6/22/14: Stop, Go or Proceed with Caution – A Conversation with Peter Schiff

Love him or hate him, Peter Schiff always speaks his mind.

Peter Schiff was rightWe happen to love him.  Not only do we admire his courage in trusting his own judgment… even when all the “experts” say he’s wrong, but we appreciate his willingness to explain his reasoning to anyone interested enough to listen.

For those that don’t know, Peter is the founder, CEO and Chief Global Strategist of Euro-Pacific Capital.  He ran for U.S. Senate in 2010, has a daily radio show, and is a best-selling author.  Slacker.

In 2005, he was sounding the alarm about the housing market, but few would listen.  We didn’t know him back then, but we wish we would have!

After everything blew up, we looked him up and have since become good friends.  Peter has been a faculty member on our last two Summits and we just found out he’s coming back for 2015!

We ran into Peter at The Money Show in Las Vegas, so we sat down to chat.  We thought you might like to listen in…

Behind the microphones in our mobile studio for this edition of The Real Estate Guys™ Radio Show:

  • Your Go-Go-Go host, Robert Helms
  • His stopped-up co-host, Russell Gray
  • Our never yellow guest, the indomitable Peter Schiff

One of the big lessons from the Great Recession is that financial markets both affect and reflect each other.  So even though we’re primarily real estate guys, we’ve learned to pay attention to stocks, bonds, currency, commodities and precious metals.

Peter Schiff isn’t really a real estate guy.  He’s big picture economy guy…that’s probably why he’s called a Global Strategist.  He has his eyes on the horizon…watching for waves of opportunity and signs of stormy skies.

When you hear Peter talk, he explains the cause and effect behind the movement of money, and filters everything through an Austrian economics school of thought.George Bush told America after 9/11...support your country.  Go out and spend!

If you’re not familiar with the two major economic schools of thought, think of it this way:  The dominant philosophy in modern economic is the Keynesian view which says that borrowing and spending fuels prosperity and economic growth.

When you understand this, it’s easier to make sense of what the government and the Fed are doing.  Everything is designed to entice people to borrow and spend.

The Austrian school believes that savings and production create prosperity and economic growth.  That is, when a society makes a lot of stuff (production) and doesn’t consume it all (savings), there’s abundance…more to go around.  Prices drop, stuff is more affordable to poorer people, and everyone is better off.

Peter Schiff says the Real Crash is yet to comeIf you keep this in mind when you listen to Peter, it helps you understand why he describes rising prices, low interest rates, increased debt and borrowing, and excess consumption all as warning signs.

It’s like using your credit card to buy a new car, new  furniture, a new wardrobe and then going out to eat every night at nice restaurants…even though you don’t earn enough money to pay for all those things without a big credit line.  Borrowing is the only thing fueling your “prosperity”.

But if you believe that borrowing is good, deficits don’t matter, then you’ll think that all the items purchased on credit are valid signs of prosperity.  After all, you got all kinds of stuff!  And more stuff is a sign of prosperity, right?Keynesian economist believe that borrowing and spending is the key to economic growth

Of course, anyone who’s ever run a household or a business knows that eventually the credit card has to be paid.  And the longer you wait, the bigger the balance will get, and the more painful the day of reckoning will be.

Peter thinks that higher interest rates would discourage borrowing and encourage savings.  He likens the cheap money to a spiked bowl of punch at a raging party.  It’s all good as long as the punch bowl is full.  But when the credit line gets cut, the punch bowl goes away, then the party is over…and all that is left is the hangover.

Evenutally the bill for all that spending comes dueSound gloomy?

Maybe a little.  But people go to parties all the time and enjoy themselves in moderation. Of course, if the guy next to you has had a little too much, it might be a good idea to keep a safe distance.  You don’t want his over-indulgence to get on you.  That’s the problem with investing alongside “hot money”.

In other words, asset prices are moving up because of cheap money.  Peter calls these “bubbles” because there isn’t legitimate productivity (fundamentals) underneath the increases.

Getting back to real estate (we haven’t forgotten that we’re The Real Estate Guys™)…

In housing, values are driven by the demand of home buyers (which is the desire to buy a home combined with the capacity to pay for one…which means an income that can be pledged to a mortgage), versus the supply of homes available to buy.

For investment housing, it’s similar…except the income comes from the tenants.  So even people with weaker credit and no savings help drive housing.

But in a weak economy (remember, “weak” means low productivity, low wages and low job growth…not a raging stock market), the incomes needed to drive housing aren’t strong.

Is that a red light?

Not necessarily.  After all, housing isn’t optional.  It’s essential.  So there will ALWAYS be a demand, even though it might be focused on the less expensive markets and product types.  And people will cut back on almost everything in order to keep a roof over their head, so even when incomes are soft, rental income is less affected than more discretionary spending.

Does that mean real estate is a step-on-the-gas green light?   If you view “green light” as throw-a-dart-at-a-map-and-buy-wherever-it-hits (like you could do in 2004), then no.  Some markets and property types are probably a long way from recovery.

Keep investing towards your financial goals...but proceed with cautionWe think it’s a “proceed with caution” yellow light.  Even though Peter disagrees with low interest rates, we have them.  And Peter says that current monetary policy favors the borrower.

Based on that, it seems like a good idea to borrow some cheap money, lock it in long term, and buy real incomes producing assets like rental real estate.  Especially because right now, in some markets, you can still buy properties at or below replacement costs.  For example, we just came back from Atlanta, and there are still very attractive deals there.

The key is picking the right market, price point and property type.  When markets get heated up, it’s SO tempting to speculate on rising prices.  If you get it right, it’s some of the easiest money you’ll ever make.  Who doesn’t want to buy a house for $500,000 and sell it a year later for $650,000?

But if you can’t sell it, are you structured in a way that you can afford to hold on for the long term?  If you could rent that home for enough to cover the rent and all the expenses for the next 3 to 5 years…or longer…then great!  If not, then you might lose everything you put into it…and your credit score.

And if you’ve been riding the tide of the rising stock market for the last year, you might think about moving some chips off the table and placing them into real assets No one likes it when the party’s over, but better to get out before the crowd…otherwise you risk getting stampeded or locked in.

