7/29/12: Bonds, Dividends and Wealth Management – How Other Investments Relate to Real Estate

We continue our summer soiree into all things economic with a triple set of interviews from Freedom Fest.  This time we’re talking bonds, dividends and wealth management from a banking perspective – and how all that relates to real estate investors.  Not as exciting as how to evict a non-paying tenant, but here we go….

Adding their voices to the discussion at hand:

  • The sultan of summers in sunny Las Vegas, host Robert Helms
  • The prince of pointless ponderings, co-host Russell Gray
  • Bond market guru and Oxford Club contributor, Steve McDonald
  • Associate Investment Director for The Oxford Club, Marc Lichtenfeld
  • President of Wealth Management for Everbank, David Conover

Wow!  That’s a pretty full house, but we suppose that’s a good thing when you’re in Las Vegas.

So we’ve been talking for quite awhile about the connection between the bond markets and the mortgage market.  Of course, the connection between the mortgage market and the real estate market is quite obvious.  But the connection is probably deeper than most people realize – especially if you’re an income property investor.

Steve McDonald goes as far as to say that “the bond market IS interest rates”.  And we know that interest rates affect every aspect of the economy including taxes, consumer spending, business investment (and employment), currency exchange and international trade.  Other than that, interest rates aren’t that big of a deal.  So, yeah, the bond markets matter.

Steve gives us a primer on the bond market and then tells us that “the bond market works secretly for the benefit of the ultra-wealthy” and is 40-50 times BIGGER than the stock market.  Now we’re even MORE interested!

If you’re a regular listener, you know we’re not big fans of bonds (or dollars) as a place to store wealth right now.  According to 2013 Investor Summit at Sea™ faculty member, Peter Schiff, bonds and the dollar are going to be the next and biggest crash.

At first, we thought Steve would disagree with Peter.  But au contraire… Steve actually agrees – and tells us that the bond market crash will make the housing market crash pale in comparison.  Then he goes on to describe some specific strategies for playing bonds in a fragile market.

One technique he describes is buying existing bonds at discounts.  Okay!  Now, we’re getting back to something we understand.  It’s the same as buying discounted mortgages.  That is, you increase your yield by paying less than the face value of the debt, so even though the current bond interest rate environment is low, you can earn high double digit returns.  That could (and perhaps will) be the topic of entire show…but not today.

All this to say that when Steve first sat down at the microphone, we weren’t sure we’d get along.  But before long (do you see it coming?), we bonded with Steve (sorry, we couldn’t help ourselves).

Whew.  And that’s only the first of three interviews in this episode.

Next, we chat with Marc Lichtenfeld who advocates dividend investing.  In fact, he just wrote a book on how to get rich with dividends.  It’s titled, “Get Rich with Dividends“.  Clever.

In this case, Marc agrees with Peter Schiff that stock investors should emphasize investing for income.  Hey!  Isn’t that the same mantra our friend Robert Kiyosaki has been preaching in Rich Dad Poor Dad?  Say “yes” because that’s the right answer.

Of course, Kiyosaki isn’t a stock guy and neither are we.  But it’s nice to know that we can all get along.  Rodney King would be so proud.

The point is: buying equities (stocks or real estate) that will likely retain their comparative value (i.e., hedge against inflation) over the long haul can be a rocky ride when markets are jittery.  But then those equities cash flow, even if the asset value is up and down, the cash flow can calm your stomach in the short term – and enhance your overall ROI over the long haul.  Brilliant!

Now we move on to interviewee number 3, David Conover from Everbank.

Last year at Freedom Fest, we interviewed another Everbank exec, Frank Trotter.  We were intrigued then by Everbank’s business model and offering, so we were anxious to visit with David and see what the world looked like through his eyes right now.

What’s interesting is that while there’s a lot of chaos in the banking business, Everbank has “robust expansion plans”. Why do we care about that?

First, we think it’s interesting when any business has robust expansion plans in this marketplace.  After all, we keep hearing about how businesses are hunkering down and running scared.  And since we like it when our tenants have jobs so they can pay the rent, we like to know what CEO’s are thinking when it comes to expansion.

What’s even more interesting to us is that Everbank is growing it’s mortgage lending operations.  We’ve been saying for awhile that one of the leading indicators of a heating real estate market will be the expansion of lending.  Everbank obviously sees opportunity in this space, so it’s something we’ll continue to watch.  When money starts flowing freely into real estate, it’s tide than can carry alert investors to handsome profits.

Also, real estate investors are typically sitting on piles (albeit some smaller than others!) of cash.  Dollars.  And we keep hearing that dollars are headed downward.  So what can an investor do to hedge against inflation, yet still have liquidity and safety?  David describes some unique banking products which give investors options to the dollar.  VERY interesting!

So all in all, this is a full deck of dialog that we think you’ll enjoy!

