What every investor MUST have to thrive in a downturn …

They say the U.S. “recovery” began in June 2009.  And though it’s been one of the weakest recoveries in history, it’s also been one of the longest.

Today, we have record high stock prices and record high debt.  (Coincidence?  Perhaps.)

Common sense alone says the probability of a stock market correction and economic recession are growing every day.

As we learned in 2008, real estate investors don’t always escape Wall Street disasters unscathed.

And while we enjoy and hope for continued sunshine, experience says it’s a good idea to pack an umbrella … just in case.

So what does that look like for real estate investors?

We think there are three things every investor MUST have in order to thrive in a downturn … and really, these apply to ANYONE who wants to be in a position to profit from bad times when they inevitably come.

Cash

When financial markets seize up, cash is king.  Or better stated, liquid wealth which isn’t dependent on a counter-party is REALLY useful.

But deposits in a bank can be frozen or seized.  And if the bank AND the institution guaranteeing the bank fails, you could even lose ALL your savings.

We know.  It seems extreme.  But it’s not unprecedented. And the whole point of preparing is to imagine a worst-case scenario.

Cash is valuable in a financial crisis because the prices of quality assets often get dragged down by the collapse of the garbage assets.  Crashes can be indiscriminate.

Think about 2008.  When mortgage-backed securities collapsed, they took high quality real estate, stocks and other assets with them.

Back then it was possible to buy properties way below replacement cost … IF you had cash … because there was no credit available.  Lack of credit created the problem … AND the opportunity.

So in a worst-case scenario, where bank deposits are even just temporarily frozen, cash OUTSIDE the banking system becomes VERY valuable.

Of course, if Central Banks start printing currency to re-inflate the system, there’s also a risk that your cash loses some purchasing power.  Think Zimbabwe for a worst-case scenario.

So some investors think it’s a good idea to diversify liquid reserves to include non-cash liquid stores of value … such as precious metals like gold and silver … also OUTSIDE the banking system.  Now you’ve mitigated risk from both a banking collapse, a credit collapse, and a currency collapse.

Relationships

It’s been said your network is your net worth.  The idea is relationships are an important asset.  It’s true in good times … and even MORE true in bad times.

Relationships with the right people … people with specialized knowledge, a strong network of their own, and resources (including the aforementioned liquid reserves) … can open up all kinds of opportunities for you.

These are people you can barter with, borrow from, partner with, and call upon for ideas, advice, and introductions.

A wise investor is ALWAYS investing in developing strategic relationships. That’s one of the primary purposes for our annual Investor Summit at Sea™

It’s hard to quantify the ROI on your financials, but any accountant can tell you good will is worth a lot … and in a financial downturn, your network could be worth a FORTUNE.

Sales Skills

We often say, “You either know how to generate revenue or you have to work for someone who does.”

But in down times, jobs are harder to come by.  When you know how to sell, you’re able to create a job for yourself … and also for others.

And in bad times, there’s more talent available needing work.  So in some ways, it’s actually easier to build a great team coming out of a recession.

To generate revenue, recruit and lead a team, negotiate favorable deals, and get into and stay in important relationships …. you’ll need sales skills.

Professional salespeople know sales isn’t a personality type or genetic pre-disposition.  Salesmanship is a learned skill … like welding, computer programming, or accounting.

We actually consider salesmanship to be an essential survival skill … one well worth learning.  Robert Kiyosaki says, “Every entrepreneur needs to be able to sell.”  We agree.

Diversification

This may not be what you think …

When most investors hear “diversification” they think asset allocation … spreading your investments around to various asset classes so if any one goes down, it doesn’t take down your whole portfolio.

“Professional” financial advisors like to call real estate an asset class … like stocks, bonds, currency or commodities.

It’s a rant for another day, but for now we’ll just say real estate is ALL those things in one … except with a lot less paper or exposure to market manipulators.

The kind of diversification we’re talking about is structuring your financial life to avoid over-exposure to any single aspect of the financial system.