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6/15/14: Ask The Guys – The Next Bubble, Green Renters and Global Warming

Real estaIt's time to answer your questions when you Ask The Guyste investing isn’t as simple as it used to be.  At least not judging by the kinds of questions we’re getting from our listeners!

Back in the old days, you just bought a piece of property and rented it out.

Sure, you needed to pick a good neighborhood and tenant, and you’d want to pay attention to interest rates so you could refinance if rates dropped.  But other than that, real estate investing was about as exciting as watching paint dry.

But over the last couple of decades, real estate investors have added things like Fed policy, global warming, mortgage derivatives and currency wars to their list of worries…just to name a few!

That’s why we’re here.

While you’re busy with your nose to the grindstone at your day job…or scouring neighborhoods looking for just the right property to place in your portfolio… The Real Estate Guys™ are traveling the world attending conferences, interviewing experts, touring markets and sitting full lotus meditating on macro factors affecting you and your real estate investing.

In the studio, a trio of posers going to the mat for you:

  • Your guru of gab, host Robert Helms
  • His half-crow co-host, Russell Gray
  • The Godfather of Real Estate, Bob Helms

As always, for this episode of Ask The Guys, we ask Walter to fly down to the mail room and rummage through the email bag for some likely candidates.  We don’t use everything Walter pulls out, which sometimes ruffles his feathers, but it’s always great to have lots to choose from.

So before we dive in to this batch, we invite YOU to add your question to the pile.  Who knows?  Maybe YOUR questions will be selected for the next episode of Ask The Guys.

Should I Accelerate the Payoff of My Loan?

When does it make sense to pay down a mortgage?What a great question!  The short answer is…it depends on your personal investment philosophy, objectives and strategy.

Here’s what we mean:  Paying down the loan is like making an investment.  You’re essentially investing your cash to save the expense of the mortgage.

So if you’re paying down a 5% mortgage, from an ROI perspective, it’s no different than buying a 5% dividend paying stock or making a 5% interest loan to someone else.  Make sense?

Of course, you’ll want to consider other factors like risk, liquidity, tax breaks, control, impact on borrowing power, etc.

Look at the total impact of the loan pay down and compare it to all your other available investment options.  If paying down the loan is the best investment available to advance your goals and fits your investment philosophy, then do it.

We’re guessing you’ll usually find a better investment.

What Metric Can I Use to Know if I Should Keep a Residence as a Rental?

Another great question!  You guys are so smart.

The big two metrics are cash-on-cash and internal or total return.

Cash-on-cash is about how much cash flow you get back each year divided into the amount of cash you put in.

So if you have $10,000 a year coming back to you on $100,000 invested, you have a 10% cash-on-cash return.  Cash-on-cash can be BEFORE tax or AFTER tax.  And it’s usually a good idea to look at both.

Total return takes into account amortization (equity build up from the pay down of the loan) and appreciation (the increase in the value of property over the price your paid).

Of course, you don’t get this until you sell, so these are paper gains (unrealized) until the property is liquidated.  It’s like when the stocks you have in your 401(k) go up in price, but you haven’t sold yet.

In both cases, you simply need to calculate the return on the property you have versus other properties you might buy.  If the current property is better, keep it.  If there’s a better investment, do that.

Of course, you need to take into consideration things like market trend, current interest rates (assuming financing is involved), transactional costs, and the hassle factor…just to name a few.

Will Tenants Pay More for Energy Efficient Properties?

Will tenant's pay more for energy efficient homes?We’re guessing some will.  But we’re also guessing that most won’t.  However, there aren’t any empirical studies that we’re aware of.

So we think that the best thing to do is talk to property managers and leasing agents in the particular market you’re interested in.  Are they getting inquiries for energy efficient properties?  Are any properties in the area energy efficient, and if so, are they commanding extra rent?

Will Global Warming Put Entire Real Estate Markets Underwater?

Wow.  This is a hot topic over which there’s been many heated debates.  Some claim the global warming is a very real threat.  Others say the argument is all wet.

The inconvenient truth is…we’re not qualified to have an opinion.

With that said, the Godfather has heard a lot of claims about both man-made and natural disasters threatening mankind’s economy, well-being and real estate.  In his seven decades of investing experience, nothing much ever came of it.

It;s not that the threats weren’t credible or very scary.  They were!

In the 60′s people were fearful of nuclear war.  Any major U.S.city, especially New York (financial center), Washington DC (government), Detroit (manufacturing…back when we still made things), and other major cities were considered to be on the short list of targets.

And how safe did Florida seem with the threat of nuclear weapons in Cuba?  We’re not sure how long it took real estate prices to rebound in Hiroshima, but we’re guessing it took awhile.

In the 70′s, it was projected the world’s oil reserves would be completely depleted by the year 2000.  A national speed limit of 55 mph was created. Laws were passed mandating fuel efficiency (we sure miss those American muscle cars.  And not only did gas prices skyrocket (we’re sure this didn’t have anything to do with shutting the gold window), but gas supply was rationed.

If the world ran out of oil, the prospects for real estate in Texas and other oil producing regions sure didn’t look good.Is the world running out of time?  Or is there plenty of life and opportunity left for you to invest for the long term?

In the 80′s, AIDS was thought to be on it’s way to a modern day bubonic plague capable of wiping out tens of millions of people…especially in major metros like San Francisco, Los Angeles and New York.  Imagine the impact on real estate prices if there were suddenly tens of millions fewer home owners and renters.

In the 90′s, the world feared the looming click over of the time clocks to the year 2000 would mean the catastrophic failure of the computer systems which ran key communication, transportation, financial and utilities infrastructure.  Think about the impact on rental income and real estate values if entire cities didn’t have power or utilities for weeks or months.

We could go on (and on and on)…but you get the idea.

We’re not making light of any of these threats.  We aren’t smart enough to know how close to the edge mankind really came.

But Simon Black made a great point on his powerful presentation on the 2014 Investor Summit at Sea.  Simon reminded us that in spite of all the problems the world has faced, both real and imagined, that somehow…some way…mankind has figured it out.

So all we can say is that if global warming is real (and we aren’t saying it is or isn’t), if there’s anything mankind can do about it, we’ll do it.