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7/22/12: A Midsummer Investor’s Dream – Housing, Jobs, Consumer Confidence and Economics

Bad news for housing can be great news for investors.  But it means seeing a bigger picture and exploring the dichotomy of mainstream news and main street reality.  Alas, we thinketh such contemplations requireth aid.  But fear not!

Behind the microphones to help you sorteth it all out:

  • The Bard of broadcasting , host Robert Helms
  • Your Puck of pontifications,  co-host, Russell Gray
  • The Godfather of Real Estate, Bob Helms
  • Special Guests, former Chief Economist for the New York Stock Exchange and current Economics Editor for Barron’s Magazine, Gene Epstein
  • Special Guest, Director of  Economic Research for the Reason Foundation, Anthony Randazzo

We shall abandoneth the allusions of 16th century English soest thou may understandeth better that of which we are attempting to speaketh…

Long time listeners know that for each of the last three summers, we’ve headed to Las Vegas to attend Freedom Fest.  We always pack our mobile microphones grab interviews with some of the very interesting people we meet.  This year is no exception.

In this episode, we start out the conversation talking with Gene Epstein.  Gene is the former chief economist for the New York Stock Exchange and is currently the economics editor for Barron’s magazine.

Now, like most folks on Wall Street, Gene is a paper asset guy – stocks, bonds, mutual funds, REITS, etc.  And when Wall Street guys talk real estate, they don’t mean rental properties owned by individual investors.  That idea doesn’t compute for them.  But that doesn’t mean we can’t learn from them.  We just need to remember where they’re coming from.

What’s great about talking to guys like Gene is that it helps us see the bigger economic picture so we can put our mom and pop real estate investing into a broader context.  We’ve said it before and we’ll say it again:  what happens on Wall Street affects Main Street.  So main street real estate investors should be paying attention to macro-economic trends just like any other type of investor.  We do these interviews to help you do just that.

Gene starts the show off on a high note (not really), pointing out the US still has doggedly high unemployment and anemic GDP growth that is just “crawling along” at about 2% a year. Since GDP is measured in dollars and the Fed has been pushing the dollar down, you could probably argue that the economy is not growing at all.

Side note: We think GDP should be measure in terms of actual products produced.  After all, if you’re cranking out 1 million widgets a year at $10 each, your productivity is 1 million widgets.  Measured in dollars, it’s $10 million a year.  But what happens when inflation (a falling dollar) causes the same widget to sell for $12.00 each?  Now, measured in dollars, you’re productivity is $12 million a year.  Wow!  Your GPD “grew” 20%!  But did you really grow?

No.  You’re still only cranking out 1 million widgets a year.  So real productivity is flat. This means you don’t need any more space or people (get the real estate connection?).  The point is that the way we report GDP can be very deceptive and it’s easy to think an economy is growing, when it really isn’t.

Back to Gene…

He says the US economy is “not in a good place”.  But (and it’s a nice one), he doesn’t see a fiscal cliff or some similar financial apocalypse looming.   Whew.  We’ll cancel our advance tickets for the flight to Mars.

Gene says that we’re not seeing serious price inflation even though we should because “the Fed is printing money like there’s no tomorrow”.  Why don’t we see price inflation (yet)?  Because the labor market is weak and oil prices have dropped.

Hmmm….what does that really mean?

If the money supply is expanding (which is what happens when the Fed “prints”, a.k.a. quantitative easing), then absent an increase in productivity (making more stuff) prices should rise, right?  More dollars chasing the same goods equals rising prices…UNLESS some other component of cost goes down to offset the inflation (say…labor and energy).

Here’s the dirty little secret:  another way to increase productivity is to reduce labor costs.  That is, companies can be more productive by making more stuff with the same people, OR they can be more productive by making the SAME amount of stuff with LESS people (or at least less expensive people).

Of course, businesses would like to sell more, but the market decides that.  And if the market’s weak (it is right now), then businesses have to look for things they have more control over – like labor costs.

But what does that have to do with main street real estate investing?

Well, if business are going to continue to be squeezed by inflation, they might be forced to lay people off and/or move to cheaper locations inside or outside the United States.  If you’re a real estate investor, it’s bad when your tenants get laid off, can’t find a job, or the companies that employ your tenants (or rent your commercial building) decide to move away.  So yes, real estate investors should care a lot about these macro factors which are affecting businesses.

But an astute investor knows there’s a bright side.  After all, one town’s loss is another town’s gain.  That is, those companies and their jobs are going somewhere.   Your mission, if you choose to accept it, is to figure out where they’re going and to go there.

The first day of the due diligence seminar we just wrapped up was about  understanding the economic, geographic and demographic factors that affect the movement of people and money in and out of markets.  It’s something we talk about quite a bit during our real estate market field trips.

