09/27/15: In Search of Yield – Real Estate Niches to Get Rich In

So many opportunities…so little time!

In this fifth and final episode of our series on how to get off the beaten path to find better cash flows, we take a rapid fire look at a variety of real estate niches.

We discover there are MANY places an intrepid real estate investor can go to find profits…without fighting with dumb money or institutional giants.

In the studio pulling the trigger on another exciting episode of The Real Estate Guys™ radio show:

  • Your rapid fire host, Robert Helms
  • His nearly fired co-host, Russell Gray

If your target is cash flow from real estate…even if your long term plan is to build equity…you’re going to LOVE this episode!If you're targeting better cash flow from your real estate investments, there are lots of real estate niches to consider investing in.

The big picture of finding higher yields is to avoid being Waldo.  He’s that kids book character who’s always lost in the crowd.

The key to success is finding investment opportunity where others aren’t looking.  And you’ll be happy to know there are DOZENS.   Here are just a few…Real estate investing niches can be a great way to find better cash flow for your real estate investing dollar

Monetizing Traffic

Whether you have retail space, land strategically located on a busy corner, or a fully leased multi-family or office building, there are people coming, going and passing by.

That traffic is valuable…to someone.

Think about WHO that someone might be, and you may have a potential “tenant”.

Here are some examples:

Kiosks and Vending Machines

Vending machines of all kinds are great ways to turn a little bit of extra floor space into rental incomeLeasing space to a kiosk or vending machine operator on a flat rate or revenue sharing basis can be a great way to generate low maintenance income from otherwise unused space.

ATM machines, laundry rooms and vending machines of all kinds are among the many potential tenants for spare space. And you don’t have to be the operator!

Cell TowersCell towers are another way to generate cash flow from real estate without the hassle of tenants and toilets

Sometimes you can get rents without having any people involved.  Cell towers are another way to monetize a strategic location to generate low maintenance cash flow.

Personal Services Stations

Each station doesn’t take up much space and can be rented to a number of independent operators.  It’s a way to create high yield on small spaces while spreading your income stream over many tenants.

Stations in a hair or nail salon can be a great cash flow investing nicheSpecialized versions of this include hair and nail salons.  They may require modifications to plumbing, but are otherwise fairly simple in terms of property improvements.

Other examples are mobile massage stations where an operator sets up a table or chair, but nothing is permanent.

Classes and Gatherings

Sometimes an unused empty space can be rented out on long term or short term basis…all the way down to per use…for things like Bingo night, flea markets, fitness classes or dance classes, small presentations, etc.Renting space to classes and gatherings which only require an empty room can be an easy way to generate quick cash flow.

It’s amazing how much cash can be generated from just a room and some mats or folding tables and chairs!

Pop-Up Stores

Another use for vacant space…this time of a retail nature…are “pop-up” or seasonal stores.  The most notable is probably a Halloween store, but there can be others.

“Undesirable” Real Estate

Sometimes there’s real estate that doesn’t seem very useful at first glance.  But with a creative mindset, you can find ways to make even the ugly duckling properties generate cash…

Document Storage

Sometimes buildings in less desirable locations, or with limited parking, or not worth prettying up, can be converted into offsite document storage.Document storage can be a good cash flow generating use of an otherwise undesirable space or building.

Some businesses are required by law to retain voluminous amounts of hard copy documents which are seldom if ever accessed because they’ve been scanned.

Often these businesses are financial, legal or medical…and they’re paying high rent for their office space.  It makes no sense to pay premium office rates to store seldom used boxes of documents.

Land

James Rickards, author of Currency Wars and The Death of Money (both on our Recommended Reading list), argues that one of the best places to store and protect wealth from the long term downward trend of paper money…is in vacant land.

The knock on land, like gold, is that is doesn’t produce cash flow.

But it can!  And in more ways than one…

Temporary or Seasonal Tenants

Vacant land can be rented out to temporary or seasonal businesses as a way to generate cash flow from property that's otherwise sitting emptyVacant land can be used for pumpkin patches, Christmas tree sales, traveling carnivals, parking for major events, and more.  If the land is located in a busy place, this is another way to monetize traffic.

Long Term Tenants

Properly permitted empty land can be used to store boats, RVs, trailers or other large items that don’t require much shelter from the elements.    This can be a way to generate income from land that’s away from high traffic areas.

Like document storage, a large item owner might be willing to drive a little to save a lot…compared to paying higher rent at a fully developed self-storage location in town.

Carry Back Financing

If you have a piece of land you don’t want to keep long term, but for whatever reason don’t want to or can’t sell for cash, you can use it to create a stream of income…simply by selling it on an owner carry back.