But if you think that the threat is so real and irreversible that it threatens specific geographic regions of the world, then you should adjust your personal investment strategy to avoid those areas.

There are people right now who believe the U.S. dollar is in trouble.  In response, they avoid bonds and bank accounts in favor of real estate and precious metals.  Other people feel the opposite and keep collecting dollars in the bank as quickly as they can.  Only time will tell…

Is Real Estate in a Bubble and is Another Crash Coming?

We don’t know and probably.

The answer to this could fill a book, so we’ll try to keep this short and sweet.

Real estate prices are rising, but wages and employment are not.  However, population is growing and new home construction is inadequate to meet the need.  So while supply is shrinking relative to demand, capacity to pay (incomes and interest rates) aren’t improving.

On top of this, up and down cycles are part and parcel of an economy…because economic activity is a reflection of human psychology.  So when things are good, people become irrationally exuberant and flood the hot investment with too much money.

Then, when everyone has bought all they can (the market is overbought), investors begin to sell to realize their profits.  This slows the upward pressure…or goes as far as to cause prices to fall (what pundits call a “correction”)…and people (being people) hit the panic button and begin to rush to the exits causing an OVER correction.

This “business cycle” of turbulent ups and downs repeats over and and over.

Monetary planners attempt to moderate this turbulence by increasing and decreasing demand.  How? By hindering or empowering capacity to pay via interest rate manipulations (and…perhaps…allegedly…direct market manipulations).

In other words, when interest rates are low, it’s easier to borrow to spend and invest.  When they’re high, it’s harder so less spending and investing happens.

But in spite of best efforts and good intentions, the result of these manipulations is an exaggeration of the natural ebb and flow of the business cycle.  Like a panicked driver fishtailing on an icy road, each attempt to moderate the movement actually exacerbates it.

We think these cycles and manipulations are inevitable.  And attempting to time them to the precise top and bottom is a fool’s game.

Better, we think, to accept them as normal and structure your deals to weather extremes.  In ideal conditions, you might not do as well as a more aggressive investor.  But when things get slippery, you’ll stay in control.  Just like that prudent driver on an icy road is less likely to lose control than the guy who’s only planning on sunny skies and ideal road conditions.

The bottom line is that a real estate bubble is mostly painful for flippers, short term speculators, and over-leveraged holders whose cash flow is too thin to weather a storm.  We know from experience.

Hope for the best.  Plan for reality.  And be patient because in real estate, time not only heals all wounds, but rewards the patient.

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6/8/14: How to Pick Up on a Smokin’ Hot Market

Let’s face it.  Whether it’s a car, lover or real estate market, we all want a hot one.

You’re on your own for the first two, but in this episode we’ll do our best to help you with number three.

In the studio for this arousing discussion:

  • Your smokin’ hot host, Robert Helms
  • His faithful wing-man, co-host Russell Gray
  • Regular contributor and Big Man on campus, John Turley

“Hot” things are usually the result of high demand and too little supply.  Sometimes the desire to possess is there, but the capacity to pay is not.  In any case, when more people want something than there is of it to go around, that thing becomes “hot”.

In investing, the goal is to be among the first to identify something that’s heating up, then grab it before the mass of other market players have gotten to the party.

So how do you get into a real estate market BEFORE it gets hot?

Before we go there, consider that real estate as an investment is very slow moving.  That is, even once the word starts to get out, it takes a while for market demand to reach its peak.  This is good because it allows regular folks (not just all the pretty people in Wall Street) to get in on the action.

Also, because real estate isn’t really a main stream investment, the “Flash Boys” aren’t coming to the party at all.

In fact, real estate is more like a block party.  It’s local only interesting to people who are in the neighborhood.  So real estate market parties don’t tend to get too crowded very fast.  This is also good for those of us who don’t mind driving (or flying) from place to place in pursuit of a fun party where we can get some action with a hot market.

So it’s important to go where your chances are good.  We say it all the time, “Live where you want to live and invest where the numbers make sense.

Step one is to watch for signals that a market is getting hot.  And those signals don’t always come in a neat package or in ways that are readily recognized.  Sometimes you have to be good a reading the smoke signals to recognize that a market is heating up.

In this episode, we invite John Turley to bring us up to date on his market, Ambergris Caye, Belize.  It’s an interesting case study, especially if you’re not familiar with this market, because it illustrates how market drivers vary from market to market.

A fundamental concept of market analysis is supply and demand.  If there are lots of people demanding a particular area, product type or price point, that area, product type or price point has the potential to get “hot”.

But how do you know WHICH area, product type or price point?  And how can you see it BEFORE the majority of others see it?

This is where purposed proximity is essential.

Purposed proximity is getting close to a market with a conscious decision of looking for critical clues about supply and demand trends.

Many people live in areas with opportunity all around them.  They have proximity.  But they aren’t purposeful.  So they drive by opportunity every day and can’t see it.

Others are purposeful from a distance.  They look at charts, graphs, stats, news and data.  They can sense opportunity because they’re purposeful.  But they can’t actually see it because they lack proximity.

Here’s where it’s important to realize that real estate markets are like people. You have to be close enough to pick up their unspoken clues that signal opportunity.As with people, promximity to markets help you pick up on the subtle clues that signal opportunity.

Body language experts tell us that communication is only 7% verbal.

This means that words only account for a fraction of the meaning in a conversation.

The majority of communication is in tonality, facial expression, gestures, eye contact, etc.

To really get the “vibe” of another person, you need to be in close proximity.  Or at least be able to see and hear them, which is why video chat has become a popular communication tool for people in both their personal and professional lives.

For a real estate market, price and sales data is analogous to the words in human communication.  It tells SOME of the story, but it’s a far cry from telling the WHOLE story.  This is why we’re big fans of field trips.  We like to visit markets up close and personal.  We like to feel it.

Plus, when you visit a market, you build relationships with people who can become your boots on the ground. 

For example, even though we go to Belize a lot, it’s nice having Big John and his team with boots on the ground.  They have their thumb on the pulse of the market.  And not just data, but rumors, inside information, and real time activity.  It’s that way for every market we’re involved with.