This is the voice of experience talking …

Heading into 2008, our businesses and investments were ALL heavily dependent on credit markets.  And when the credit markets seized up, so did our businesses and investments.

We THOUGHT we were diversified.

We operated an educational company, a mortgage brokerage, a real estate brokerage, a radio show, a real estate development company … and even a publishing business.

On the portfolio side, we owned a variety of real estate product types including single-family homes, apartments, office buildings, and resort properties … in several different U.S. states, and three foreign counties.

Pretty diverse, right?

BUT … the common thread for almost all of our ventures was a very high dependence on credit.  We were overexposed to the credit markets.

It was a bad structure.  Then the financial crisis came and the structure collapsed. VERY no fun.

The lesson for us and for you … take a GOOD look at your financial structure.

What are you dependent on?  Is there any ONE thing which could unravel it all?

Our good friend Simon Black at Sovereign Man says, “If you prepare for a crisis which doesn’t occur, how are you worse off?

Or to paraphrase Les Brown, “Better to be prepared and not have a crisis, then to have a crisis and not be prepared.

We say plan for and enjoy the sunshine, but always pack an umbrella … just in case.

Until next time … good investing!


More From The Real Estate Guys™…

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

Fed rate hike looms …

Do you remember the opening scenes from the classic movie Mary Poppins?

The camera focuses on a weather vane changing direction as observers comment …

Looks like the winds are changing over 17 Cherry Tree Lane” … home to one George W. Banks.

But today it’s the Fed’s Janet Yellen – not Mary Poppins – bringing winds of change. 

And it’s not over Cherry Tree Lane, but 1600 Pennsylvania Avenue … home to one Donald J. Trump.

According to CNBC, “It’s (almost) official:  The Fed is raising rates next week.”

“If there were any doubts about whether the Federal Reserve would be hiking interest rates this month, Wednesday’s blockbuster jobs report almost completely removed them … pushed market-implied probability of a Fed move to 92 percent …”

Of course, interest rates are the price of money … or rather, currency … in an economy. 

And because the U.S. dollar is the reserve currency of the world, Fed policy affects the entire world … including lowly real estate investors, our tenants, and their employers.

So will the Fed raise rates?  And if they do, what does it mean to investors … real estate and otherwise?

Let’s just do a short re-wind … 

Right after the election last November, we said, “… the odds [of an interest rate increase] are probably higher now because we’re guessing the Fed isn’t a fan of Donald Trump.

Of all the aspects of a Trump administration, the one we find MOST fascinating is the dance between President Trump and the Federal Reserve.”

Of course, now we know the Fed actually did raise rates … albeit only a token amount … in December.

Then President Trump gave his first big speech to Congress.  And as we observed shortly thereafter, the stock markets LOVED it.

Now the markets think the Fed will raise again in March, so the stock market’s pulling back.

Dizzy yet?

Not if you’re a real estate investor.  You’re just watching all the gyrations, and collecting your rent checks each month.  Market fluctuations are bo-ring … in a GREAT way!

We like to point this out when talking to whip-sawed stock investors about the calming benefits of investing in real estate.  Sometimes a little boring is fun.

However, with the probability of a Fed hike looming, here are some things for real estate investors to think about …

Mainstream financial pundits ASSUME a Fed rate hike is automatically bad for real estate. 

The theory is higher interest rates make homes less affordable. You hear this ALL the time.

And when newbie real estate investors hear this, they get nervous about investing. But there’s so much more to the story …

First … if fewer people can afford to buy homes, then more people need to rent!  Duh.  And who’s that good for? Landlords.

Next, higher Fed rates are usually introduced as a tool to slow inflation as measured by the CPI or Consumer Price Index.

Well, a higher CPI is usually the by-product of higher wages … which is usually the by-product of a tight labor market. 

Go back and read the CNBC excerpt.  The Fed is expected to raise rates because of the “blockbuster” jobs report.  In other words, a tightening labor market.

Now we’re not saying the U.S. economy employment situation is great and wages are rising.  But perhaps the Fed is trying to get ahead of the curve.

