Ask The Guys – Infinite Returns, Gold, Cap Rates, and Cash Flow

It’s your questions and our answers.

That’s right. It’s time for another segment of Ask The Guys … when we hear about the real-world challenges investors like YOU face every day.

We have another great collection of questions from our loyal listeners … covering everything from infinite returns to gold, proper reserves, compressed cap rates, and cash flow.

Remember … we aren’t tax advisors or legal professionals.

We give ideas and information … NOT advice.

In this episode of The Real Estate Guys™ show, hear from:

  • Your in-the-know host, Robert Helms
  • His go-with-the-flow co-host, Russell Gray

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The ins and outs of infinite returns

Our first question comes from Sean in Durango, Colorado, who wants to know more about the ins and outs of infinite returns.

This is a topic we are pretty passionate about … it was even the theme of this year’s Investors Summit at Sea.

The idea of an infinite return is pretty simple. It means that you’re investing on the house’s money.

In other words, you put up some money for a deal … to buy a property or be in syndication or grow crops … and at some point the deal has paid you back … and you’re still making money.

Maybe that takes a year or five years … but once you get all of your initial capital off the table, everything else that comes in is an infinite return.

Infinite returns are easy to do in real estate … but it DOES take time.

There are lots of different ways to chase an infinite return, like getting creative with financing and syndication … but the core concept remains the same.

You’re earning a return on no money at risk.

Purchasing real estate with other people’s money

Teresa in Claremont, California, wants to know more about using other people’s money to leverage the purchase of real estate.

Does it only work with people who have lots of money for a downpayment? Are there any lenders willing to finance 100 percent of a deal for a buy and hold?

Using someone else’s money doesn’t mean breaking into their house in the middle of the night or stealing from their bank account.

It means showing them the opportunity.

One of the primary sources of other people’s money are lenders. They’re in the business of putting capital to work for their depositors, for their shareholders, and sometimes for themselves.

Lenders put up some of the money for a deal in exchange for some portion of the return or a predictable income stream, like an interest payment.

You can also leverage other people’s money through syndication. If you need $1 million to do a deal, you can raise $100,000 from 10 different people.

There are lots of legal and ethical implications to a syndicated route like this … but it can be a great way to get started passively or if you’re interested in being a full-time real estate practitioner.

A lot of people think they have to have some sort of money to start with to do a deal. It helps … but you don’t have to.

What you do have to have is a deal that makes sense … because it’s going to end up being the collateral or the investment that your equity partners come to.

No matter what, you’re going to have debt … and you’re going to have equity.

The key is to look at how much profit is in the deal and figure out how much of that you can give away to different people for their participation.

And when all of that is done … is there enough leftover for you?

Finding a lender who will cover 100 percent of deal through a loan is tough … and the ones that do will usually be for a primary residence.

Protect your cash flow with reserves

Gary in Scottsdale, Arizona, owns four single-family rental properties.

The question on Gary’s mind is how to deal with the reality of net cash flow … one major expense can wipe out your entire annual cash flow.

It’s real and it happens. It has even happened to us.

We always … always … put contingencies and reserves in our pro formas.

A pro forma is your plan for the property … what you think the income and expenses are going to be.

There are two major places where you will need reserves.

When you buy the property, you can’t put 100 percent of your cash into the down payment and the property. You need to have some in reserve.

Most lenders require this. When you close escrow, they’ll want to make sure that you still have money in your bank account.

We also recommend that you take some reserve capital out of every month’s payment as the rent comes in.

Perform your vital functions … and then put a little bit aside. That amount depends on your projected plan for your property and what needs you anticipate.

The cause and effect of cap rates and interest rates

With cap rates compressing across the country, it has been said that investors should be careful to still maintain a good spread between the cap rate and the interest rate.

Drew in Chicago, Illinois, wants to know if there is a direct correlation between these two factors or if it’s just a general rule of thumb to indicate when a market might be overpriced.

We think this is a great question.

Capitalization rate … or cap rate … is determined using net operating income.

Cap rate doesn’t include anything to do with leverage or your loan … so there is zero correlation between cap rate and the interest rate.