With that said, some data is very useful because it’s a leading indicator of demand.

For example, if a large employer signs a deal to open a new operation in a small town, the resulting employment can be a driver of demand for housing.  But because the demand hasn’t manifested yet, there’s time to get in ahead of the wave.

And before it’s in the paper for the whole world to know, there’s usually a handful of local market players who know it’s coming, like the commercial real estate broker helping to find space or land for the business.  Or the residential brokers looking for housing for the key executives.  Boots on ground.

Of course, just because a big employer is moving in, it may not be enough information to take action on.   But when you have several corroborating signs from different sources, then you probably have something substantial to act on.  In any case, it CERTAINLY warrants a closer look…because where’s there’s smoke, there’s usually fire.

So listen in to this discussion as Big John Turley provides some of the many signs which say “market on fire” in Ambergris Caye.  Then think about whatever markets you’re active or interested in.  What smoke signals are in the air and how can you investigate further?

And then remember, you don’t want to by shy when the market’s sending out the “vibe”…or you risk missing out on some hot action.

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6/1/14: Getting to Critical Mass – Rebalancing Your Real Estate

As any real estate investor knows, properties may generate passive income, but owning them is far from passive.

Because even if you have great property managers and you never see your tenants, you still have important decisions to make about markets, debt and equity.

And while most real estate investors focus on doing deals and managing cash flow (both VERY important activities), the smartest ones also pay attention to asset allocation models.

Yes, it’s true.  Asset allocation modeling isn’t just for Wall Street financial planners and paper asset advisors.

Balancing on their chairs in the studio to build on this critical topic:

  • Your massively popular host, Robert Helms
  • His unbalanced co-host, Russell Gray

All businesses have jargon.  So to make sure we’re all in the same page, let’s clarify some terms:

Critical Mass – that’s how much equity you need to invest for cash flow to generate enough spendable cash flow to support yourself in the manner to which you’re accustomed…or would really like to be accustomed!

Asset Allocation – In traditional financial planning, you’d have a pie chart divided into slices for stocks, bonds, cash, precious metals and maybe one or two other things like annuities, fine art, etc.  We’ll talk about what that looks like for real estate investors in a moment.

It's important to rebalance regularly as you build towards critical mass

It’s important to re-balance regularly as you build towards Critical Mass

Re-balancing – this is simply adjusting your asset allocations (how much of each component) to bring the ratios into alignment with your predetermined plan or model (which of course presupposes you have a plan or model!).

Make sense so far?

Most people’s investing lives can be divided into two broad categories:  Accumulation and Consumption (sometimes called Annuity, not to be confused with insurance products of the same name).

Accumulation is just what it sounds like.  You’re accumulating wealth on your quest to reach Critical Mass.

At Critical Mass, you have enough wealth (equity) to deploy for enough Passive Income (money you don’t have to work for) to achieve escape velocity from the gravitational pull of the daily grind.  Or as our good friend Robert Kiyosaki would call it, Getting Out of the Rat Race.

Critical Mass provides the thrust to propel you out of the Rat RaceObviously, the FASTER you can build wealth, the sooner you can get to Critical Mass so you can achieve escape velocity.

In our temporarily out-of-print book, Equity Happens, we spend quite a bit of time talking about equity growth strategies and the important role of leverage.

Now that equity is happening again (did you have any doubt?), we thought it was time to revisit some of the important themes inside the topic of getting to critical mass.

First, you have to be on the OWNERSHIP side of the equation.  That is, you don’t want to be the lender.  You want to be the owner (or part owner).  This is called EQUITY.  That’s why they call stocks “equities”.  In real estate, it’s called being the landlord.

Next, it’s important to pick the RIGHT MARKETS.  The old adage about the 3 most important things in real estate being Location, Location and Location is true.  Because it’s all about Supply & Demand.

When you pick properties in popular areas (demand), where there is some limiting factor in supply, you have a chance of getting APPRECIATION.  That’s people bidding up the value of the property FASTER than the pace of simple inflation.

Of course, what’s “popular” depends a lot on the property type.  If you’re depending on rental income to pay for the property, mansions in Beverly Hills might be low in supply and high in demand among Hollywood elite, but no one’s renting them from you.  And if they did, the rent probably wouldn’t provide enough cash flow to make the use of leverage appealing.

So “popular” might be affordable houses or apartments in B class neighborhoods in areas with a strong, geographically-linked, regional economy.  Or it might be resort properties in a popular area with limited supply and lots of people paying top dollar for overnight stays.

One way to re-balance your real estate during your Accumulation Phase is to REPOSITION EQUITY into hotter markets.  You can use a cash out re-finance (those are coming back!) to move equity out of a property you want to keep; or you can sell the property and use a 1031 Tax Deferred Exchange to transfer the equity without paying tax on any gains.

Now, if you were in the Consumption or Annuity Phase, you might move your equity from a highly appreciated, low cash flow market to a market and product types that cash flow like crazy (but maybe don’t appreciate as well).  So the idea of re-balancing applies within each phase or in transition from one phase to the other.

Does your brain hurt now?  Sorry.  Let’s just do a couple of more concepts and then you can get a snack.

LEVERAGE (i.e., debt) can be one of our best friends…especially during the Accumulation Phase.  Debt allows you to control MORE property with LESS purchase equity (down payment).

Of course, the down side of leverage is you’ll get less cash flow.  But that can be okay, as long as you have enough (with a safety margin) to make the mortgage payments (and you don’t need any cash flow to live on).

And at today’s stupid low interest rates, it’s hard to make the argument that the best use of cash or equity is to reduce mortgage debt.  But that’s a different discussion.

The main benefit of leverage is that it MAGNIFIES GROWTH.

For example, if you own a $100,000 property for cash and a year later its value increases 10%, your wealth (equity) has grown by $10,000.

If you paid CASH, then your return on your $100,000 invested is 10%.  Super.

Now, if you put only 10% down ($10,000) and got a 90% loan, then you grew $10,000 on $10,000 invested, which is a 100% gain. WOW!

Of course, a paid for property will have more positive cash flow than a 90% leveraged property.  That’s the trade-off.  Maybe for you something in between is “optimal”.  That’s where BALANCING comes in.  YOU have to do the math and decide what’s the optimal balance for your situation.