Investing in notes can be another great way to generate above average cash flowNow you’ve taken the disadvantage of raw land, which is that it’s hard to finance, and made it an advantage…because your buyers will probably pay an above market price and rate for your financing.

And if you combine owner financing with the “pizza” strategy (taking a whole pie and selling it in smaller pieces), you can create multiple income streams on higher values.

In fact, we know people who like this strategy so much, they borrow cheap money from easily re-financed properties to purchase chunks of land for “cash”, then sub-divide and sell the pieces with owner financing.

The down payments get them most or all of their money back, and they retain the cash flow from the loans…at a rate much higher than the original loan.

Now they can take their cash and do it again.

Ranch and Farmland

A variation on the land theme is agricultural land.  Once again, you’re generating income from a plot of land.Renting empty land to farmers for is another great way to generate cash flow from land that is just sitting empty

It can be as simple as leasing out some excess acreage to a farmer.

This might be some land next to a home or restaurant leased to a grape grower, or acres of land for crops of nearly any kind from food to timber.

You can also lease land for storing or grazing livestock.

Specialty Properties

People and business will pay rent to use real property in MANY different ways.  Some of our FAVORITES are…

Self-Storage

Self-storage investing is a great way to generate cash flow outside of residential real estateAnother form of retail with no people…or very few.  And as people downsize to save money, they hate to part with their junk.  So they rent space to store it.

But it’s not just middle-class folks.

Specialized storage, like fancy boats and RVs or exotic cars can be a way to collect self-storage rents from a more affluent customer.

Mobile HomesMobile homes are a variation on residential real estate investing that often generates far better cash flow...with less hassle

Another fun one.  Usually, you don’t own the structure.  Just the dirt.  So your tenants are home-owners, just not dirt owners.  And they tend to be longer term, lower hassle tenants.

Assisted Living Facilities

With 10,000+ baby boomers retiring every single day, there’s a growing population of aging people who will eventually need help caring for themselves.

Learning how to invest in assisted living facilities is a great way to generate huge cash flows while providing an important service to a growing population of senior who need help with their cay to day livingNot everyone will want or need a nursing home.  Many won’t want to live in large compounds that look more like hospitals than homes.

For those aging seniors who want the warmth and companionship of a home and friends, but still need someone to help them with their day to day living, assisted living facilities can be a great answer.

And assisted living facilities are a fantastic investment opportunity as well.

We did an entire episode on this topic with our good friend, Gene Guarino.  Gene’s also been kind enough to do a webinar on how to invest in assisted living facilities, which is available in our Special Reports library.

The Opportunities are Endless…

Even with five full episodes dedicated to the Search for Yield, we have only scratched the surface.  And that’s what we LOVE about real estate.

While investors in bank accounts and bonds get next to zero compensation for the very real risks they take… corporate profits are strained by a weak economy…and stock prices gyrate up and down like the Tower of Terror with every breath that proceedeth out of the mouth of Janet Yellen…

Real estate just keeps on being real…serving real human need of ALL kinds…and generating better and more stable cash flows than just about anything else out there.

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

09/20/15: In Search of Yield – Creating Cash Flow from Commercial Real Estate

If you’ve ever wondered how to invest in commercial real estate, this is a great episode to get started with.Commercial real estate is a way for residential real estate investors to expand their horizons and find alternatives to houses and apartment buildings to create passive income from real estate

That’s because there are MANY ways to make money from commercial real estate.

And as we’ve been discussing for the last few episodes, with cash flows on residential real estate tightening, alert investors have already begun to widen their horizons.

In The Real Estate Guys™ radio show studio helping you widen your real estate investing horizons through a look at how to invest in commercial real estate investing:

  • Your wide open host, Robert Helms
  • His horizontal co-host, Russell Gray

Commercial real estate is both a deep and wide topic.

Flitting across the surface of the topic, there are three major categories of commercial:  Office, Retail and Industrial.

But that’s far from exhaustive.

And then going deep into each of the big three, there are all kinds of sub-categories.  And it’s WAY too much to cover in one episode.

So the purpose of this edition of The Real Estate Guys™ radio show is to give you an overview of some of the many options available when you enter the wide, wonderful world of commercial real estate.

How to Invest in Commercial Real Estate – OFFICE

How to invest in commercial real estate - Office buildings are an alternative to residential real estate for creating passive income through real estate investingWhen it comes to office real estate, the first thing most people imagine are office buildings holding white collar workers all sitting at desks starting at computer screens and shuffling papers.

But there’s more to office than just that.  And it’s a good thing.  Because as technology has empowered a virtual workforce, the need for mainstream office space has been affected.

Today, many people telecommute.  That means less desks…or some cases, shared space.

