12/29/13: Thinking Outside the Buck – How Savers Can Avoid Being Losers

Robert Kiyosaki says, “Savers are losers”.   Does this mean you should consume more than you produce, or that saving is bad?  Of course not.

There are multiple meanings to the Savers are Losers concept.  In addition to drawing a distinction between working for money (saving) versus having money work for you (investing), there’s the problem of money versus currency.

As real estate investors, we put a lot of time and effort into “making money”.  And while it’s fun to consume, most of us create profits with the idea of accumulating and storing wealth…at least temporarily until the next great investment comes along.

The challenge comes when the vehicle we use to store the value of our profits (paper currency) is being consistently devalued by its issuer.

With central banks (like The Federal Reserve) around the world “printing currency” at unprecedented rates, everyone doing business in currency (like the dollar) is affected.  And the dollar has the greatest effect of all because it’s used globally as the world’s reserve currency.

So while most folks are simply simply focused on how to earn and accumulate more money, we thought it would be a good idea to think about what “money” is, and whether the dollar is the best or only vehicle to use as money.

So put on your golden thinking cap, and get ready to think outside the buck…

Sitting behind The Real Estate Guys™ silver microphones for this episode:

  • Your precious silver-tongued host, Robert Helms
  • His generic round co-host, Russell Gray
  • Special guest and golden boy, Anthem Blanchard

As real estate prices rise (denominated in dollars) and equity happens, real estate investors are going to be the proud owners of bulging balance sheets.  Finally!

Of course, we’ve seen this movie before, so while we enjoy booms, we’re very aware of the boom / bust cycle that is inherent in an unsound money system. If you don’t know what that means, don’t worry about it for now.  Just remember that there are booms and busts (ups and downs), and when a market is booming, you ride it up.  Along the way, you’re extracting profits and storing them up for the next bust, so you can go out into the wreckage and snap up bargains.

So as prices rise and lending comes back into the market, investors will have the ability to realize profits (through sales) or extract equity (through refinancing).  Even buy and hold investors (presuming positive cash flow) will be stacking up dollars because the more properties you own, the more cash reserves and operating “float” you hold.

Most people hold this cash in currency, like dollars.  In fact, for most people, dollars are the ONLY measurement of wealth.

But thinking outside the buck, we wonder if it might make sense to store a percentage of those profits and reserves in something other than currency?

After watching the “bail-in” that victimized savers in Cypress last year, the concept of “counter-party risk” changed our perception of risk when dealing with banks.  Especially considering the miniscule reserves held by the FDIC against the huge amount of bank deposits insured.  We already know banks can fail because hundreds did during the Great Recession.  What if the insurer fails?

Soif money in the bank isn’t as safe as…well, money in the bank…then where can you store wealth until you’re ready to use it again?

And even if money in the bank is safe from the bank failing to return it (counter party risk), what happens if when the bank returns it, it isn’t worth as much as when you deposited it?  Think about putting $5 in a bank account in 1965 when gas was 25 cents a gallon.  For five bucks, you could fill up a 20 gallon gas tank!  That’s a lot of driving!

But today, $5 won’t buy you 2 gallons of gas.  So even if the bank gives you your five dollars back, it’s lost its purchasing power.  This is what many baby boomer savers are discovering as the try to sail off into their golden years.  They have more money than they’ve ever had, but it won’t buy as much.

So we sit down to talk with Anthem Blanchard, who literally grew up in the precious metals business.  His father, James Blanchard, was a pioneer in restoring Americans’ right to own gold.  For you young folks out there, you may not know that from 1933 until 1971 is was illegal for U.S. citizens to own gold.

Really.

It’s a long and sad story, but the short of it is that when the U.S. was founded and for most of world history, gold and silver were regarded as “money”.  And dollars were just paper coupons redeemable for real money (gold and silver).  But in 1933, the U.S. decided it was bad for people to own gold, so they made it illegal.

The reason that happened is at the heart of the challenge faced by savers today:  governments wanted to spend more money than they have.  Shocker. And it’s obviously going on today in record fashion.

So alert investors are looking for alternatives.  In fact, it’s gotten so bad that even consumers are looking for alternatives.  There’s a reason Bitcoins are gaining so much popularity.  It’s a currency that isn’t controlled (yet) by government.

The fact that Bitcoins are creating such a stir tells you that people are concerned about the dollar.  And it isn’t convenience.  Because while tech is cool, dollars are effectively virtual too.  Just think about credit cards, debit card, wire transfer, online payments, etc.  All digital.

The issue with Bitcoins are they aren’t real and they don’t have government backing.  We’re not here to put down Bitcoins, but compared to the thousands of years of human history with gold and silver, we’d rather look to precious metals as an alternative to dollars for storing and transporting wealth.

Of course, because metals are tangible, they aren’t easy to use in commerce.  But that’s changing!