Lastly (at least for this blog)…

You don’t have to wait to build equity.  That is, you might be able to proactively do something to the property or its operation to FORCE equity rather than wait for the market to appreciate.

So, in the previous example, if you put $10,000 down on on a $100,000 property, then fix it up, you might not have to wait a year for the value to increase.  Because you forced it to happen sooner!

Then you can decide if you want to leave the equity there, or reposition it for more property or higher yield (investing extracted equity for higher interest than the cost of the loan).

See?  Real estate asset allocation, rebalancing and equity optimization can be FUN!

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5/25/14: Diary of a Resourceful Investor – Using What You Have to Get What You Need

How do you buy real estate with no money and no credit?

This is one of the most asked and abused questions in the real estate investing education business.

The good news is that it can be done.  To find out how, we dial up a good friend who’s not only figured out how to do it consistently, he also loves to share his secrets for success!

This episode of The Real Estate Guys™ radio show features:

  • A true resource of broadcasting brilliance, your host Robert Helms
  • His next-to-nothing co-host, Russell Gray
  • A truly resourceful real estate investor, J Massey

Talking to J is always a fun time.  He’s full of enthusiasm, wisdom and catchy phrases that quickly communicate complex ideas.

We first met J Massey in our Southern California real estate investor mentoring program just after The Crash of 2008.  We soon discovered that J had experienced a series of personal disasters which left him with useless credit, no money, no equity and no income.  Yikes!

But having a wife and four children to support, failure was not an option, J developed an uncanny resourcefulness which allowed him to build a successful real estate investing business and portfolio.

Back in 2012, we invited J to tell his story to our radio audience.  You can find that interview here.

Since then, J’s joined the faculty of our Summit at Sea™.  We’ve been proud to introduce him to our friends and fellow broadcasters, Robert Kiyosaki and Simon Black, and J has been a guest on both of their programs.

So what makes J so interesting and what can we learn from him?

What stands out to us is J’s mindset.  So many people think achievement starts with knowledge.  Of course, knowledge is important, but it isn’t first.  Mindset is.

“Look for problems, not for properties.”

J says the first important mindset is to focus on looking for problems, NOT properties.  When you look for properties, all you see are things you can’t afford with your current resources.  That’s discouraging.

Better to look for problems and then challenge yourself to find solutions.

Why?  Because resources are solutions.  But outside the context of solving a problem, resources are all but invisible.  However, once you have a problem to solve, you begin to see the potential for the people, things and circumstances around you to solve the problem.  NOW you can see all the resources available!The world is full of resources to help solve your real estate investing problems

“No one has a money problem.  They have an idea problem.”

This is true not just for you, but for most of the people out in the world.  Our friend, Blair Singer, says “When emotions are high, intelligence is low.”  That is to say that when people get freaked out about their finances, they can’t think straight.

If you can learn to keep calm in a crisis, you will see solutions that others won’t.  And when this happens, you have something VERY valuable to bring to the party.

“Fail fast. Fail forward.  Fail frequently. That’s how you learn quickly.”

How fast do you want to find a solution?  The sooner you start trying, the sooner you find the answer.  We all want the smooth, painless, non-stop ride to the top.  But the real world is full of sometimes painful setbacks and disappointments.

But inside every failure is useful feedback.  If you learn to find it, you’re a better, smarter investor.

With each experience, you find out what works, what doesn’t and ultimately what works best.  Next time, you see more potential solutions faster and your odds and effectiveness improve.

It’s all about others. 

It sounds so simple.  But when you’re starving and scared, it’s easy to make it all about you.

However, when other people understand the problem, how they fit into the solution, and why being involved benefits them, they will almost always provide the resources necessary to achieve the goal.

Been there. Done that.

Here’s the great news:  No matter what problems you find yourself or others facing, someone has probably already figured out how to solve all or part of it.  So you don’t have to be the smartest guy or gal in the room.  You simply have to be the one willing to invest the time and effort in finding those people more experienced than yourself.

And while this all sounds good on the chalkboard, J is out on the field running the plays and making it happen.  He would be the first to say that if HE can do it, so can YOU.

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5/18/14: Lots of Real Estate – Strategies for Investing in Land

Land investing is a very unique aspect of real estate investing.  Raw land typically doesn’t provide income or tax breaks.  And without a tenant to make the payments, there’s no amortized equity.  Besides, with no income, borrowing to buy land can be risky business.

So why do it?

Well, as you might suspect, there are…lots of reasons.

In the studio for this episode of The Real Estate Guys™ radio show:

  • Your well-grounded host, Robert Helms
  • His dirt-poor co-host, Russell Gray

While the Holy Grail of real estate investing is passive income, it takes equity to acquire those income producing properties.  And it’s wise to have adequate liquid reserves to handle maintenance, repairs, turnover and marketing.  Of course, if you use debt to acquire your income properties (and why wouldn’t you?), then you’ll need to have additional reserves to service that debt when the property is sitting vacant.  So liquid cash (currency of something else that is readily convertible into currency) can be pretty handy.

Of course, once you have all the currency you need, not to mention that once your empire of income properties starts pouring out piles of positive cash flow, you might want a place to park some of that money for the long term where tenant and toilets aren’t involved.  Someplace not subject to counter party risk…and in something that will retain it’s relative value, no matter what happens to the currency.

Land can be a great place to store long term or generational wealth.So reason #1 for buying land is long term preservation of wealth…even generational wealth.  Think of it like gold or fine art.

In fact, if you’ve been listening to James Rickards (author of Currency Wars and The Death of Money), he’s an advocate of using real assets (versus paper currency) as a means to store long term wealth.

In other words, instead of building up a savings account full of dollars, convert those dollars into real assets by buying things like land, precious metals and fine art.  His point is that these items have a long term history of being relatively safe stores of value in unstable economic times.

Of course, if you’re strategic about the land you buy, you could end up doing more than simply storing value (hedging against inflation).  You might actually make a profit (appreciation) as the land becomes more desirable (location and path of progress).