And with more people free lancing, executive suites and collaboration stations are growing in popularity.

Also, with so many records digitized, it’s less important to keep physical records in close proximity of workers.  This reduces the need for high priced office space, while adding to the demand for off-site record storage.

Yes, there are still businesses that retain hard copy documents for many years…often for compliance reasons.

How to Invest in Commercial Real Estate – MIXED-USE

Also growing in popularity are mixed-use buildings where people live above offices or retail space.  Part of this shift can be attributed to younger people waiting longer to start families and move to to the suburbs.

Another factor in the popularity of Mixed-Use is traffic congestion and people’s desire to reduce the amount of time they spend in cars to go to work, shop and socialize.

How to Invest in Commercial Real Estate – RETAIL

From strip centers, to shopping malls, to single-purpose structures like car washes or that coffee kiosk in the parking lot, retail real estate comes in a variety of shapes and sizes.

How to invest in commerical real estate - Retail real estate investing is an alternative to investing in rental houses to generate passive incomeAnd while office has certainly been affected by technology induced societal changes, retail much more so.

So as a retail real estate investor, it’s important to understand how the internet is affecting your tenants, the retailers.

One only needs to consider that Amazon, a company with not a single retail location, has surpassed Wal-Mart in terms of stock market capitalization.

People order MANY things on-line (one of the reasons we love markets like Memphis, Dallas and Atlanta that are distribution hubs).  This means they aren’t necessarily going to the corner store to buy them.

Therefore, a smart retail landlord manages his tenant mix carefully…preferring businesses whose products or services require customers to visit them.  You can’t order a sandwich, a mani-pedi, or a haircut online.

But it’s more than simply making sure your tenants have local customers and aren’t losing business to websites.

A good tenant mix will promote cross-selling.  So when a customer comes to the center to drop off their dry-cleaning, they can get get a haircut, or a teeth cleaning, or massage.

In other words, you are helping your tenants leverage each other’s traffic, by offering a complimentary mix of products and services and getting more of that customer’s spending to happen in your retail center.

How to Invest in Commercial Real Estate – INDUSTRIAL

Although it isn’t glamorous, industrial space can be a stable way to generate long term cash flows.

How to invest in commercial real estate - Industrial tenants often sign long term leases because it's expensive and difficult to move all their equipment to a new locationWhen a business rents a building and loads it up with equipment, whether it’s light manufacturing, auto repair or something else…it takes a lot of time and hassle to move.  So they don’t.

And they’re happy to rent because they don’t want to tie up their money in real estate.  They need it for equipment and inventory.

As you can see the list of commercial opportunities is long and diverse.  And we only scratched the surface.

But as people pile into pile into the the ever more crowded residential space because it’s easy to understand, if you’ll take some time to learn a commercial niche, you may find less competition and more profits are waiting for you.

Listen Now:

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

The Fed FINALLY admits it…

Could the Fed’s decision NOT to raise rates be basically an admission this “recovery” is a farce?

Janet Yellen swears to tell the whole truth and nothing but the truthIf the economy can’t absorb even a token rate increase, it must be FAR from robust.

As we’ve discussed, there’s simply not enough income (productivity) to service all the debt.

It’s like a sub-prime borrower using a teaser rate to squeeze into a home they can’t afford.  When rates re-set, their income’s not enough to cover the new payment.

In other words, we have a sub-prime economy hooked on teaser rates.  An interest rate increase could push it over the edge.

Of course, the flip side of every problem is opportunity.

Right now, Janet Yellen has a BIG problem.  And she thinks housing can help her get out of it.

Check out this headline from Bloomberg…

Janet Yellen Sees a ‘Very Depressed’ Housing MarketJanet Yellen has a big problem

 “The Fed chief noted… housing ‘plays a supporting role’ to bigger drivers such as consumer and business spending.”

“The central bankers ‘recognize that the housing market is sensitive to mortgage rates’ and that an increase…will eventually impact consumer borrowing costs.”

In other words, Yellen didn’t raise rates so she could prop up housing.

Great!

But…proceed carefully.

First, we’re not sure Janet Yellen will succeed at goosing housing.  And that’s okay.

Encouraging consumers to go into debt based on home equity isn’t a smart path to long term economic “recovery”.Encouraging homeowners to go into consumer debt based on home equity is a bad idea

Isn’t that how we got here in the first place?

And with interest rates already so low, there’s no room to push up debt based solely on lowering interest rates.

So incomes need to rise.

But competition from low overseas wages and technology put a drag on American wages.

So Yellen might be tempted to revert back to money printing…or more “quantitative easing”.

Long term that’s bad for the dollar.

So mortgages and real estate could be very good things to have in the years to come.