Then again, this Bloomberg article suggests wage growth might NOT accompany this jobs “boom.” So maybe the Fed agrees and won’t raise rates. Or maybe they will anyway.

The point is NO ONE KNOWS … and it doesn’t REALLY matter.

If rates don’t rise, the stock market will roar a while longer.  Great!  More time for stock investors to take profits, and move some paper wealth into nice, boring real estate.

If rates do rise, there will be fewer qualified home-buyers, which leads to more people needing to rent some nice, boring real estate.  Great!

If job growth stagnates and wages fall, there will be fewer homebuyers, less new build inventory expanding competitive supply, and more renters seeking out AFFORDABLE markets and property types.

And as long as you’re okay investing in nice, boring, affordable markets and properties, you’ll be there to meet the demand. Great!

Of course, if job growth continues and wages rise, so will rents and mortgage rates.  A rising economy lifts all assets.

And for real estate investors who’ve locked in nice, boring, long-term fixed financing on their nice, boring properties … you’ll have lower fixed costs against those rising rents. 

This means better cash flow and equity growth.  Great!

The point is that if real estate investors focus on affordable markets and properties, and structure deals with sustainable financing and cash flows …. it doesn’t matter much which way the wind blows or how hard.

Until next time …. good investing!


More From The Real Estate Guys™…

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

Multi-Family Financing with Maximum Leverage and Minimum Risk

 

As a real estate investor, knowing which tool to pull out of the toolbox is a big part of your success. And to know which tool you need, you have to know what tools are available.

Commercial loans generally have shorter terms than residential loans … and that isn’t always good. What if the market doesn’t agree with your personal timeline?

Keeping in mind that times have and will again change, we took a look at the best commercial financing options out there to keep your risk low and your leverage high.

In our latest episode, we visit with an FHA multi-family lending expert to find out how to finance apartments with maximum leverage and minimum risk. In this informative episode of The Real Estate Guys™ show you’ll hear from:

  • Your multi-passionate investor host, Robert Helms
  • His multi-problems co-host, Russell Gray
  • Multi-family financing expert Paul Winterowd

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Multi-family financing basics

To get you the basics on multi-family loans, we did a Q&A with Paul Winterowd, a long-time member of the lending team at Bonneville Multifamily Capital.

If you’re a multi-family investor or interested in becoming one, “It’s a great time to be in the business,” Paul told us.

That’s due to two things … flowing capital markets and stable rates that have held over the years.

Paul told us that multi-family properties are the No. 1 asset class in commercial real estate because of their broad risk profile.

So what are the primary things to know before getting a loan?

To start, there are some significant differences between the loans offered by the banking system and loans offered by government agencies.

Among them is the balloon payment. Most bank loans for multi-family property investors have five- to ten-year amortization schedules that force investors to pay the full amount or refinance once time’s up.

And that can pose problems, especially considering how much the market can change in five or ten years.

Paul shared with us a story of a friend who bought a multi-family property in Las Vegas in 2004. With his co-investors, he put a total of three to four million dollars into the property. Their five-year term came due in 2009—right after the housing bubble collapsed. Even though Paul’s friend made every payment on time, no banks would work with him. The bank sold the property to a loan shark, who foreclosed.

Paul’s friend didn’t do anything wrong, but he fell hard because of timing.

We asked Paul what options investors have if they want to be less beholden to the ebbs and flows of capital markets.

He told us that there is ONE loan program in the commercial real estate world with a fully amortizing term and no balloon payment … an FHA loan.

Everything you need to know about FHA loans

An FHA loan is a mortgage insured by the Federal Housing Authority, which is under the jurisdiction of the Housing and Urban Development (HUD) Department.

FHA provides a conduit for financing. The great thing about the FHA’s commercial loan program is that terms can stretch up to 35 years … 42 years for construction loans.

Essentially, this loan is the closest to a single-family loan that exists in the commercial lending world.

And there’s more … although it’s easy for people to make a decision based solely on the lending rate, Paul told us that FHA rates are “bottom of the barrel.”