And if you’re feeling more ambitious, you could “force equity” by improving the land.  This could be as simple as sub-dividing, changing the zoning or acquiring other entitlements.  In this case, the land might appear completely unchanged to the naked eye.  But the legal rights and permissions associated with the land could make the land more valuable to the next buyer.

Of course, that brings up the question of exit strategy.  One of the basic tenets of real estate investing is not to get into a deal you don’t have at least one (and preferably more) clearly identified strategies for getting out.

When it comes to land, the best way to think about possible exits is to understand the life cycle of a property.  Of course, land almost always lasts forever, so you could argue the life cycle is forever.  But for our purposes, we’ll think of land as starting out as raw (no entitlements of infrastructure like sewer, power, streets, etc).  From there, it becomes entitled, infrastructure is added directly on the land or nearby, improvements (buildings) are added, and eventually human beings live, work or play on the property.

Most people think of real estate only in it’s “finished” state (ready for human use).  Land investors see the whole cycle.  And each step along the way, value is added to the land.  And anywhere along the line, the original land owner can hand off the development baton (sell) to the next guy who’ll take it to the next level.

Obviously, the closer the land gets to a finished product (and depending on what the finished product is), the number of potential buys grows and the property becomes more “liquid” (easily sold and converted to cash).  Like a bus, you can get on at the beginning, in the middle, or near the end, and ride as long as you like.

Land investing is usually long term which makes it ideal for retirement funds.  Especially because tax advantaged accounts don’t really need the tax breaks…and land doesn’t provide any.

But land, like any asset, can also be flipped quickly for a profit if it can be acquired or controlled at a price below what someone else might be willing to pay.  Again, keep in mind that there are typically fewer buyers at the front end of the life cycle.  Of course, you only need one!

One final note…

In addition to being a long term store of wealth, land can also be a powerful part of an international asset protection strategy.  As FATCA compliance descends on the global investors, land is an asset which remains more private and unattractive to revenue starved governments than off-shore bank and brokerage accounts.  So if privacy and asset protection are high on your list, you might consider using off-shore land as a place to store long term wealth.  Who knows what that little Caribbean island will be worth some day???

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5/11/14: How to Know if a Real Estate Market is Real

Markets get hot for different reasons and if you can get in front of a rising market, it can be a lot of fun.

But when the tide of hot money rolls back out, does your market have a solid foundation for stability and recovery?When real estate investing, it's important to consider infrastructure

It’s an important question.  So we decided to dedicate this episode of The Real Estate Guys™ radio show to one of the most important foundations of a solid real estate market: infrastructure.

Behind the shiny microphones to talk about the role of infrastructure in real estate market analysis:

  • Your stable host, Robert Helms
  • His recovering co-host, Russell Gray

Money moves in and out of all markets, both paper and real, for two basic reasons: momentum and/or fundamentals.

A postmortem of those formerly hot markets which dropped precipitously in the 2008 crash tells us that there was a lot of hot money chasing momentum (speculation).  And when the hot money stopped flowing in, prices fell all the way past fundamental levels.

This is a very simplistic explanation, because the real estate bubble was really rooted in hot money in the bond market which fed the real estate market.  But the concept is that more properties were built and purchased than there were fundamental reasons for building and owning them.

The result, of course, was inflated prices and overbuilding.  And when the tide shifted, prices fell.  In some cases, prices fell well below replacement costs (a fundamental).

But some markets fell further than others.  And some markets came back sooner than others.

So what makes the difference between a slow falling or fast recovering market, and those that die and never or very slowly come back?

This is an obviously complex question, but one of the key components to a more stable and better recovering market is infrastructure.

Infrastructure is an important consideration when choosing a real estate market to invest inIn basic terms, infrastructure is all of the things that need to exist to support human occupation of land.  These things include roads, airports, utilities, etc.

In broader terms, infrastructure that is attractive to residents and businesses include education, health care, entertainment, shopping, communications and in some cases, shipping.

When you think about it, it makes perfect sense.  After all, people and the businesses which employ them need infrastructure in order to live, work and recreate.

Therefore, it stands to reason that, all things being equal (taxes, cost of living, weather), a market with superior infrastructure is more desirable than one with less infrastructure.

So when you look at a prospective market to invest in, don’t focus simply on its price to rent ratio.  While it’s great to buy a cheap property with strong cash flows, it’s better to have a property that can better withstand the beatings of the economic waves over time.

Instead, learn to look at the market through the eyes of your tenants and their employers; or, if you’re a commercial real estate investor, your tenants are the employers.

Ask yourself if there is a strong and educated labor pool (educational infrastructure).  Are new people attracted to the market to go to school?  Colleges can help drive inbound migration to an area.  Best of all, college grads tend to rent for awhile after they graduate and first start working.

Think about the support services people need and want…like health care, shopping and entertainment.

And what about a businesses ability to move people and products in and out of the region?  Are there good roads, airports, railways, etc.?  And is the physical location itself conducive to efficient transportation?

Our thesis is that the best long term markets are those that have solid and diverse infrastructure because it’s a huge competitive advantage over those that don’t.  And because infrastructure takes time and a lot of money to put in, any market that already has it is in position to get stronger faster when the economy is growing.

When the economy is booming and everyone’s flush with money, all markets look good.  But what about when the economy turns soft?

If you want to stay in the game in good times and bad, it’s critical to understand the role of infrastructure in a real estate market.  So listen in to this episode as we talk infrastructure and real estate market selection.

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5/4/14: Beyond Entity Structure – Proactively Protecting Your Portfolio

Sometimes you think you’ve covered, then you find there’s a big hole in your asset protection.  Not only is it embarrassing, it can be very expensive.

Sadly, most people’s assets are exposed.  But not in the way you think.  And you may be one of them if you think simply setting up an LLC has you covered.  If only it were that easy!

We’ve spent quite a bit of time over the years talking about using entities and off-shore strategies to protect your valuables. But there’s also been a glaring hole in our coverage of the topic of asset protection: insurance.

Wait!  Come back!  This is actually a VERY interesting and IMPORTANT topic.  It’s something long overdue to be discussed. And unless you’re among the very small group of sophisticated investors familiar with it, you’re very likely to learn some thing you didn’t know…important things that can save you a LOT of money.