Because, as we discuss in our Real Asset Investing report, mortgages are a way to short the dollar.  And in spite of it’s recent “strength”, the dollar has a one hundred year history of loosing value over time.  This makes sense because the Fed has a stated goal to create long term inflation.Real Asset Investing explains how to protect yourself from a falling dollar

Real estate is a great way to hedge against long term inflation.

Just be mindful of the fundamentals of value.

REAL value comes from income.  The more income, the more value.  The less income, the less real value.

But after nearly seven years of artificially low interest rates, trillions of dollars in “stimulus”, and zero meaningful reform of highly leveraged derivative speculation…asset values for stocks and bonds have risen without corresponding increases in income.

So this CNBC article says Wall Streeters turned to Main Street for more real returns…

Investors Snapping Up New Homes for Rentals

Hedge funds and foreign investors are buying U.S. houses…large-scale investors buying thousands of discounted foreclosed properties…turning them into single-family rentals….The housing market is recovering…but these investors are not selling. They are buying more, and now they are buying new.”

This perplexes mainstream pundits who only understand “buy low, sell high”.  But the article explains…

 “‘…institutional capital is still looking at … a long-term hold…there’s yield and…appreciation to be had.’” 

Exactly.  Welcome to real estate investing.

Of course, Bloomberg reports that all that big-money bids up prices and takes inventory off the market…

Previously Owned U.S. Home Sales Retreat on Limited Availability

No wonder Wall Streeters are buying new…which of course, makes home builders happy.

As John Burns reported, home builders are beginning to cater to investors instead of only home owners.

But if real value is based on income, how are incomes doing?

Not so good…according to a Bloomberg article:

Americans paychecks are shrinking “Wages and salaries in the U.S. rose… at the slowest pace on record, dashing projections that an improving labor market would boost pay.”

“Private wages were little changed…, the worst performance since those records began in 1980.”

Is this headline from Market Realist provides a little glimmer of hope?

Wage Growth Could Possibly Be Ticking Up

Could…possibly…maybe…kinda sorta…

But then we dig deeper and find:

“Despite falling unemployment, one of the conundrums of the current labor market is flat real, or inflation-adjusted, wages.

And right in the same article we find out why it matters…

“Historically, real estate prices have correlated closely with wage growth…Recently, home prices have been increasing again, but that’s due to low inventory….the ratio of median home price to median income is again approaching bubble-type highs. As the Fed removes accommodation, further home price appreciation will be dependent on wage growth.

Of course, rents also come from wages, and this Associated Press article says…

US rental prices up 3.8 pct. in past 12 months; pace slows but still faster than wage growthRents are becoming unaffordable for many Americans

“…rental housing costs have been rising nationwide at roughly double wage growth…The result is an affordability crunch for renters.”

This means long term resistance to rental increases…and even pressure to lower rents as people look to move to more affordable housing.

Here’s the bottom line…

The Fed’s decision tells us the economy is weaker than advertised.

Wages are soft.  People can’t afford higher debt paymentsor higher rents.

But they NEED housing.

So housing and rents are rising.  But without wage growth it may not be sustainable.

You shouldn’t count on rising rents or lower interest rates to improve your cash flow.

So it’s REALLY important to BUY RIGHT.
  • Choose affordable markets with a good local economy, low taxes and living expenses, and an attractive quality of life for people leaving expensive areas in search of affordable housing.
  • Avoid paying too much. Be disciplined. Don’t chase the market.
  • Lock in low fixed rate long term financing. The difference in adjustable and fixed rates probably isn’t worth the risk right now.
  • If you want an equity pop, force it by adding value.  Ditto for rents.  Maybe the market will push prices higher, but don’t count on it.  The equity tide can rise…and it can recede.
  • If you can get available equity out at today’s cheap interest rates, it’s probably a good idea…as long as you have someplace to conservatively invest the proceeds for more than it costs to borrow.  Right now, that’s pretty easy.

When we look at the investment landscape, we agree with the contingent of defectors from Wall Street…stocks, bonds and bank accounts look very scary right now.

But investors have to store their wealth somewhere.

Real estate provides income, long term equity growth, tax breaks and the most affordable form of conservative leverage.

In today’s climate, it’s hard not to like properly structured real estate in the right markets.

So if you have wealth you want to protect and grow…consider real estate.

If you know how to invest in real estate, but are already fully invested…think about starting a business to help other people get into real estate while the getting is still good.

Until next time, good investing!

  • Want more? Sign up for The Real Estate Guysfree newsletter and visit our Special Reports library.
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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.

09/13/15: In Search of Yield – Escape from Wall Street with Private Placements

Big banks and Wall Street have once again been accused of manipulating a MAJOR financial market.  This time they’ve been slapped with a lawsuit alleging manipulations of the mammoth Treasury market.