But there CAN be cause and effect.

If interest rates are low and you can borrow money for cheap … you want to borrow more.

And if you want to go out and find a property, you’re going to find a lot of competition because rates are low.

So, you’ll bid up the price for the same amount of income … making the cap rate go down.

Leveraging from gold and real estate

Debra in Alpharetta, Georgia, wants some further insight into leveraging from gold and real estate combined.

Assets like gold and oil are basically proxies for the dollar.

We borrow in dollars. We lend in dollars. We invest in dollars.

When you start looking at the dollar, you see a long-term trend in loss of purchasing power … it’s called inflation.

Real estate investors use inflation to get rich by borrowing money from the future and bringing it into the present when it’s worth more.

So when you borrow … you have effectively shorted the dollar.

You can accelerate that process with gold.

If you look at the history of gold relative to the dollar, it basically stays the same as the purchasing power of the dollar declines.

Gold gives you the opportunity to hold some liquid wealth outside of the banking system and hedge against the falling currency.

More Ask The Guys

Listen to the full episode for more questions and answers.

Have a real estate investing question? Let us know! Your question could be featured in our next Ask The Guys episode.


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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Out of control debt is a problem … and an opportunity

Debt is a lot like religion and politics.  People have strong opinions … so it’s risky to talk about it in a group setting.

But we’re going to do it anyway … because there’s more debt in the world than ever before.  And it has big potential ramifications for real estate investors.

Most real estate investors use debt.  Some because they need to … others because they want to.

Consumer finance gurus hate debt.  They say cut up your credit cards, pay down your mortgage, drive an old car, and brown bag your lunch.

On the other hand, Robert Kiyosaki (the greatest-selling personal finance author in history) LOVES debt …

… but he makes an important distinction between “good” debt and “bad” debt.

“Bad” debt is used for non-productive purposes, and payments come from the earnings of the borrower. 

When you borrow more than you can service and eventually pay off, the debt first enslaves you … then bankrupts you.

That’s bad.  And it can happen to people, businesses, and countries.

“Good” debt is invested for productive purposes … creating income and capital gains exceeding the interest expense.  Good debt is profitable.

And when the payments come from the investment itself … the loan is essentially free, the return is infinite, and the debt goes from good to GREAT!

The topic of debt popped up when ex-Starbucks CEO Howard Schultz announced he may run for President.

His pet worry?   According to this Time.com article

‘‘… the fact that the United States is $20 trillion in debt…” 

Actually, it’s closer to $22 trillion.  But who’s counting? 

It seems Schultz thinks the MAIN problem is Uncle Sam’s debt … and presumably he can fix it.

Maybe.  But we’ve seen dozens of politicians over the decades … both winners and losers … all warn about the national debt.

But no matter what combination of colors end up in control … one thing is SURE.  The debt grows … and grows … and GROWS.

So even if Schultz runs and wins, he’ll probably be the same as Donald Trump, who’s no different than Barack Obama, who was no different than Ronald Reagan.

There.  That should have offended pretty much everyone … so now we’re all on a level playing field.

But this isn’t about politics or personal preferences. 

The whole point is to cut through the noise and look at the structural realities so we can make better investing decisions.

Here’s the dirty little secret … the entire system is debt

When currency is borrowed into existence (which is how it works), then it can’t be paid back WITH interest … unless you borrow even MORE currency into existence to pay the interest too.

It’s an infinite loop of ever-expanding debt.  It’s not political.  It’s STRUCTURAL.

Like water in an aquarium, you can swim from one end to the other, hide under a rock or behind a plant, lurk in the depths, or float at the top. 

But no matter where you go or how you’re positioned, you’re ALWAYS in the water.  If you jump out, you suffocate.

Even if you personally manage to become “debt free” … your government goes into debt for you … then uses taxes and inflation to force you to debt service.

Depressed?  Don’t be. 

But that red pill reality check is the first step towards “confronting the brutal facts” … a pre-requisite to making better, more pragmatic decisions. 