So, to insure your assets aren’t shining naked for financial predators to abuse, we go on the road to talk with one of the top lawyers on the subject.

Under the cover of The Real Estate Guys™ Cone of Silence in San Jose, California:

  • Your mostly covered host, Robert Helms
  • His over-exposed co-host, Russell Gray
  • Special guest, insurance attorney Randy Hess

When it comes to insurance, most real estate investors think of property insurance and umbrella liability.  Both are important, but they’re really just the tip of the iceberg.

But because insurance is one of those products you pay for, but hope you never use, no one is standing in line excited to shop for it.

So right out of the gate, you may be wondering why we’re interviewing an attorney to learn about insurance.  After all, wouldn’t it make more sense to talk with an insurance broker?

But consider that insurance is really a contract between the insurer and the insured.  The contract contains promises.  You promise to pay the premium and the insurer promises to pay all legitimate claims.  Sounds simple, right?

Think about this:  When you enter into any other contract, isn’t it smart to have an attorney review the document to make SURE you know what you’re getting into?  And in the case of insurance, most of what your insurance agent says doesn’t matter.  It’s the policy (the contract) that dictates the parties’ (that’s you and the insurer) responsibilities.

And who writes this contract?  You got it…the insurance companies’ lawyers.  And even though it’s regulated by state insurance commissioners and all kinds of consumer protection laws, who do you think the policies are most likely to favor?  Right again…the insurance companies.

And one final point to illustrate that when you’re dealing with insurance, you’re out-gunned…like most consumer protection laws, they’re primarily designed to protect non-business people.  When you enter the realm of business (like real estate investing) the law considers you to be sophisticated enough to look out for yourself, so it does less to protect you.

So we think it’s REALLY important to have a good insurance attorney on your team of advisors.

But this is LOT more than simply making sure you understand your policy.  This is about MAKING SURE you get paid when you make a claim.

It starts with getting the right kind of insurances.  Once again, it sounds simple, but nothing having to do with insurance is simple.  In fact, to talk insurance, you have to go the cupboard and open up a can of alphabet soup.  Though far from comprehensive, here’s a list of  some of the kinds of polices EVERY real estate investor should be aware of:

CGL – Commercial General Liability insurance.  This is like your personal umbrella liability policy, except it covers your BUSINESS activities.  Running a rental property business, even as the property owner, is a COMMERCIAL enterprise.  Your PERSONAL insurance most often does NOT cover it.  So if you think your LLC and your umbrella policy have you covered, think again.

D&O – Directors and Officers insurance.  If you have an entity (like an LLC or corporation) that is holding and managing your properties (even if you’re operating through a professional property manager), there are living, breathing humans (probably you) making all the decisions, signing the documents, etc.  D&O insurance protects the INDIVIDUALS for the things they do while acting in their official capacities as Directors and/or Officers of the entity.  Once again, your PERSONAL coverages probably don’t cover your business activities.  But when your entity gets sued, you’ll almost certainly be named in your individual life (it’s how the predator goes after your personal assets) so you need this kind of coverage to protect you.

E&O – Errors and Omissions insurance.  This is a MUST HAVE if you’re syndicating.  It covers mistakes you make when providing professional services (like money management).

All of the above are in ADDITION to your personal insurance and the insurance you have on the property (fire, theft, damage, loss of rents, etc).

Wow.  That can be intimidating.  But it gets worse…

Each one of these policies can be laced with exclusions.  These are legal clauses which give the insurer the right to DENY your claim.

Now, insurance companies are NOT supposed to deny claims in order to increase their operating profits. Just like people shouldn’t judge you by how you dress.  Good luck with that.

But the law says if you have a legitimate claim, the insurance company has an obligation under the law to make a “good faith” effort to pay the claim.  Some companies are good about this.  Others…not so much.

When an insurance company refuses to pay a legitimate claim, just like when any other counter-party in a contract fails to perform their obligations, you need to sue them (or at least threaten to), which means you need a lawyer.  Someone like Randy Hess.

But even good insurance companies can write policies which exclude things you think you’re covered for.  And if you don’t read the contract, don’t understand what you read, or rely upon your agent’s representations and not the policy itself, you can end up with big holes in your coverage.  These holes can allow the insurance company to deny a claim…legitimately.

So we think it’s REALLY smart to have your coverage counsel (insurance attorney) review your policy BEFORE you buy it, to make sure it really protects you.

Now, if you’re thinking, “Oh, I don’t need all that.  I’ll just hide behind my entity and no predator can get through.”

That’s naive and here’s why…

When the predator sues you, you still have to defend.  That means you need to hire a lawyer to respond to the complaint and handle the litigation.  And even if you end up in mediation or arbitration, there are still SUBSTANTIAL costs.  In other words, you can win, but still lose.

But one of the aforementioned insurance policies will pay all your defense costs.  Do you know which one?  Do you know how much they’ll pay?  Do you know whether the defense costs come out of the total policy limits or are they in addition to whatever gets paid out to the plaintiffs?  Because if you have a $1 million policy and get sued for $1 million, but then spend $500,000 on defense (yes, it can cost that much), then there’s only $500,000 available to pay the plaintiffs if you lose.  Guess where that extra $500,000 comes from?  That’s right.  From you.

And if you can’t afford to defend, then you automatically lose, even if you’re not wrong.

Yes, it’s a jacked up system, but that’s the way it works.  So if you’re investing in U.S. property, even if you’re a foreigner, you’ll be dealing with the U.S. system.  It’s the same system that accounts for the vast majority of the world’s lawsuits and feeds the overwhelming majority of the world’s lawyers.

When you look at this way, insurance and your insurance attorney are a bargain.  You just can’t afford to be ignorant about how to buy polices that will really do their job when called upon.

That’s why we interviewed Randy Hess and why we strongly recommend you listen to this episode with a notebook.  It could be one of the most valuable broadcasts you ever listen to.

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4/20/14: Family Ties – Investing with the People Close to You

Would YOU invest with family?  SHOULD you?

It’s a controversial topic with lots of pros, cons and considerations.  The risks and rewards can be much more than financial.