Wall Street and big banks have been slapped with a lawsuit alleging manipulation of the market for TreasuriesMaybe getting caught in the LIBOR scandal and paying BILLIONS in fines wasn’t enough of a hand slap.  Or maybe the fines are just commissions to the government for allowing the Wall Street “boys to be boys”.

Who knows?

All we know is that the Fed just decided NOT to raise interest rates, so savers continue to be punished…while flash traders continue to get essentially free money to place highly leveraged bets in the Wall Street casinos.The Fed keeps printing free money for Wall Street gamblers to use in their casinos

Of course, you probably know you don’t have to play their game.  After all, you’re a real estate investor.

The challenge is main stream residential real estate has started to attract attention…and capital.  So prices have been going up even faster than rents, resulting in lower cash flows.

In this third episode of our In Search of Yield series, we take a look at private placements as an alternative to both dangerous paper assets and main stream real estate where returns are just a little too thin.

Private placements are simply non-publicly traded investments which up until recently had largely only been available to insiders.  Many people haven’t heard that a new law breaks Wall Street’s monopoly on investments.New breaks Wall Street's monopoly on investments

Placing themselves safely in the privacy of the studio for this episode of The Real Estate Guys™ radio show:

  • Your high yielding host, Robert Helms
  • His private place mat co-host, Russell Gray
  • Attorney and regular contributor, Mauricio Rauld

Way back when Mauricio first brought to our attention the provision in the JOBS Act that was loosening the restrictions on raising money from investors without the time, hassle and expense of a public offering…we KNEW this had the potential to be big.

And while a lot of tech folks got on board the crowdfunding bus (and we think crowdfunding is cool…and will eventually be very big), we saw an immediate and direct benefit for real estate investors.

Investors who have more deals than money are now much free to share those deals with investors who have more money than deals (or the time and expertise to chase deals).

Sounds like a match made in Heaven.  That’s why we keep producing our Secrets of Successful Syndication seminar.  Syndication is almost always done through private placements.

So if it’s gotten easier to offer private placements, then syndication just got easier too.  THAT’S EXCITING!

If you have MONEY you need to put to work…

Then you need to understand the basics of a private offering.  The good news is it’s not that complicated.

First, you need to know who you’re doing business with.  And it’s not just the people, but the legal structure too.It's easier than ever to research people and businesses you're considering doing business with.

Are the people reputable?  Are they experienced?

What’s the legal structure?  Is it in good standing?

Fortunately, in today’s internet age, it’s fairly easy to find (and rat out) a bad actor.  But you don’t just need to rely on a Google search.  There are law firms who can help you check out the people and entities you’re thinking of investing with.

Next, you should understand the deal.

It's important to read the fine print and understand the details of anything...and anyone...you're investing in.Do you understand the plan for getting in, making money, and getting out?

Many private placements are not liquid like stocks.  So you don’t buy and sell whenever you want.

Typically, there’ll be an offering period when you can get in (invest).  When the offer is “fully subscribed” the offering period ends.

Then there’ll be a holding period.  This is the amount of time the organizer or “sponsor” expects to need to do whatever the deal is.  Often, you can’t get your money back out during this period of time.

Then there’s an exit.  This is the time when the sponsor expects to liquidate the holdings and return your money to you…with profit!

So when you’re looking at an offering, you must consider whether the plan makes sense…and whether it fits with your timing and investment objectives.

Beyond the sponsor and the deal, it’s important to be aware of how the investment might impact your tax, estate and asset protection plan.

Most of the time, your ownership in the offering will be as a “limited” investor.  This means your personal risk is limited to only the money you put in.  But that’s not always the case.

If you invest as a General Partner (you probably never want to do this) or “Tenant in Common” (TIC), you may have some DIRECT exposure to civil, criminal and financial liability.

The tax structure of the deal is important to know also.  A structure that is “disregarded” for tax purposes simply passes all the tax benefits and liabilities to the owners.

That’s not necessarily bad.  In fact, sometimes it’s great.  You just need to know and discuss it with your tax advisor.

It’s also important to think about what happens if…It's important to think about What If....

…the sponsor dies or quits

…the sponsor gets sued or goes bankrupt

…the project fails (especially is there’s a loan involved)

…a fellow investor gets sued or goes bankrupt

…a fellow investor sues the sponsor

…you need your money back sooner than the project is scheduled to return it

…the project takes longer than expected and you need to wait to get your money back

…the project requires more money than initially planned

And this is just a partial list!

Sound scary?  It is.  But you know what’s worse?