Robert Kiysosaki understands the financial system is based on perpetual, growing debt.  You can’t effectively escape it.

In fact, on our 2012 Investor Summit at Sea™ …  after G. Edward Griffin (The Creature from Jekyll Island)  explained the debt-driven nature of the Federal Reserve system …

… Kiyosaki said, “Don’t fight the Fed.  BE the Fed.”

That’s a LOT of paradigm shattering brilliance all distilled into two short sentences.

But it begs the question … HOW?

Debt. 

The Fed uses debt to create currency and so can you.  The key is to use GOOD debt … and stay keenly aware of where you are in the “cycle.”

Consider this truism …

“If something cannot go on forever, it will stop.” 

 – Herbert Stein 

Debt can only grow safely if it can be serviced.  When payments are missed, then debts default, credit market seize, and asset prices plunge.

That’s what happened in 2008.  And it was GOOD … at least for those who saw it coming (or listened to them) and were properly positioned.

For investors, crashes are like sales.  You can stock up on quality assets … IF you’re emotionally, intellectually, and financially prepared to act quickly.

Good debt is the tool of choice for extracting equity while it’s available … and having it liquid for the next inevitable shopping spree.

And real estate is the collateral of choice …

… because the cash flows, large loan limits, tax breaks, favorable interest rates and amortization schedules make real estate debt the best good debt available.

Plus, you’re double-hedged against inflation because you have both a real asset AND long-term debt.

That’s important because …

Out-of-control debt virtually assures currency debasement.

That’s wonky talk for inflation. It takes more paper money to buy the same real things.

The sooner you “get real” with real estate, commodities, energy … the better you avoid the inflation tax.  Of course, real estate and oil also help avoid income tax too!

And one last thing …

(thanks to our Peak Prosperity pals Chris Martenson and Adam Taggart for enlightening us)

Economic activity requires resources.  Try making a product without raw materials or energy.  It ranges from not easy to impossible.

Debt requires payments … which come from profits … which come from productivity … which requires resources.

Growing debt requires growing supplies of resources.

But if supplies are limited, then growing demand will inevitably bid UP the prices of those resources.

And those who own, produce, process, and distribute those resources … and along with those who invest in the communities those folks live in … will be enriched.

There’s a reason we pay attention to precious metals, energy, farmland … in addition to our fascination with everyday real estate.

Real assets help build a resilient portfolio … even in the midst of a debt-fueled slow-motion train wreck. 

So go ahead and cheer your for your favorite politician.  Watch the Super Bowl, too.  They’re both cheap entertainment.

But remember to confront the brutal flaws of a debt-based system and then structure yourself accordingly.

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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A potentially big real estate story for 2019 …

While most Americans are fixated on the brouhaha surrounding the government shutdown, we’re thinking about something even MORE slimy …

Oil.

Long time followers know we’ve been watching oil for quite a while … and for a variety of reasons over and above the amazing tax breaks.

Oil and energy have a substantial impact on the economy, inflation, geo-politics … even the health of the financial system. 

We’ve observed that as oil prices rise and fall, the specific area of their impact shifts.   There are important clues and opportunities to be gleaned from watching these dynamics.

When oil prices rise, it’s a drag on economic growth and can also be a sign of inflation.   It’s no secret President Trump wants to lower cost inputs to help fuel economic growth.

The Trump formula is lower taxes, lower oil, lower interest rates, a weaker dollar, and less regulation.  Labor is the only input he wants to see rise.

You may agree or disagree, but that’s what Trump wants.  Of course, there are some conflicting goals in the Trump recipe …

Specifically, low interest rates and a weaker dollar generally mean rising prices (inflation) … and oil is one of the first places it shows up.

Also, more economic activity leads to more energy consumption, which means higher demand … and rising prices.

So … the only way to keep oil prices low in an environment like this is to increase oil production to where supply overwhelms both higher demand and a weaker dollar … and pushes oil prices down anyway.

Perhaps obviously,  a domestic agenda which needs lower energy costs will affect U.S. relations with oil rich nations.

We think Trump’s stance towards Saudi Arabia … in spite of denials … makes it clear low oil prices are a high priority for the White House.