In addition, FHA loans provide a very attractive loan-to-value ratio: between 75% and 85%. Traditional bank loans will get you between 65% and 70%.

A necessary disclaimer: Paul doesn’t work for the federal government. He’s just really good at helping people figure out which loans are right for them.

Gearing up to get a loan

The FHA loan sounded like a REALLY great option to us … so we asked Paul what it takes for an investor to get involved with the FHA program.

Paul told us that in general, the key litmus tests to get a loan are adequate experience and sufficient net worth.

Because lenders want to know that this isn’t your first rodeo, they’ll want to see more than just a single-family property on your résumé … meaning it may be necessary for you to bring in a partner.

Lenders will also want to see at least a 1:1 ratio of net worth to loan amount to make sure that buyers have cash assets on hand in case anything gets wrong. The FHA program offers a boost here, accepting ratios as low as 1:4.

And yes, you can go into the FHA program with a partner, or partners. The FHA will look at your combined assets and experience, although in a classic syndication scenario, they will need a lead sponsor or sponsorship group.

Because Paul is intimately involved in the lending process, we asked him what he looks for when he underwrites loans.

He told us in order to mitigate risk, he needs buyers to hit several important numbers in regard to their asset:

  1. A debt-coverage ratio of, at minimum, 1.25. That’s the net operating income of a property divided by the annual debt service. Paul and other underwriters want to see that there’s plenty of net income to cover the debt service.
  2. Records of at least 90 days of occupancy at 90% or above.
  3. A trailing twelve months (aka a profit and loss statement for the last year).

Paul emphasized the importance of keeping good records … in fact, he could not emphasize it enough!

In terms of buyers’ personal records, he told us he’d also need the following:

  1. A list of all assets and outstanding debt.
  2. A personal financial statement that shows the buyers’ experience.

Obviously, there’s a lot of preparation that goes into qualifying for the FHA loan. But are there any downsides?

The only real downsides are the paperwork and waiting time, Paul told us.

Typical HUD loans take about 60-90 days, but permanent financing for FHA loans takes even longer … about 4-6 months.

Because HUD is insuring these loans, more underwriting has to take place to minimize risk for the federal government.

As Paul reminded us, “Good things come to those who wait.” If you’re willing to be patient and deal with a little more paperwork, you could find yourself with a killer solution.

Is there anything Paul wishes borrowers knew before seeking out an FHA loan? Paul told us that people think timing is everything and rate is everything … but they’re not.

If buyers took a step back and looked at the bigger picture, they’d be able to find other benefits that are very compelling. We think a fully amortized loan is worth the wait.

Debt isn’t always dangerous

We see Paul as a wealth of knowledge.

In any new situation, it’s helpful to have a sort of “safari guide” … someone to lead the way in places you haven’t gone before.

We hope that Paul’s knowledge has given you some things to think about.

In particular, we want you to keep in mind that debt can be an asset. Taking advantage of opportunities like the FHA loan can force value and create more equity from the equity you don’t have to spend up front, leading to a cycle of success.

We also hope that if anything, Paul got you thinking of some good real estate practices.

This week, we encourage you to go out and make some equity happen!


More From The Real Estate Guys™…

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

Trump’s trillion … and you

You probably heard that President Trump gave a speech last night.  Looks like the stock markets liked it.

So what’s all the excitement about?  And what does it mean to real estate investors?

First, forget about whether you like or agree with President Trump … or think he’s a chump.  He’s going to do what he’s going to do whether you like it or not.

The big deal is a TRILLION dollars of infrastructure spending and a big boost in military spending.  That’s a lot of cash flow … right into the economy.

Forget about how he’s going to pay for it.  That’s a policy problem … and maybe a fiscal problem.  We’re sure Peter Schiff and the rest of our faculty will have something to say about all that in a few weeks on our Summit at Sea™.

And no one’s really talking about the looming debt ceiling showdown March 15.  Something else we’re sure to discuss on the Summit.

According to this Reuters article, “Treasury Secretary Mnuchin said … he would like to see an increase in the debt ceiling ‘sooner rather than later’.”