While private placements have their risks, so do public offerings. Investors must choose carefully which option is best for them.Investing naively in publicly traded offerings like stock, bonds and mutual funds…that you don’t understand, operating in shark infested markets by people you don’t know, and never asking any questions…except “What happened to my money?” after an unexpected “Black Swan” event crashes markets without warning.

No investment comes without risk.  The best ones come with risks we understand and are managed by people we know and trust.

But there are other advantages to private placements, not the least of which is private placements are PRIVATE.One of the greatest benefits of investing in private placements is the ownership is often highly confidential

And when constructed properly, they can be VERY private, which means it’s much easier to keep your financial holdings out of the cross hairs of financial predators and snoopy governments.

Remember all the mystery surrounding Donald Trump’s actual net worth?  Until Trump filed his paperwork and disclosed his holdings, no one really knew.  Trump’s holdings were private.  And yours can be too.

If you have deals and you need to raise money…

You should be VERY happy right now!  There’s a lot of money looking for the benefits of private placements, including higher yields, better asset protection and more privacy.

And when you learn how to create private placements, you can package up one or more of your deals and offer them to private investors…without the hassle and expense of public registration.

Just remember to think about all of the aforementioned considerations…and make sure your offering is ready to address the many questions a prudent investor would have.  When you do, you’ll have something likely to be attractive to investors and their money.

All this to say, this is a VERY exciting time to be either an investor or an entrepreneur…because a whole new world of opportunity has opened for both!

Listen Now:

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

The Fed’s Plan Revealed…

Will the Fed Raise Interest Rates?

Global stock markets continue to convulse as participants and pundits try to divine whether Janet Yellen will really pull the trigger and raise interest rates.

Our bet is no.  Or if so, maybe by only a quarter point (25 basis points in bank-speak) just to prove the Fed hasn’t forgotten how to do it.  After all, it’s been about 8 years.

But we think not.

The list of reasons is far too long for this missive, but here’s a few:

The Dollar is Too Strong

We’re not saying WE think this is bad.  But the people in charge think so.Some say the dollar is too strong and that's bad for the economy

They say a strong dollar makes it harder for U.S. companies to sell exports…because it takes more foreign currency to buy anything denominated in dollars.

And U.S. companies doing business abroad are losing out when converting their foreign sales back into U.S. dollars.  So they say a strong dollar is bad for earnings and stock prices.

Also, a strong dollar means the U.S. government is paying more real interest on all its debt to foreigners.

The goal for a borrower is to receive strong dollars today and pay back weaker dollars later.  It’s why policy makers (and real estate investors) like a falling dollar.

A strong dollar is deflationary, which is the polar opposite of what the Fed wants (more on that in a moment…)…though most consumer we know LIKE IT when prices fall.

But when prices on things like houses, cars, stocks, bonds, etc., drop in dollar terms…and those things are being used as collateral, it means the value of the collateral drops.

That forces painful margin calls and creates a temptation for borrowers to bail on the debt.  Just think back to the sub-prime crisis which triggered the Great Recession.  It all started when debt went bad.

And speaking of debt, there’s the other major reason NOT to raise interest rates…

Uncle Sam is Drowning in Debt

When interest rates rise, payments go up.  That puts downward pressure on spending, which the financial brainiacs believe is the key to economic expansion.

The US government is carrying a large debt burdenThe problem today is that interest rates are SO LOW that even a 25 basis point increase is a substantial percentage increase.

Do the math.

If you have debt at 2% and rates rise by .25% that effectively increases your interest expense (and payment) by 8%.

That doesn’t sound like much, but when you’re Uncle Sam and you’re already paying out $381 BILLION in interest each year…an 8% increase costs an additional $30 BILLION.

Now if interest rates were to rise 100 basis points, say from 2% to 3%, that’s a 33% increase…or a whopping $125 BILLION increase in interest payments.

And because Uncle Sam is already running in the red, it’s all debt compounded on debt.  Just like using your credit card to pay the credit cards you used to pay the credit cards you used to pay your house payment.

In financial terms, we call this a “train wreck”.

Since the last great re-set in the 80’s when then Fed chair Paul Volcker jacked rates up to over 20%, the government has gone aggressively into debt and lowered interest rates steadily for three decades.

But now we’re at the bottom of the interest rate barrel.

So if you can’t lower interest rates to leverage your payments into servicing higher loan balances (just like you do when you refinance your mortgage to a lower rate and keep the same balance …or grow it…while reducing your monthly payment)…

Then the only other options you have is to make more money.Uncle Sam needs to ask its taxpayers for MORE money...again

For Uncle Sam, this means raising taxes.  And there are two ways to do this.

The small government faction says lower rates to grow the private sector and take a smaller percentage of a bigger pie.