It’s consistent with what Trump told us when we asked him about his vision for housing and real estate.  He said, “Jobs”.

Remember, oil and energy were the largest drivers of job growth in the United States coming out of the 2008 financial crisis.

Many real estate investors who recognized this trend and got involved in Texas real estate in 2009 …and  have done very well over the last 10 years.

We think that party’s probably not even close to over.

One less obvious, but very important connection between oil and real estate is in the financial system … specifically, the debt markets.

As we’ve discussed several times over the years, LOTS of loans were made to oil companies when oil prices were over $100 per barrel.

But when interest rates rise and oil prices fall … it’s the worst of both worlds for heavily indebted domestic oil producers.

MANY billions of oil-related debt has the potential to go bad … and crater the financial system just like bad mortgage debt did in 2008.

And when credit markets seize for whatever reason, liberal users of debt, such as real estate investors … are directly affected.

We don’t think it will happen.

First, there’s too much upward pressure on oil prices.

Second, as we’re about to discuss, there’s BIG motivation to stimulate domestic production … which provides a lot of cash flow to service debt.

Of course, we could be wrong … as Ben Bernanke was about the dangers of sub-prime … so real estate investors should pay attention to oil.

Using the gas pump as an indicator, you probably already know oil prices have been a little soft.

Of course, businesses and consumers (including your tenants) LOVE this because it makes everything more affordable.

U.S. car manufacturers love it because it means they can sell more gas guzzling SUVs and trucks.

But bigger picture … oil and energy are major cost inputs on virtually all products.

After all, it takes energy to manufacture and transport everything.

And many products are made from petroleum derivatives, such as plastic, roof shingles, and asphalt.

So even though energy is left out of the “core inflation” index, the effects of changes to oil pricing are still reflected in it.

And so partly due to subdued oil prices, concerns about excessive inflation have been muted … even in the midst of a red-hot economy.

Obviously, sellers of oil would prefer higher prices. 

But you can only charge what the market will bear … which is a factor of supplydemand, and capacity to pay.

It’s also important to note that energy, like real estate and food, isn’t a discretionary purchase.

People MUST have energy to survive and thrive.  Therefore, demand for energy is ever-present.

So when it comes to oil … the thing to watch is supply and capacity to pay.

Breaking out capacity to pay from the traditional supply and demand model is something we started doing a long time ago … because there’s no effective demand without it.

Just because you want something, doesn’t mean you can afford it.  Think of it like debt-to-income ratios and interest rates in real estate.

Just because someone makes an offer on a house (demand), if they can’t quality for the loan (capacity to pay), there’s no sale.

And when mortgage rates rise, but wages don’t, the dynamic negatively impacts qualifying ratios … thereby decreasing capacity to pay and ultimately, effective demand.

That’s why observers often expect rising interest rates to lead to decreased housing demand.

It’s similar with oil.

When oil prices rise and wages don’t, then lack of  “real” wage growth (incomes outpacing inflation) makes it hard for the market to bear price increases.

That’s why the recent blowout jobs report was notable.

Not only were lots of jobs created, but wages grew at the best rate since 2008.

That means capacity to pay improved.

As you may recall, Saudi Arabia (the leader of the middle-eastern oil cartel OPEC and one of the largest oil producers in the world) INCREASED production …

… which meant MORE supply and LOWER prices (and thanks from President Trump).

But just recently, Saudi Arabia reversed course, calling for a target price of $80 per barrel … and a REDUCTION in production to make it happen.

Now before your A.D.D. kicks in … remember, this ALL has ramifications for real estate investors …

The point is there’s some real pressure on oil prices to rise … and a lot of motivation by President Trump to take steps to push prices down.

We think BOTH will happen and lead to interesting opportunities for real estate investors … in spite of the pressure higher oil prices puts on your paycheck-to-paycheck tenants.

If you invest in oil for the tax breaks and oil prices go up … there’s big potential for a double dip … tax breaks and profits.

Nice.  You can use both for your next down payment.