Meanwhile, Gene echoed something that 2013 Summit at Sea™ faculty member Peter Schiff has been telling us:  One of the unpleasant medicines necessary to heal the ailing economy is higher interest rates.

Actually, Gene didn’t say that directly.  But he meant it.  Because what he did say is that the U.S. needs to implement similar policies to those used in the early 80’s.  Since we’re old enough to remember the early 80’s, we know that interest rates were high.

It sounds counter-intuitive. After all, lower interest rates makes it easier to borrow.  Isn’t that good?  Maybe.

But lower interest rates punishes savers, especially when you combine it with a falling dollar (inflation).  After all, who want to save when the dollars are going down in value and the paltry interest earned isn’t even keeping up with inflation.  This is why Robert Kiyosaki says savers are losers.

But (obviously), if interest rates were to go up, it would create a host of ramifications too big to describe here. For anyone managing  big portfolio of debt (which describes most active real estate investors), then Fed policy is something to be watched VERY closely.  You can bet the lenders are paying attention.

As if all this wasn’t enough, when we’re done chatting with Gene Epstein, we get Anthony Randazzo on the microphone in this his second appearance on The Real Estate Guys™ radio show.

Anthony is the director of economic research for Reason foundation and he specializes in housing finance and macroeconomic policy.  Hey!  We were just talking about that.  Good timing.

Anthony is pretty analytical.  He spends his time researching statistics, analyzing data, drawing conclusions and making policy recommendations.  Then when we talk to him, he gives us the Cliff Notes version. It’s like being buddies with the smartest kids in the class.

Anthony points out that housing is (and almost always has been) flat when adjusted for inflation.  That means that houses, like other “hard assets” generally retain their relative value over the long term as the dollar loses its value.

Think about that one.

Today, it takes more dollars to buy a house and car than it did 30 years ago.  But it doesn’t take more house to buy the same amount of cars.

Huh?

Let’s say you could buy 10 brand new cars for the price of one new house.  In 1970, that might be ten $4,000 cars to buy one $40,000 house.

But in 2010, it might be ten $40,000 cars to buy one $400,000 house.  Or vice versa.

The point is that relative to each other, the cars and houses retained their value.  It didn’t take more cars to buy a house.  The ratio stayed the same.  But it took a WHOLE lot more dollars to buy the car or the house.  Why?  The value of the dollar dropped.

Now, back to real estate.

Obviously, real wealth is built accumulating things of real value.  Even better when that thing of real value generates monthly cash flow. And even better, when there are tax breaks.  And even more better (we know, that’s terrible grammar), when you can buy it using borrowed money. And even extra more better (yes, it’s getting bad), when interest rates and purchase prices are low and income (rents) are up.

Yes, that time is now.

So, our two guests both agree that housing will be “bad” for the next few years.  We hope they’re right.  That means the sale will continue and bargain shoppers will be stocking up.

Now you know why we like to talk to all these economist types.  They cheer us up!

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7/15/12: Banking, Monetary Policy and Real Estate

Whatever you may think about the Federal Reserve or its motives and contributions, one thing is certain:  The Federal Reserve has a profound impact on the supply and cost of capital.  This alone makes paying attention to the Fed an important part of any investor’s routine market vigilance – and real estate investors are no exception.

While attending Freedom Fest in Las Vegas, we caught up with a 2012 Summit at Sea™ faculty member who was one of several keynote speakers – along with Steve Forbes, Peter Schiff , Robert Kiyosaki, Andrew “Judge” Napolitano and Mark Victor Hansen.

Coming to you from Las Vegas, Nevada:

  • Your straight dealing host, Robert Helms
  • Your royally flushed co-host, Russell Gray
  • Special guest and best selling author of The Creature from Jekyll Island, G. Edward Griffin

This is G. Edward Griffin’s second appearance on The Real Estate Guys™ radio show.  Last October, as part of our Halloween theme, we traveled to Southern California to interview Mr. Griffin – and didn’t quite know what to expect.  After all, his signature book, The Creature from Jekyll Island – A Second Look at the Federal Reserve, is somewhat controversial to say the least.

But after spending a week on our 2012 Summit at Sea™ with both G. Edward Griffin and Robert Kiyosaki discussing the Fed, banking, investing and real estate, we were excited to reunite with both of them at Freedom Fest.

We took advantage of the opportunity to sit down with Mr. Griffin one more time, in the wake of several Freedom Fest speakers (including Robert Kiyosaki, Peter Schiff and yours truly) talking about the Fed and its impact on real estate.

Whether or not you subscribe to the notion that the Fed is a nefarious cartel of international banks bent on world domination, or a misguided but very powerful 4th branch of the U.S. government; or a necessary, effective and benevolent steward of the U.S. dollar – no one seems to disagree that when then Fed expands the money supply (quantitative easing), that new currency flows through the economy and ultimately has an affect on all types of asset classes, including real estate.