That is, lower tax rates, which they believe will leave more profits in the hands of entrepreneurs who will use it to expand their businesses (if they can find customers).

Then, when the pie is big enough, the smaller percentage of tax yields more absolute dollars to Uncle Sam.

Go red team!

The big government faction says raise taxes on the entrepreneurs and uber-rich and funnel that money through the government to the poor and middle class.

Then, when those everyday people spend all that money, it will provide customers and profits for the businesses, which will in turn result in even more tax revenue.

Go blue team!

Obviously, these two policies are polar opposites and each one enrages the proponents of the other.

So everyone beats up on each other and nothing gets done.

Go purple team!

BUT…there is another way…Ben Bernanke says the Fed can print as much money as it wants...at essentially no cost.

And on November 21, 2002 a guy named Ben Bernanke (who later took over for Alan Greenspan to become the chairman of the Federal Reserve) explained it in a speech before the National Economists Club in Washington DC.

Big Ben said….

“…the U.S. government has a technology called a printing press (or, today, its electronic equivalent) that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

“By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.”

The Fed can print as much money as it wants...for free.“We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

“…sufficient injections of money will ultimately always reverse a deflation.”

Our emphasis.  Always.

And just so you know we don’t make this stuff up, you can read the whole thing here.

So we think the Fed will find some excuse to turn the Quantitative Easing (QE) printing presses back on.

But, you say (correctly) didn’t they already do QE?  Like, 4 times?  Then why didn’t prices rise?

Great observation.

Here’s the short of it…and why it matters to real estate investors RIGHT NOW

The Fed expanded its balance sheet (printed) by about 4 TRILLION DOLLARS since 2008.

Most of the money ended up in bonds (causing bond prices to rise and interest rates to fall)…or stocks (causing stock prices to rise to record levels)…and on banks’ balance sheets (as reserves parked at the Fed).

Of course, when you read Big Ben’s 2002 comments, he expected the banks to lend.  That’s the way all the new money was supposed to get to the market.

But frightened borrowers weren’t anxious to take on more debt.  They were inclined to save or pay off debt, rather than spend.

So there’s not been a long line of borrowers to lend to.

On the lender side, with the politicians busy POUNDING on the banks (and rightfully so)…banks decided it was safer NOT to loan…except to only the very BEST borrowers.

But now that all the very best borrowers have taken on their fill of debt, Uncle Sam is back to making nice with the banks…hoping to get all the money pushed out into the market.

And guess which sector they’re focused on?

Yep.  Real estate.  And it’s happening as we head into an election year.  But that’s probably just a coincidence.

Check out this headline:

FHA Offers Olive Branch to Hesitant LendersWall Street Journal 9/1/15

The government is trying to coax banks back to making mortgage loans to risky borrowers…”

This makes sense because we already have construction lending surging.  But builders can only borrow if they have buyers to sell to.  And most buyers can only buy if they can get financing.

So Uncle Sam can see that the bottleneck in the pipeline is at the street level…where real estate investors like you invest.

All this to say (and thanks for reading to the end) that the stock market gyrations could actually be GOOD for real estate in the mid-term.

When nervous stock investors seek safety, they’ll go to bonds and push interest rates down.  Great!  Borrow all you can and lock in LOW FIXED rates.

Make SURE your properties cash flow conservatively and focus on big, affordable markets with low taxes, a friendly business environment, and a diverse local economy.

Some frightened stock investors will pile into real estate…just like they did in 2001 after the tech bubble deflated.  The Chinese already are.

So, we wouldn’t be surprised to see a run UP in prices in the near term…which could be a chance to grab some equity and move it to safety…once again taking advantage of increasingly liberal lending.Is another housing bubble forming?

Eventually, the real estate bubble that’s beginning to inflate now will “pass a little gas”.  Or maybe a lot.

Sure, it will stink.  But it won’t kill you if you’re prepared to hold your breath and go in and do some bargain hunting.

Meanwhile, as all this unfolds, it’s a good idea to continue to watch and prepare.  You can’t control it.  But you can roll with it.

Good investing!

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09/06/15: In Search of Yield – Hotel and Resort Investing

In the second installment of our series on looking outside of little green houses for higher cash flows, we turn our attention to a Monopoly favorite….big red hotels.

Except in this case, they aren’t big, they aren’t red…and they aren’t necessarily on Boardwalk or Marvin Gardens.

So in this episode, we sit down with a seasoned real estate investor and international boutique resort developer for an insider’s perspective on how hospitality real estate works…and where the opportunities are.