Higher oil prices reduce the risk of oil debt imploding credit markets.  Healthy credit markets are essential to vibrant real estate markets.

If oil prices rise on the international stage, we’d bet President Trump will do whatever he can to further stimulate domestic production to counteract it.

And that means more U.S. jobs and robust regional economies … with increased demand for real estate to in those areas.

All this to say, we think it’s smart to pay attention to oil … as an investment, as an economic gauge, and as a treasure map to potentially hot markets.

Oil will be a big topic of discussion on our upcoming Investor Summit at Sea™.

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.


Love the show?  Tell the world!  When you promote the show, you help us attract more great guests for your listening pleasure!

Social Security, Inflation and Real Estate …

If you’re relatively young, Social Security is probably just an abstract concept and another bite out of your paycheck.

But before you tune out,  consider that the U.S. Social Security program creates both problems and opportunities for real estate investors of ALL ages … including YOU.

Big picture …

Social Security and Medicare make up about 42% of federal program expenditures.  They’re a BIG chunk of Uncle Sam’s spending.

According to this Congressional Research Service report on Medicare and this Social Security Administration Trustees’ Report … both are headed towards insolvency in the not-too-distant future.

That’s bad.

Worse … both are “pay as you go” programs.  That’s not our description.  That’s exactly the way the U.S. government describes them.

The programs don’t really have any money.

The only “assets” these programs have are YOUR taxes … and IOUs from Uncle Sam.  The CRS report explains it on page 5.

Of course, IOUs from Uncle Sam are also backed by taxes … and the Federal Reserve’s printing press (which means inflation).

According to recommendations by the SSA Trustees in their report, the answers are … wait for it …

… raise payroll taxes and reduce benefit payments.  

Shocker.

You probably know payroll taxes are paid by working people (your tenants) and their employers.

Higher payroll tax obviously means less take-home pay to live on … including paying their rent to YOU.  So you may want to pay attention to the direction of payroll taxes.

But what about benefit reduction?  How does that matter to real estate investors?

There’s the obvious impact on tenants who rely heavily on Social Security, disability benefits or Medicare to help them with their routine living expenses.

Reduction in subsidies means those tenants have less money to pay rent … and less flexibility to absorb increases to rent or other costs of living.

But there’s a less obvious angle to consider … one we pay close attention to … and that’s the Fed’s printing press.

We trust at this stage of your financial awareness, you’ve heard of John Maynard Keynes, the father of the “Keynesian economics” you hear about.

Here’s a long, but powerful statement made by Keynes in his book The Economic Consequences of the Peace …

“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflationgovernments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.  By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.  As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

There’s SO much we could say about that quote … but read it and re-read it a few times.   You’ll view the news in a whole different light.

For now, let’s get back to Social Security, inflation … and YOUR real estate investing …

As you can guess, cutting benefits overtly is not a politically popular solution.

Neither is raising taxes.

Yet according to the people in charge of these programs, that’s EXACTLY what needs to happen.

And it is happening … but “in a manner which not one man in a million is able to diagnose.”

That is … cutting benefits and raising taxes are both cleverly hidden inside how Uncle Sam and the Fed handle inflation.

When most people think of “inflation,” they think of Uncle Sam’s official gauge of inflation … the Consumer Price Index (CPI).

It’s well known that the Fed has a stated goal of 2% per year inflation … every year … year in and year out.

That doesn’t sound like much. And whether it’s good or bad depends on which side of the coin you’re on.

If you own real assets, you get richer in nominal terms.

If you use long-term debt, like mortgages, you get richer in real terms.

That’s too big a concept for today, but one EVERY real estate investor should know like their name.  In fact, it’s a big part of what Robert Kiyosaki will be talking about at our next Investor Summit at Sea™.

But just because you own properties doesn’t mean you’re home free (punny, we we know) because …

… for folks who don’t have assets (like your tenants) … inflation means it costs more to live.  To see it in dollar terms, use Uncle Sam’s inflation calculator.

Based on the CPI, a tenant in October 2018 would need $1,542 to purchase items that cost only $1,000 in October 1998.

