Capitalizing on the American dumbbell …

Ohhhh … there’s SO many directions we could go with that subject line … but let’s pick something both potentially polarizing and unifying …

Income inequality.  It’s a political cause and an economic reality.

But we’re not here to talk politics.  Because it doesn’t matter if we think it’s fair or not.  We’ll leave that to the politicians and activists.

Income inequality is what it is.  And while our politics might affect our voting habits … the economic reality is what drives our investing decisions.

So what is income inequality … and what does it mean to real estate investors?

Great question … so glad you asked.

In simple terms, income inequality refers to a disproportionate amount of a society’s income concentrated in a small percentage of people at the top …

… with a big gap between the masses at the bottom who average much less income per person.

Sadly, this topic often descends into an argument of accusations between political viewpoints … a blame game.

People at the top look down on the lower income masses with contempt …

They don’t work. They don’t save.  They don’t invest.  They don’t take risks.  They’ve made their own bed.

People at the bottom look up at the rich with envy and jealousy …

The game is rigged.  It takes money to make money.  The rich are greedy selfish exploiters of the little guy.

Ironically, both are probably right … and both are probably wrong.  But again, we’ll let the politicians and activists fight over all that.

Investors are best served to set all that aside … and simply focus on the opportunities inside the economics and demographics of income inequality.

For many years, Rich Dad Poor Dad author Robert Kiyosaki has been saying the financial system is helping the rich get richer, while the poor get poorer … and the middle-class gets squeezed.

It’s like a dumbbell … where one end is fat with the wealth of the rich … and the other is fat with the poverty of the masses.  The skinny part in between is the middle-class.

But of course, all this has a direct impact on real estate … and should be taken into account when making real estate investing decisions.

John Burns Consulting recently took a look at this very subject …

What the Shrinking Middle Class Means for Housing

“The widening gap in income distribution trends in the US has significant implications for home buying activity and homeownership.” 

More rental demand.  More demand for homes at the highest and lowest price points.  Less demand for median-priced homes.”

If you’ve been following us for a while, this is probably old news.

We’ve been touting the opportunities in affordable housing like apartments and mobile homes …

… as well as higher-end opportunities in resort property and residential assisted living.

That’s working both ends of the dumbbell.

Smart investors should probably also watch migration patterns created by income inequality … and changing government policies.

Obviously, if there’s “more demand for homes at the … lowest price points” … it doesn’t mean people need to live on the streets of high-priced markets like San Francisco or New York.

They can move … to the suburbs of affordable states like Utah, Nevada, Arizona, Texas, and Florida.  And they are.

But it’s not just middle-class folks looking to lower their costs …

Millionaires Flee California After Tax Hike  – Forbes, July 7, 2018

New Jersey’s Tax Gift to Florida – Wall Street Journal, July 1, 2018

In 2014, Florida passed New York as the third most populous state.  It’s one of the reasons we’ve been high on the Central Florida market for quite some time.

A big part of Florida’s growth is from retired and wealthy boomers heading south for warm weather, affordable housing, and NO state income tax.

Of course, when they move … they bring their incomes and spending with them.  One state loses.  The other wins.

So while affluent retirees might not rent their home from you, they’ll spend money with the local businesses who employ your tenants.

The point is money moves people … and policies moves money.

So whether you love, hate, or even ignore a policy … it affects the movement of money and people … which affects real estate.

Lastly, it’s wise to also consider the systemic causes of income inequality … and put them to work for you.

The global financial system is inherently inflationary.  It’s the stated goal of all central banks … most notably the Federal Reserve … to CREATE inflation.

That means anything denominated in currency (dollars) is destined to rise in dollar price over time.

In other words, as dollars lose value … it takes more of them to buy the samethings.  That’s inflation.

That’s why a typical house in the U.S. which used to cost $20,000 is now $200,000 … even though it’s the SAME house, only older.

So from that standpoint, the system is rigged.   People who own assets pull further ahead of those who don’t.

But people who don’t have assets like real estate, stocks, and commodities on their balance sheets get no paper wealth from inflation.

Relatively speaking, they get poorer.

Over time, the poor get poorer in real terms also … as the costs of housing, energy, food, and products of all types goes UP faster than their incomes.

The financial system is the ROOT cause of income inequality.

It’s also the fastest path to wealth for those who can use long-term debt to acquire long-term income producing assets … like real estate.

Sure, we know there’s cronyism, regulatory barriers that protect big corporations from competition, tax loopholes, insider trading, and all kinds of unfairness helping the rich get richer.

You need to be an insider to play that game successfully.

But real estate is available to almost everyone.  It’s a sacred cow of sorts.  It’s hard to manipulate, and most everyone in power protects it.

So the sooner Main Street pulls its money out of Wall Street and takes advantage of real estate … the sooner the playing field gets flatter and fairer for Main Streeters.

It’s why we love real estate.  It’s why we teach syndication.

MAYBE someday the politicians will quit arguing with each other and really fix the system.  We’ll keep breathing in and out.

Meanwhile, we encourage YOU to take what the system gives you … and do it in a way that adds a lot of value to Main Street.

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.

Digging for gold in a pile of bull …

Well, there’s sure been some interesting headlines recently!  WAY more fun than just trying to reverse engineer the logic behind the Fed’s rate increase.

With that said, we watch gold because we think it provides valuable insight into the dollar, bonds, and the financial system.  For more on all that, read James Rickards’ trilogy about money.

But something REALLY weird just happened in gold …

Gold Plunges After 1.8 Million Ounces Were Traded in One Minute –Bloomberg Markets, June 26

“Bullion sank at 9 am in London on Monday after a huge spike in volume in New York futures that traders said may have been the result of a ‘fat finger,’ or erroneous order. Trading jumped to 1.8 million ounces of gold in just a minute, an amount that’s bigger than the gold reserves of Finland.”

