With so much craziness in the world, we thought we’d consider what it might mean for real estate investors.
After all, why should paper asset investors get all the thrills of global instability? Real estate investing might be stable, but it doesn’t have to be boring!
Biggest sword competition …
You may have heard that U.S. President Trump and North Korean Supreme Leader Kim Jong-un recently publicly compared sword sizes.
Since both the U.S. and North Korea are nuclear powers … this has the world understandably jittery. Though things seem to have calmed down the last few days.
Still, geo-political jitters usually amplify the two basic emotions of investing … fear and greed.
Scared money tends to flee to “quality.” (Trapped money flees to Bitcoin … but that’s a different discussion …)
Frightened investors are more concerned about preserving capital and purchasing power (which aren’t necessarily the same thing) … than making a profit.
For much of recent history, a flight to quality meant piling into the U.S. dollar and U.S. bonds.
But with another debt-ceiling debacle on the horizon, record debt at every level, pensions in crisis, huge unfunded liabilities, and an economy sending very mixed messages …
… it’s not inconceivable the world might not continue to see the U.S. dollar and bonds as the financial fallout shelter of choice.
Meanwhile, greedy money tends to focus on front-running the scared money, and buying up the scared money’s abandoned assets at bargain basement prices.
As for real estate investors … we sit on the sideline munching popcorn and collecting rent checks.
But that doesn’t mean there aren’t risks, opportunities and lessons for real estate investors to learn from all the drama.
War is expensive …
We recently discussed the potential shift from “monetary” stimulus (cheap money funneled from central banks to the financial markets) …
… to “fiscal” stimulus (government spending funneled into the economy on infrastructure and military spending).
Now we’re not saying Uncle Sam is purposely pursuing war to stimulate the economy. That would be far too cynical for two happy-go-lucky real estate guys.
But IF more war happens, it’s sure to be expensive. And because Uncle Sam already operates at a deficit and has no savings (technically “broke”) … it means a lot more borrowing.
The big question is … from whom does Uncle Sam borrow?
This matters because whom Uncle Sam borrows from to pay for more war … and how it’s done … will probably impact asset prices and interest rates.
Watch your monitors …
If Uncle Sam issues bonds (borrows) and the bids are soft, interest rates rise. It also says something about the way the world views the dollar (not good).
Of course, this means rising interest rates in the whole swimming pool … including good debt (your mortgages) and bad debt (your tenants’ credit card and car loans). Either or both of those affect your bottom line.
Another sign confidence in the dollar is declining will be a spike in gold prices.
If gold catches a bid, it could mean scared money would rather hide in a barbarous relic with no yield … over stacks of paper with pictures of dead people printed in green ink.
(Not sure how green paper is less useless than yellow metal … but that’s a different debate …)
But if big money prefers gold over greenbacks, it’s a clue about the direction of the dollar.
And assuming your assets, liabilities, and income are all denominated in dollars, we’re guessing the value of the dollar is of interest to you … or should be.
Pre-emptive strike …
So what do you do when you don’t know what’s going to happen?
Here are some things to think about …
Uncle Sam already has a huge debt problem. Another war doesn’t change anything … it just speeds it up.
In the short term, a flight to quality could be temporarily good for the dollar and drop rates by creating demand for both dollars and bonds.
If rates fall for a season (and even if they don’t … they’re pretty low right now), it might be a great time to back up the truck and load up on lots of good debt … and use it to acquire assets that conservatively yield more than the cost of the loan.
That’s effectively going “short” the dollar based at a time of temporary strength.
You can also go a little further short by adding some gold to the mix. But remember, gold isn’t about profit … it’s about preservation of purchasing power.
Sure, a falling dollar causes gold to go “up” in dollar terms, but so does everything else, so more dollars doesn’t put you ahead … it just keeps you from falling behind.
Side note …
If you’re not really sure about gold or how it fits into what you’re doing, join us when we speak at the New Orleans Investment Conference in October.
Some of the biggest brains in precious metals and resource investing will be in New Orleans … along with our friends Robert Kiyosaki, Simon Black, Peter Schiff and Simon Black. It’ll be like an Investor Summit at Sea™ reunion!
Back to our story …
Something else to consider carefully right now are the markets you’re invested in … because the idea of “flight to quality” applies to real estate markets too.
People and businesses will move to where they can get a better life at a better price.
We like affordable markets in low tax, business friendly, fiscally sound states …
… places with good infrastructure (transportation, utilities, medical, education, resources), strategic location (distribution, travel hub, geographic amenities), and diverse economic drivers.
Also, take a look at your current debt and equity structure.
It might be wise to harvest excess equity and lock in low long-term rates on properties you’re committed to owning long term.
You can then use the proceeds to pick up additional properties in growth markets … or add some cash, precious metals, or high-yield private mortgages to add some diversification into your portfolio.
Stay calm and invest on …
It’s easy to freak out when the world is weird. But it’s been weird before and it’ll be weird again.
Meanwhile, unlike so many other styles of investing, real estate allows you to hedge most probable outcomes.
Plus, there’s the time-tested assurance that virtually every major power player in the food chain has a vested interest in supporting real estate.
No one wins when real estate loses … and even as we learned in 2008 … if a bomb goes off in real estate, the powers-that-be move heaven and earth to fix it as quickly as possible.
Sure, there’s risk.
But it’s risk that’s largely understandable, reasonably mitigated and … so long as you’re structured to weather the occasional economic storm …
… real estate is arguably the most stable and easily operated investment vehicle available to everyday people.
Until next time … good investing!
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