We’re guessing he’s going to get it … and the “big” showdown will pass quietly.

It’s same thing we thought back in 2011 and again in 2013… just two of the debt ceiling showdowns in recent history.  Huge debt and deficits are the American financial system … for now.

So it seems the stock markets are pretty sure all this spending is going to happen.  And maybe President Trump will figure out a way to pay for it with help from private industry and NATO partners.  Maybe he won’t.

But we think the odds Uncle Sam’s about to open the checkbook are pretty high.  Like it or not.

So … if it happens, where’s the opportunity for real estate investors?

Here are some things to think about …

Infrastructure projects require huge amounts of planning.  If you’re paying attention, you’ll probably be able to figure out which communities and industries will be the winners.

Common sense says go snooping around for the kinds of real estate the people who live and work in those communities and industries will want … and you’ll probably be in the path of cash flow.

Less obvious, is to think about the supply chain for those projects.

Way back when China first started its economic ascent, it spent zillions on infrastructure … including all those ghost towns you read about.  So again, the spending doesn’t have to be smart or responsible for the cash to flow.

But guess which real estate was the big beneficiary of China’s big spending?

Australia … because that’s where a lot of the raw materials came from to build China’s infrastructure.

So understanding China’s supply chain allowed investors who were not interested in owning Chinese real estate to make real estate profits because of China’s spending.

But Australia also benefitted from all the Chinese who became rich on government spending used their new-found riches to go on vacation … to Australia.

The point is there’s a ripple effect of spending.  And sometimes those ripples carry out through supply chains and consumer behavior to drive real estate demand in peripheral areas.

The same can be said for military spending.

We already know from President Trump’s rhetoric he’s likely to focus the vast majority of his spending on American companies.

So a savvy investor might start to really pay attention to what kinds of military contracts are being awarded and where those companies are doing the work.

Those are working class manufacturing jobs.  Great tenants!

And taking a page from the infrastructure spending supply chain model, those primary military contracts have out of area sub-contractors and suppliers.

If Trump’s trillions come with the condition those military suppliers “buy American and hire American”, the odds are good the money won’t end up in China.  So it could well push real estate demand in those American markets in the food chain.

This is the same kind of strategic investing paper asset investors are doing. 

Except they’re buying up the stocks they think will win and are speculating on the price.  They want to buy low and sell high.

Of course, there’s LOTS of competition.  If you feel smart AND lucky … go for it.

A strategic real estate investor … that’s you … can take the same approach, but you’re looking to take a slice of the paychecks of all those workers and companies who are feeding off the Trump spending initiatives.

And because real estate is more esoteric … and messy … it’s nowhere near as crowded as the stock markets.  Nor is it as easily gamed, as we’ve discussed in a prior commentary.

So whether for your own portfolio, or if you’re investing money for others, there’s opportunity developing as the Trump administration roles out its agenda.

Until next time … good investing!


More From The Real Estate Guys™…

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

The dollar could be dangerous right now …

If you earn, save, borrow, invest, or denominate wealth in dollars, this CNBC headline might concern you:

Why Being Long the Dollar is “Very Very Dangerous Right Now”

Comments from readers showed people were confused …

“Why being long the US dollar is ‘very very dangerous’ right now” … what the hell does that mean?”

“1st prize for ambiguous headline”

This commenter feels trapped …

“All Americans are long on the Dollar. There is no other place to be right now.”

As we often say, mainstream financial news and its readers tend not to understand real estate investing. Conversely, many real estate investors get confused by mainstream commentary.

So let’s break this down for real estate investors …

Being “long” just means you own it.  If you’re long a stock, you own it for the long haul.  You think its future is bright.

Being “short” means you’ve sold it.  With stocks, “short selling” is borrowing a stock you don’t own to sell at today’s price.

You’re betting the stock will go down, so you can buy it back cheaper later to pay back the broker you borrowed it from.

It may seem weird to sell something you don’t own.  But it’s not any weirder than spending money you don’t have.  People do that all the time.