“Thin activity and automated trading may exacerbate such moves.”

“… trader may have … underestimated the market’s ability to absorb so much gold.”

Ya think? 

Of course there was “thin activity!”  It was 9 am in London on Monday.  That’s Sunday in the U.S., so American markets were closed at that time.

Coincidentally, markets were closed in India and Turkey, two of the largestphysical gold buyers, because they were observing Ramadan.

This is notable, because this fat-fingered trader was selling PAPER gold.  If a sizable physical buyer were on the other end, it could get messy if Mr. Goldfatfinger actually had to deliver the metal.

This Reuters article says …

” … somebody sold it by mistake and bought it back quickly, triggering stops below $1,250.”

A “mistake”???  REALLY?  Who does that? 

“Oops.  Just accidentally sold $2.3 BILLION of gold I don’t have … in ONE minute.  Silly me.  My bad.”

Now we don’t trade paper gold, so maybe we’re uninformed. 

But it seems like anyone with an account big enough to make a $2.3 billion order would have some kind of double check before hitting submit.  Our computers don’t even let us permanently delete an email without a double check.

 “Are you SURE you really want to place a GIGANTIC MULTI-BILLION DOLLAR order for gold you don’t have?  Okay then … click submit … and good luck!”

But it’s okay.  It worked out for Mr. Goldfatfinger.  Because after triggering the stops at $1250, he “bought it back quickly”.  Whew!  That was a close one.

If you’re not familiar, a “stop” or “stop-loss” is when you own a paper asset … and you limit a potential loss by placing an order to sell it AUTOMATICALLY when the price hits a certain level on the way down.

It’s designed to protect from a larger loss by getting you out fast when the market’s in free fall.  Of course, to work, there have to be buyers in the market when your sell order is placed.

As we’ve discussed, the timing for this order was such that the market was “thin”. 

In this case, Mr. Goldfatfinger’s $2.3 billion boo-boo triggered other investors’ stop losses, and when their computers started selling into a “thin market”, it put even more downward pressure on pricing.

But it all worked out … at least for Mr. Goldfatfinger … because he was conveniently able to buy all that gold back … probably at an even better price than he “accidentally” sold it for.  What amazing luck!

Mr. Goldfatfinger must just really have that Midas touch.  For the stops who got flushed … not so much.

So what does this have to do with real estate investing?  Maybe nothing.  Then again … maybe something.

Remember just a couple of weeks ago Bitcoin hit an all-time high?

Then on the same day as Mr. Goldfatfinger’s gold flash crash … cryptos Bitcoin and Ethereum crashed too. 

Same day?  That’s weird.  Probably just a coincidence. 

But with gold and cryptos looking so sketchy, it seems everyone worried about Italian bank bailoutscentral bankers’ concerns about a China led global financial crisis, and (insert whatever unnerving geo-political /economic event of your choice) …

… should stay calm, and move in an orderly fashion into the firming U.S. dollar and stock market.  After all, the Fed’s raising rates and talking tough.  Go dollar!

Okay.  So what are we getting at?

Consider these thoughts:

You don’t have to be a wild-eyed conspiracy theorist to suspect financial markets are probably manipulated by a variety of players … including central banks, big Wall Street firms, and the occasional rogue trader.

Why anyone would trust their financial future to “assets” used as gambling chips in the paper trading casinos is hard to fathom.

But we know many people feel they have no choice.  Paper investing is all they know. 

That’s why we train real estate investors to raise money from paper investors to invest in real estate.

So if you know how to make money in real estate, and are willing to take on private investors, you can build your wealth by helping other people build theirs … and provide a valuable public service.

Now we’re not saying real estate markets aren’t subject to attempted manipulation.  But usually, any attempts to affect real estate pricing is to the UP side.  Voters don’t like it when their home prices crash.

Fortunately, because real estate isn’t highly liquid, it’s also not highly volatile … and if you focus your assessment of value on cash-flow rather than price action, real estate is even MORE stable.

That’s because while paper asset prices gyrate … and even when real estate prices peak and retreat … rents are pretty darn steady.

The closest real estate could come to being dumped would be if some big Wall Street investor decided to “close their position” in housing and dump their portfolio on some unsuspecting neighborhood.

But the odds of that happening are small.

First, there’s no stop-losses to trigger.  There’s no flushing of other players to get at their inventory.  So there’s no motivation to purposely crash the price.

And fund managers are probably smart enough to meter out their sales so as NOT to cause prices to fall (though we WISH they would!).  They want to get the best price they can when they sell … unlike Mr. Goldfatfinger.

Plus, both homebuyers and mom-and-pop investors are standing by to gobble up any inventory dumped by hedge funds … and would welcome the opportunity to do so.

In fact, this Dallas News article says “mom-and-pop investors have more than made up for the pullback of big Wall Street and hedge fund homebuyers.”

Uh oh.  Why would big players be pulling back?  Is that a bad sign?

Not necessarily.  In the article, Daren Blomquist from ATTOM Data Solutions says, ‘The big guys have been priced out of the markets like Denver and Dallas.”

That’s because they need big volume and can’t find it.  The low-hanging fruit is gone and they’ve moved on to other things.

And in this case, the Dallas market appears to be doing just fine. 

In fact, the real challenge is getting good deals in a hot market … though this may be the calm before the next wave … because some are saying more renters are expected to choose homeownership in 2017.

All this to say, real estate goes through cycles just like the economy and financial markets.  But we think the cycles are much more honest, stable, and safer.

And if you’re careful to choose properties in strong markets, measure value by cash flow and not just momentum, and use stable financing structures which can endure rising interest rates, we think there’s still a LOT of investment opportunity out there in 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.