawing investors into the marketplace.  And with the Fed overtly committed to aggressive “quantitative easing”, it isn’t hard to imagine that somewhere down the road price appreciation will return to normal levels (at least!).  But we digress.

The point is that there’s a lot of work to be done in the real estate market to move properties from distressed owners back to banks and then to new owners.  And in many cases, the property will change hands more than once, as investors insert themselves into the process.  It seems to us that with a lot of people out of work and a lot of work to be done, some folks might want to revisit real estate as a way to make a living.

While most people think of a career in real estate primarily as selling houses to people who’ll live in them, there are actually many other options!  In this episode, The Real Estate Guys™ explore the variety of opportunities available when considering real estate as a full time vocation, whether as an agent or an investor – or both!

In the silver DeLorean radio studio for a trip Back to the Future for a show originally broadcast in 2008:

  • Your host and professor of pontification, host Robert Helms
  • Your co-host and fondler of the flux capacitor, co-host Russell Gray
  • The Father Time of real estate, the Godfather, Bob Helms

Enjoy and Happy Holidays!

The Real Estate Guys™ Radio Show podcast provides education, information and training to help investors make money with their real estate investments.

Listen now!
Don’t miss a show – subscribe to the free podcast!
Want More?  Sign up for The Real Estate Guys™ free newsletter!

10/31/10: Halloween Horror Stories – Getting the Lessons When Things Go Wrong

Sometimes real estate is hard. You want a rent check, but get a reality check instead.  However, the best lessons often come from studying problems, so next time, you can avoid them – or least solve them faster.

So once a year at Halloween, we set aside an episode to look back over the year and pick out just a few of real life case studies where a property owner endured a difficult and often painful problem with their property ownership.

Sitting on the tomb behind the microphones in our radio crypt:

  • Your scary smart host, Robert Helms
  • Creepy co-host, Russell Gray

In this episode, we discuss six different tales of trouble – and look at the problem, the solution, and most importantly, the lesson.  So grab your Jack O’Lantern and Trick-or-Treat bag and get ready to collect several tasty tidbits of real estate wisdom from these horror stories of real estate reality:

  • Those Pesky Swamp Things – Creative solutions to tenant service when they’ve lost their cool and the heat is on.
  • It Came Through the Ceiling -  Water you going to do when your all wet tenant’s trying to soak you?
  • A Deal Too Good to Be True – Come on over and I’ll sell you a story, but is it okay if I don’t have a title?
  • When the Levy Breaks – Don’t lien on me when things go wrong.
  • The Hand in the Till – Could you manage to send me an explanation of these expenses?
  • Master and Servant - It’s all good until it’s not, then when a one-size-fits-all lease doesn’t, it can give YOU fits.

Enjoy this spooktacular show!

The Real Estate Guys™ Radio Show podcast provides education, information and training to help investors make money with their real estate investments.

Listen now!
Don’t miss a show – subscribe to the free podcast!
Want More?  Sign up for The Real Estate Guys™ free newsletter!

Next Page »