In the studio to help us check in to the four-star ideas for hospitality investing:

  • Your hospitable host, Robert Helms
  • His last resort co-host, Russell Gray
  • International resort developer and regular contributor, Beth Clifford

In a world of artificially low interest rates, artificially high asset values, and overtly managed (manipulated?) financial markets…queasy investors are trying to find something real to cling to.

For most investors, that means income.  But not all income investments are created equal.

With stocks and bonds arguably in a bubble, where can you invest for income without risking a huge loss of principal?Debt-based investments like bonds expose investors to the triple threat of low yield, default and collapsing principal value.  Yikes!

And with interest rates SO low, and the looming threat of rising interest rates, it seems like bonds would be a scary place to be.

At least with real estate backed debt like private mortgages (NOT derivatives of mortgage-backed securities), the debt is backed up by a real asset.  One that presumably can generate sufficient income to make the payments…even if the lender has to take over operations.

So while we would be very hesitant to use bonds or bank accounts to generate income from debt (remember, when you make a deposit in a bank you are effectively loaning them your money), we’d be a lot more open to making loans against quality cash-flowing real estate.

On the equity side (buying a property versus lending against one), we like to borrow whenever we can generate more cash flow from the property than it costs to borrow.  And with interest rates so low, it’s better to be a borrower than a lender in today’s market…unless you’re able to lend at above average interest rates and still attract credit worthy borrowers and quality collateral.

Now if you’re an active residential real estate investor in single-family or apartments, you know that rates are low on both sides of the fence.

That is, though loan rates are low…so are cap rates (cash-on-cash returns).  That’s because lenders and borrowers both rushed into residential in search of better yields and security.

That’s why we think now’s the time to look outside of mainstream residential real estate for better yields.  The principles are the same, but the numbers are better.

In this episode, we consider hotel and resort property investing…and not just domestically, but globally.  And whether you want to play in the debt or the equity side, hotel and resort properties offer some very unique and attractive characteristics.

First, the properties are typically nicer…Resort properties are fund to use and to rent out

Sure, you could buy or loan against a dump.  But except for motels that are really more like psuedo-apartments for transients, most hospitality properties are operated for a more discriminating clientele.  Therefore, the properties are in good shape and located in nicer areas.

Next, the properties are professionally managed

While it’s true that you can hire a professional manager to handle your single-family home or apartment building, some investors are tempted to practice do-it-yourself property management.

But running a hotel or resort is much more work because instead of monthly or yearly leases, you’re dealing with daily or weekly tenancies.  And a good operator is the key to success, and it probably should not be you.

Hospitality has a new guest…

A new generation of mobile workers are able to live, work and play...all at the same time...in hotels and resorts.Hotel and resorts are grabbing a new and growing demographic…the mobile workforce.

In today’s technology empowered free-lance world, it’s easier for people to live a far more mobile lifestyle.  It’s no longer necessary to take off work to stay in a hotel or resort.  You take your work with you.

Hospitality properties are easier than ever to market

The same technology which facilitates a mobile workforce also opens up international markets to the small time hotel or resort operator.  From social media to travel sites, it’s just a lot easier for prospective guests to find a property.  So while it’s nice to have a big brand affiliation, it’s a lot more level playing field for boutique operators to compete for attention.

A sweet spot to store your wealth…

If you invest in a very small property, you may not get the economies of scale necessary to attract a professional operator and generate a respectable hands-off bottom line.

If you go too big, the obvious obstacle is you have to have…or raise…a lot of money.  And then you’re competing with other whales.

But there’s a sweet spot…above the small-time operator, but below the mega-chain, where an individual investor can play and there’s still enough meat on the bone to make it profitable.

And if you can find a niche, or a market, where there’s more need than there is supply,  you can get in and stake your claim early.

Rents from the affluent

One of our favorite things about hospitality investing is it allows us to collect rents from businesses and (relatively) rich people.

When you’re buying little green houses or apartments, your customer (tenant) is typically a working class guy or gal…maybe even on some kind of government subsidy like foot stamps, Social Security, Section 8, etc.

These are the first people to feel the pinch of rising food, energy and healthcare costs.  They just don’t have a lot of extra money after paying for essentials.  So when their cost of living rises, it makes it harder for them to pay you rent.

And if the government subsidy goes away or is reduced…or if interest rates on your tenants’ consumer credit goes up…then it becomes even harder for them to pay you rent.

But, while affluent people would probably never rent their home from you, they’ll pay you rent to stay in your resort property.

There are other ways to derive rents from the affluent, but resort property is one of our favorites.

And right now, the yields are much higher than apartments, so we like it even better!

So tune in and take in a heapin’ helpin’ of our hospitality…discussion, that is.  And consider how you might begin to put some paradise in your portfolio.Collecting resort properties can be a fun and profitable way to invest in real estate.

Listen Now: 

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