That’s means they need more than a 50% increase in take-home pay over 20 years … just to keep the SAME standard of living.

Similarly, for programs like Social Security … with  built in cost of living adjustments (COLAs) … a $1000 benefit in 1998 now costs Uncle Sam $1542.

No wonder the debt is swelling.

Of course, it didn’t take Uncle Sam long to figure out keeping the CPI lower than real-world rate of inflation, would effectively cut benefits without political fallout.

In other words, as Peter Schiff often points out, the CPI probably UNDER-reports the ACTUAL rate of inflation … which means the reality is even harder for the working class than the CPI indicates.

So it’s important for investors of all types to get the best measure of real-world inflation possible.  And the CPI is arguably not it.

That’s why many investors turn to Shadow Stats or the Chapwood Index.

The Chapwood Index is handy for real estate investors because it breaks inflation down by city.  That’s important because unlike stocks, bonds, and commodities … real estate is a LOCAL investment.

Here’s where it all comes together …

Even though Uncle Sam is motivated to keep inflation LOW for CPI purposes, they have no choice but to print gobs of dollars to fund the huge and growing debt and deficit.

Meanwhile …

Income producing, leveraged real estate is arguably (and by far) the safest, most powerful hedge against long-term inflation.

But again, rental property investors must stay alert to the pressure inflation puts on their tenants.

Remember … just because nominal GDP is growing, it doesn’t mean your tenants are getting more purchasing power.

So be careful to select markets, product types, and tenant demographics that fit well into what’s happening in the big picture.

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.


Love the show?  Tell the world!  When you promote the show, you help us attract more great guests for your listening pleasure!

The REAL cause of rising rates …

Maybe it’s just us …

But as we’re preparing for our Future of Money and Wealth conference … (our way of sharing our epic Investor Summit at Sea™ faculty with more people) …

… we keep seeing headlines that make us think there’s more happening in the financial world than just a little stock market volatility …

From Bloomberg on February 7th:

Dollar Will Stay Weak If China Has Its Way, Morgan Stanley Says

There’s SO much we could say about that one headline …

… in which a major U.S. financial institution acknowledges both China’s desireand ability to weaken the almighty dollar.

But we’ll restrain ourselves (for now) and ask a more mundane, but relevant question …

What does a weak dollar mean to real estate investors? 

We’re told a weak dollar is good for U.S. business … because it makes U.S. products cheaper for foreigners to buy with their now relatively stronger currency.

Okay, so maybe that’s good for local economies that depend on exporting.

And maybe it helps landlords in those areas because more export sales might mean more jobs and higher wages for local workers (your tenants).

But a weak dollar also means imports are more expensive for U.S. consumers.  All that stuff made in China now costs MORE for U.S. buyers.

Last time we looked, tenants buy a lot of stuff made in China.  If they’re paying more for it, then they have less money available for rent increases.

So a weak dollar is bad if it leads to consumer price inflation …

And sure enough, from CNBC on February 14th:

Consumer Prices Jump Much More Than Forecast, Sparking Inflation Fears

According to the report …

“Markets reacted sharply to the news, with stocks sliding and government bond yields rising.”

“Bond yields rising” is just fancy talk for rising interest rates.

If you talk to any savvy mortgage broker, they’ll tell you mortgage rates pivot off of 10-year government bonds.

When bond yields go up, so do mortgage rates.

And to no surprise comes this Market Watch headline on February 15th:

Mortgage Rates Rise to Nearly Four-Year High on Inflation Concerns

As Robert Kiyosaki always reminds us, real estate investing is about debt and cash flow.

Your mission is to acquire more of both … but with a positive spread.  So if the debt costs you 5%, you want the cash flow to be at least 2-3% higher.

But when rates are rising, and tenants are being squeezed by inflation, your spread might compress.

Long-time followers know we’ve been advocates of locking rates long term because of the probability rates would turn up.  Now it seems they are.

If the trend continues, short-term adjustable loans could get uncomfortable.

Real estate investors not paying attention may be unprepared for higher rates.

But the mini-news cycle above illustrates an important lesson …

If you understand how these things fit together and their domino effect … you can see them coming … and prepare.