Just as innovators came up with Bitcoins as an alternative to the dollar, creative entrepreneurs are coming with technologies to make using precious metals more convenient.  Anthem Blanchard is one of those innovators.

So listen into this edition of The Real Estate Guys™ radio show as we discuss precious metals as an alternative to the dollar for the long term storage of wealth, and how technological innovations can make the use of precious metals in daily commerce less expensive and more convenient.

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If you like this topic, be sure to check out our special report: Real Asset Investing – How to Grow and Protect Your Wealth Against a Falling DollarClick here to request now.

Home Construction Slows – Good or Bad?

The AP headline this morning says “Stock Market Slumps as Home Construction Slows”.  Oh no!  We can hear the pitter patter of mutual fund investors’ feet running to their computers to check the damage to their 401k.

Funny, but when we look at our computer, we see interest rates on 30 year fixed mortgages back under 5%.  Even jumbos are under 6%!  Meanwhile, gold, oil, car prices and CPI (Consumer Price Index) are all up.  (Hint: those are signs of inflation).

When you put all that in the blender, what do you get?  Well, it depends on what color glasses you’re wearing. (Too many metaphors? Sorry.)

Here’s the deal plain and simple: In the US, home and apartment construction is not growing as fast as the population.  Rents are not falling as fast as prices.  Interest rates are ridiculously low.  Toss in gobs of people unemployed, which means they’re missing payments and wrecking their credit.  They won’t be able to buy a home for awhile, so if they can’t keep the one they have, they will be renting.

So what do we have?

• A growing population and influx of people going from homeowner to renter means more demand for residential rentals.

• Less new apartments and homes coming on line mean less supply.

• More competition for fewer rental units means upward pressure on rents, in spite of a weak job market.  Why?  Because people need a place to live.  Next to food, it’s pretty high on most people’s priority list.

• Low interest rates means if you or your investment partners are credit worthy, you can get great (i.e., low) long term interest rates on loans just before what many believe will be an inflationary cycle.  Inflation means anyone in debt will win as the value of the dollar falls.  This is why China is a little miffed at Uncle Sam.   China holds a lot (if you think a trillion is a lot) of US debt and are concerned about a falling dollar.

• Low interest rates also mean lower payments.  Lower payments make it easier to get a property to cash flow without 80% down.  To quote from that fabulous book Equity Happens, “Cash flow controls mortgages. Mortgages control properties. Properties will make you wealthy over time.”  This is true with or without inflation (i.e., appreciation), because you are using the tenant’s money to pay off the loan.   No other investment lets you do that.

Additional opportunities exist for the extra ambitious.  We call it finding and forcing equity.  How?  With less new units coming on line and many banks and overextended owners letting their properties fall into disrepair, there are opportunities to buy someone else’s problem cheap.   Then, fix it up, rent it out and wait.  If things go your way, you may be able to refinance to get your original investment out – and now you’re in for free.  Kiyosaki calls this “infinite return”.  We like it.

Of course, it’s not all rosy.  Unemployment is still a concern.   And financing (especially refinancing) is harder to qualify for.  But, if it were easy, then everyone would do it and there wouldn’t be opportunity.  Hey, wait a minute.  It’s easy to buy mutual funds, isn’t it?  And everyone does it, don’t they?  Hmmmmm…..

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Is Gold All that Glitters?

The AP reports that gold hit an all time high of $1,118 per ounce today. Do you understand why?  Do you REALLY understand?  And what does gold have to do with real estate (besides that you dig gold out of the ground)?

Great questions!

Gold’s rise is a prime refection of a falling dollar.  Why?  Because when the dollar “falls”, it takes more dollars to buy anything that’s real.  It’s called inflation.  Supply and demand play a factor, so just because the dollar falls, doesn’t mean that gold is going to respond immediately and proportionately.  But in general terms, a falling dollar means inflation of things that are real.  Things like gold, oil and real estate.  Typically, gold really takes off when people are nervous about the dollar.  So take that for what it’s worth.

The Real Estate Guys don’t claim to be experts at gold, but it’s something we’re very interested in.  We watch the demand for gold, oil and treasuries because they give us insight into where cash is moving.  When cash moves into real estate or mortgages, then it helps push real estate values up and equity happens.  Do you see the connection?

Russ just got back from the Rich Dad Art of a Deal conference with Robert Kiyosaki. Rich Dad Gold Advisor Mike Maloney was there and we invited him to be on The Real Estate Guys show.  We figure it he’s smart enough for Mr. Kiyosaki, we’re interested in talking to him.  We want to pick his brains on your behalf and find out what he thinks about the movement of cash and its effect on real estate.  Sound interesting?  Then stay tuned to The Real Estate Guys!  To make sure you don’t miss an episode, subscribe to our free podcast.  And while you’re at it, sign up for the newsletter – and tell a friend.  When you help us grow the audience, we are able to continue to bring you quality guests and programming.  Thanks!

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