Crowded around The Real Estate Guys™ mobile microphones for this episode:

  • Your son-of-a-gun host, Robert Helms
  • His father, investing partner and lifelong pal, Bob “The Godfather” Helms
  • Co-host and serial father, Russell Gray
  • First time guest and junior co-host, Sean Gray

Investing entails risk.  We usually think of those risks as financial, although most people realize there are human beings involved in all deals.

But when our only connection to the other party is the deal itself, if things go sideways, we know we can walk away (or into court) and when the dust settles we don’t need to ever see them again.  Or care much if we do.

HOWEVER, when your investment partner is your parent, sibling, child, grandparent or cousin, you have connections that run deeper than money.  They say blood is thicker than water (not really sure what that means), but what about money?  Or more specifically, the loss thereof?

Will YOUR personal relationship survive a sour deal?  It can be a scary prospect.  So why take the risk?

Well, on the other side of the equation is the joy of profiting together.  After all, if you REALLY believe in your deal, and you’re going to share with with someone, wouldn’t it be best to share it with someone you love?

And if you don’t really believe in your deal, should you be doing it all?  Is it right to put a stranger’s money at risk just because they’re a stranger?

Of course, there are other rewards to investing together.

There’s the camaraderie of searching for and researching opportunities; and sharing the challenge of working through issues.  Sometimes relationships grow stronger from pushing through life’s challenges together.

And what about the opportunity to mentor a child by involving them in your investing business?  When you pass on, do you really want to hand over your life’s work (your portfolio) to heirs that aren’t prepared to manage it successfully?

We’ve been actively working and investing with family members for years.  We’ve had ups and downs and made lots of mistakes.  Fortunately, family ties have proven stronger than financial setbacks.  And believe us, we’ve had some real setbacks.  Of course, we’ve also had some fun wins…so much so that we keep doing it!

So if you’re thinking about investing with the people your tethered to, listen in on this conversation and pluck some pearls of wisdom from three generations of experience.

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4/13/14: Using 1031 Exchanges to Build Your Real Estate Portfolio Bigger, Better and Faster

Equity is back for many investors!  That means it’s time to start thinking about equity optimization strategies again.

Ahhh….it reminds us of the good old days before the mortgage meltdown.

But until liberal lending comes back (yes, it eventually will…), a 1031 tax deferred exchange is a very useful tool for moving passive equity (the unrealized capital gains) from a particular property to another market or property (or multiple markets and properties!) that you think can perform better.  Or maybe you just want to diversify.

So to discover the latest and greatest in 1031 exchanges, we called up an old friend and invited ourselves out for lunch.  Our friend was delayed in a meeting, so we had lunch without him.  When we were finished, we sat our friend down in front of our mobile microphones and picked our teeth and his brain.

In sunny San Jose, California recording this interesting exchange of ideas:

  • Your talented today host, Robert Helms
  • His talent-deferred co-host, Russell Gray
  • Special guest, 1031 tax-deferred exchange expert, Ron Ricard

If you’re old enough and were bright enough to buy investment real estate a long time ago, you probably have some equity in your properties.  Some of it is the original purchase equity (down payment), and another big chunk of it is from amortized equity (pay down of the loan using the rental income), and (hopefully!) the BIGGEST chunk is from passive equity (long term price appreciation).  For that matter, you might even have a chunk of forced equity (appreciation directly tied to work you did to increase the value).

Or maybe, you were bold enough to buy property in the pit of the recession and now you’re the happy holder of gobs of new equity in a short period of time.  Good job.

In any case, if you have equity above and beyond your adjusted cost basis, you have capital gains.  And as long as those gains stay locked up in the property, you have unrealized capital gains.  That doesn’t mean you don’t know the equity is there. ;-)  It means you haven’t gone from cash to asset and back to cash again.  In other words, you haven’t sold the property and realized the gains.

Whew.  That was taxing…

But what do you do if the market or property you’re in is no longer the BEST place for your equity?

One option is to refinance the property and take some of the equity out with a cash-out loan.  Great idea, except those loans are hard to come by these days.  And that strategy only works if you still want to be in that property or market.

But what if you want to shepherd your equity to greener pastures?

If you simply sell the property, you’re off the hook for your loan (this might be important if it’s a residential 1-4 unit property and the loan counts against your Fannie / Freddie limit), and you have access to the equity…or do you?

Remember, you have a BIG FAT PROFIT.  Which is awesome, except when you file your tax returns and Uncle Sam says, “Hey!  Where’s MY cut?

And Uncle Sam’s cut can be pretty hefty in terms of absolute dollars.  Think about it.  If you have a $100,000 gain, your tax might be as high as $25,000!!!  That could be a down payment on a nice little rental property in Memphis, Atlanta or any number of low price, high cash flow markets.  Ouch.

That’s why a 1031 tax deferred exchange is a cool deal.

Simply stated, section 1031 of the IRS code (hence the name) provides an alternative to tax today IF you transfer your equity DIRECTLY (you can’t touch it in transit) into one or more other investment properties.  The tax is DEFERRED until such time as you actually realize it.  If you plan it right, you’ll NEVER realize it, but will still have access to all the money.  Of course, that’s the topic of another show….

For now, what you need to know is to get this WONDERFUL benefit, you MUST follow the rules.

Yes, there is a catch.  There are rules.  Like the 3 property rule, the 45 day identification rule and the 180 day rule.  Just to name a few…

But we’re not going to clog our blog with all the nitty gritty details.  First, we’re not tax guys and we’d feel really badly if you read this blog and make an important tax decision and that doesn’t work out.  Next, it’s WAY too much detail for a blog.  And lastly, you should ALWAYS consult with a qualified tax advisor when planning moves which have important tax implications.  Don’t be penny-wide and pound stupid.

The purpose of this blog and episode of The Real Estate Guys™ radio show is to make you aware that the 1031 tax deferred exchange exists…and is an important and powerful tool for repositioning and optimizing equity.  We also want to encourage you to get qualified advisors involved WAY in advance of making any decisions.  Yes, it’s a hassle and an expense.  But so is writing a HUGE check to the IRS.

The bottom line is NOW is the time to start getting educated about your equity optimization strategies and tools.

So listen in to this episode and our guest Ron Ricard will give you a great primer on 1031 tax deferred exchanges.

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