A weak dollar leads to inflation which leads to rising rates.

We could spend a lot more time explaining all that, but that’s the gist of it.

While it played out in the above headlines in just over a week … often these trends chug along over months or even years.

So, it’s easy (but dangerous) to fall asleep at the wheel.

Of course, it isn’t just the 10-year bond that’s signaling dollar weakness.  So is gold (rising), and oil (rising), and even cryptos (exploding).

But as mentioned earlier, for us … the MOST interesting part of the story is China … something we’ve been talking about for over four years.

Morgan Stanley, as reported by Bloomberg, essentially acknowledges that China’s economic size and strength are now able to influence the dollar … and YOUR interest rates.

Of course, U.S. policy also plays a substantial role, and piling on gobs of debt isn’t helping.

The point is that the future of money and wealth is evolving rapidly right before our very eyes … in ways far more profound than just routine economic cycles.

What’s an investor to do?

We think the right real estate, structured with the right debt, will prove to be one of the most attractive investments in the months and years to come.

But lazy or naïve investors seeing only “higher wages” and a “strong economy” and position only for sunshine are living dangerously.

Right now, we’re convinced every serious real estate investor should be paying close attention to the future of money and wealth.

That’s not a sales pitch for our event.

We created the event because headlines have been telling us for years something’s coming … and it’s getting closer every day.

So we’re getting in a room with the smartest people we know for two full days to focus on what’s happening and how to play it for safety and opportunity.

Stay alert, informed, optimistic, and pro-active.

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.

Avoiding Bubble Trouble – Tips for Hot Market Investing

“Are we in a real estate bubble right now?” Trust us, we’ve heard this question asked a LOT lately.

In this episode of The Real Estate Guys™ show, we’ll dive into that question.

We’ll discuss:

  • The three components that converge to create market bubbles
  • Why real estate is a good investment class for avoiding bubble trouble
  • How to react in a hot market … AND
  • How to prepare for when prices inevitably do deflate

You’ll hear from:

  • Your bubbling host, Robert Helms
  • His falling-a-bit-flat co-host, Russell Gray

Listen



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Are we in a real estate bubble?

Our primary caution to you is that all-time highs do NOT equal market bubbles.

It can be difficult to parse whether a bubble is, well, bubbling up. Here are the three different components to rising prices:

  1. Leverage. Financing means pulling money from the future to bring in dollars today. But the ready availability of money can end up driving prices higher, even though many loans are fashioned to make things more affordable.
  2. Disparity between supply and demand. When there’s more demand than supply, prices go up … even if the price no longer matches the value of the commodity.
  3. Inflation. Inflation causes currency to literally lose its purchasing power. So it takes more currency to buy the exact same things.

When you see runaway price increases, take a minute to consider what the cause is. Is the fundamental value of the property increasing, or is rampant speculation driving prices up?

When the factors above start to change, the price of a property can increase … or decrease … significantly. So pay attention.

Don’t get so caught up in a hot market you get blinded to the actual value of an investment. Buy because it makes financial sense … and not because everyone else wants to buy.

If you don’t know better, it’s easy to believe you shouldn’t be buying anything right now.

But real estate is a very different investment than most. Every single deal is unique, which means YOU have a ton of flexibility to add value to a property.

Real estate allows you to negotiate on the front end, manage operations on the back end, and analyze any given property on its own individual merits, instead of just looking at the market or asset class as a whole.

Real estate is not a commoditized asset. That gives you the power to strike individual bargains.

Tips for buying in a hot market

The vast majority of investors invest in stocks and bonds. They’re used to having zero control. As a real estate investor, there’s a lot you can do to position your portfolio for success.

Avoid the bubble mentality. Don’t buy because everyone else is buying.

Don’t treat properties like commodities and hope something good will happen. Pick your investments individually, and make sure you have a Plan A … and a Plan B and Plan C.

Then, do a sound analysis and underwriting.

Wondering whether there’s a difference? There certainly is.

Analysis means gathering the numbers and putting them together to get an estimated return.