Therefore, we ask Mr. Griffin to give us a short review of the history and mechanics of the Fed.  Since he literally wrote the book on the subject, he’s one of the best qualified people we’ve met to help us with this essential understanding.

While Ed’s position is that the Fed is a problem (hard for us to disagree), we also know that for every yin (negative) there’s a yang (positive), so (parents, cover your children’s eyes) we enjoy pulling out our yang (the force is strong with us) and discussing the opportunities that the Fed’s shenanigans create for real estate investors.

It’s a topic we’ve covered before, but as we listen to Peter Schiff and other financial pundits turn up the warnings of a falling dollar, we can’t help but smile.  After all, there is no better financial vehicle with which to short the dollar than a low interest 30 year fixed rate mortgage on an income producing property in the right market.  In fact, that was the topic of our presentation at Freedom Fest.

It’s one thing to walk around talking about market cycles and how what goes up must come down and vice-versa.  It’s another thing to understand the mechanics of money from the Fed to Wall Street to Main Street so you can see the wave coming and ride it.  And it starts with understanding the Federal Reserve Banking System.

So listen and learn as we discuss banking, monetary policy and real estate with G. Edward Griffin.

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7/8/12: Analyzing Real Estate Markets in a Changing Economy

We know that the recession formally “ended” in June of 2009, but it seems like someone forgot to tell the economy. Oops.

So since we haven’t been in a “throw a dart at a map and buy a property” market for quite some time, the notion of strategic market selection has come back in fashion.  The only problem is that so few people really understand how to look at a real estate market from an investors perspective.

Not to worry!  Your friendly neighborhood real estate guys are here to help.

Swinging into action for this amazing episode:

  • Your dynamic disher of diligence dialog, host Robert Helms
  • His mild mannered sidekick, co-host Russell Gray
  • The ever effervescent Godfather of Real Estate, Bob Helms

We’re busy prepping for our upcoming seminar, Analyzing Markets and Properties – The Due Diligence Process (yawn….catchy title, we know), so we have due diligence on the brain.

But more than that, we see lots of people getting interested in real estate again – and who can blame them?  Low prices, growing rental demand, no new inventory, dirt cheap (pun intended) interest rates and cash flows that just make you smile. And with anemic interest rates on bonds and savings accounts and a bi-polar stock market, folks just need someplace to put their money.

The bottom line is that investors are getting back into real estate in a big way – which is good and bad.

It’s good when resources rally to heal a hurting housing market.  But it can be bad when “dumb” money…we know, that’s condescending…how about “inexperienced” money gets into the market.  We guess if you’re a seller and a greater fool shows up and overpays, you make a little extra, but in the grand scheme of things, it isn’t good when people get into markets and properties they don’t understand.

So, in the interest of public service, we offer this episode as a pre-emptive strike against irrational real estate exuberance.

See, a bad market can doom a “great” deal.  Conversely, a strong market can make a mediocre deal a winner.

Here’s the catch:  You might be able to buy a distressed property and pretty it up, but what can you do to prop up a limp market?  And if it’s true that a rising tide lift all boats, it’s all true that when the tide goes out everyone can see who’s been swimming naked.

Please don’t swim naked.

We think it’s smart to start your quest for real estate nirvana by getting in touch with your inner investor. Once you know who you are, what you want and what you’re willing to do to get it, then you can go out in search of real estate markets most likely to produce the desired results.

Yes it’s true.  Real estate markets have personalities, just like people.  Some are very conservative, predictable, safe (and a tad boring), while others are wild, carefree and sometimes seductive.  The key is hooking up with one that fits your style.

But how do you know?

There a lot of factors which influence a market’s behavior.  Demographics, geographic features, strategic location and yes, politics too.  Anyone who was in Phoenix when they changed the way they policed illegals, heard a giant sucking sound as low end tenants vacated their residences in mass numbers.

We’re not here to say whether the policy was good or bad. It happened and it affected the real estate values and for our purposes, that’s what matters. What we learned is that you’d better pay attention to such things.

Other things to pay attention to are net migration, employment, business environment, types and diversity of economic drivers, infrastructure, building permits, land prices and the list goes on and on.

Feeling overwhelmed?  That’s okay.  We understand.  Maybe that’s why you don’t see too many people really delve into market due diligence.  It’s kind of a rally killer when the goal is to get the property sold fast.

But if you’re a buy and hold investor (as opposed to a turn and burn flipper), then even if you’re not marrying the market, you are probably going to be in a fairly committed relationship – so before you move in together, you should do a little homework.

So listen into this episode as we share precious and practical pearls of prescient wisdom which can help you peer into the perils of property market sand pick places prone to perform positively.  Phew!

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