So “long” the dollar is holding cash or dollar denominated bonds.  Being a bond holder is basically the same as being a lender.  You lend dollars and accept dollars in repayment.

Borrowing is being short the dollar.  You’d rather “sell” (i.e., spend or invest) dollars today at today’s value … and then pay back later with cheaper (inflated) dollars.

So if you think the dollar will get stronger over time, you’d pay off debt and save cash.

This chart might influence your opinion:

Source: https://fred.stlouisfed.org/series/CUUR0000SA0R

If you think the dollar will continue it’s 104-year slide, you’d “short” the dollar … by borrowing and converting dollars into real assets.

The author of the subject article is clearly bearish on the dollar.  He thinks it’s “very, very dangerous” to be long the dollar.

So the commenters who complain the headline is ambiguous or confusing simply don’t understand history … or the concepts of long and short.

And the comment that “all Americans are long the dollar” and “there’s no place else to be right now” isn’t accurate either.

Real estate can be a great way to short the dollar.

Using a purchase or cash-out mortgage, you can leverage the income from a rental property to borrow (short) dollars with a mortgage.

Just pay attention to cash flow and the spread.

If you can borrow money at 5% and buy a property cash flowing at 8%, you’re earning a 3% spread on the borrowed money. Nice.

For liquid savings, you can use other currencies, precious metals, Bitcoin, or other highly liquid dollar alternatives.  You don’t need to save dollars just because you earn them.

Real estate is also awesome because you can “straddle” … basically going long and short at the same time.

To straddle using real estate, you’d use a cash out mortgage (debt) to short the dollar.

Let’s say it costs you 6%, which would be deductible in most cases (check with your tax pro).  So your net cost might only be 4%.

You can go long the dollar by lending the loan proceeds against a high equity property at 9%.

Now, you’re long and short equal amounts at the same time.  You’ve got a positive spread (9% income against 4-6% expense) and positive cash flow.

Plus, the loan you made is backed by a property you’d be happy to own if the borrower defaults.  High equity and good cash flow.  If there’s not, you shouldn’t have made the loan to start with.

Now, you’re prepared for a strong or falling dollar.

Think about it.

If the dollar falls (inflation), you’re in good shape.

Inflation causes real assets and income, like real estate and rents, to go up in dollar terms.  Meanwhile, your debt and debt service remains fixed.  You win.

Meanwhile, even though you’re long the dollar with the loan you made, the cost of the funds (your debt) is fixed.  So you’re fixed on both sides.  You’re even.  And with a positive spread, you win.

Plus, inflation causes the property you loaned against and the income it produces to go up in dollar terms.  So the loan you made is safer because the collateral got better.  You win.

But what if the dollar gets strong?

First, let’s define “strong.”

There’s “strong” compared to other currencies, like what’s been happening over the last few years.  That’s very different than “strong” in terms of purchasing power and against real assets.

The former is relative strength.  The latter is REAL strength.

Recently, the dollar has gotten strong relative to other currencies.  Yet real estate and rents both went up.  A relatively strong dollar didn’t hurt real estate.

It would take REAL dollar strength to push down the dollar-denominated price of real estate and wages. That’s REAL deflation.

MAYBE that could happen.  But imagine the reaction of the Fed, the politicians, the banks, and the voters, to falling real estate prices and wages.

You don’t have to imagine.  We all know… because it’s what happened in 2008.  They pulled out ALL the stops to reflate everything.  They had to.

That’s because the banks hold trillions in debt, and the federal government owes trillions.  Inflation serves them both best. They’re scared to death of deflation.

That’s because banks need property values to hold or increase … otherwise, upside down borrowers walk.  Banks fear holding non-performing loans against negative equity properties.

And no one’s more motivated to pay back cheaper dollars than the world’s biggest debtor, Uncle Sam. Debtors LOVE inflation.  It makes their debt easier to pay.

So … the long and the short of the dollar is it’s that it’s probably better to be short for the long haul. And nothing lets you do that better than leveraged income producing real estate.

Until next time … good investing!


More From The Real Estate Guys™…

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

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