When you get a pro forma, make sure you double-check the analysis … the math isn’t always correct.

Underwriting goes one step further. A proper underwriting process pulls third-party financial statements to verify the numbers from the analysis match reality.

It’s very important to underwrite all of your deals. Do this by gathering all the information you can from trustworthy parties … financial statements, rent rolls, copies of rental agreements.

You can even go a step further and verify information with tenants independently.

Next, you need to make sure your assumptions hold water. Check the property tax, the property condition, and maintenance schedule.

Evaluate the total cost of an investment, including needed rehab.

Last, look at your potential revenue. Evaluate rents to see if they match market rates, and see whether there’s any opportunity to make improvements and increase revenue.

A note … you CAN’T underwrite your way out of risk. But to minimize risk, you want your eyes as wide open as possible.

How to position your existing portfolio

Underwriting is important when making a new investment, but what can you do about your existing portfolio?

Quite simply, you can go through the same process you would with a new purchase.

Use zero-sum thinking to ask yourself whether you’re getting the most from your investments.

Look at the numbers … cash flow, debt and interest rates, and equity. Is there any room to improve the property?

You might think about moving some equity around. Many real estate investors think the only option for accessing equity is selling a property or doing a 1031 tax-deferred exchange … but you have a third option.

Consider a cash-out refinance, which allows you to transfer equity from a developed property to a market or property type with upside potential.

To proactively strategize about bubbles, separate your equity from your properties.

But be cautious … always do underwriting and analysis on potential purchases. You do run a risk when you thin out your equity, so make sure you hedge your bets as much as possible.

Making a risky purchase could mean being locked into a property when equity and cash flow decrease during a downturn.

So, ensure you have a plan for holding on to the properties you purchase in the event the market crashes and you go underwater.

Time heals a lot of wounds … we’ve seen many investors hold onto properties during a downturn only to make a killing once the market starts perking up again.

It may well be that the market you’re in has bubbled to the point where selling makes sense. When considering where to put your equity, be cautious and be smart.

Roll with the highs and lows

There are quite a few things you can do to protect yourself from the downside of bubbles and benefit from the upside.

  1. Seek out recession-resistant pricing. You want to look at rent pricing that is just below the market median. This is the sweet spot … you’ll get people coming down from the top in bad times and people coming up from the bottom in good times.
  2. Follow the barista rule. Some markets are more affordable than others. If your barista can afford to live in the same area they work in, that market has recession-resistant pricing that isn’t artificially inflated.
  3. Be in a position to pick up bargains when the downturn comes. Have the wits to pull some chips off the table when the market’s at the top so you can make a killing when the market deflates and there’s blood in the streets. In other words, keep some liquid equity close at hand when the market starts getting hot.

Bubbles aren’t bad … markets naturally rise and fall. You just have to be resourceful enough to catch the waves.

Now 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.

Certainty in uncertain times …

Sometimes when the world seems to be spinning out of control and not much makes sense, it’s helpful … even necessary … to cling to something stable.

Headlines are filled with wars, rumors of wars, natural disasters, senseless murders, endless divisive vitriolic political rhetoric, greed, corruption, hypocrisy …

And that was just last week.

No wonder so many Americans love to just veg out and get away from it all by watching some football … oh wait.

When it comes to investing, it’s easy to go “full turtle” … retreating into our shells, hunkering down until the storm passes.

History says that’s not a winning strategy.

After all, there have ALWAYS been wars, disasters, corruption, and a zillion reasons to pull the covers over our heads and wait for morning.

But is there ever a time when looking back 20 years, you wish you would NOT have bought more real estate?

We’re guessing folks in 2015 wish they bought more in 1995.  And those in 1995 probably wish they bought more in 1975 … and those in 1975 wish they bought more in 1955 …

You get the idea.  And if you know history, there was a LOT of crazy stuff that happened in the world during each of those 20-year periods.

But one thing’s been SURE … real estate’s been among the safest places to build and protect wealth from the storms.

Yes, the cynics out there can point to individual cases where a real estate investor took some lumps in a downturn.  We’re on that list for 2008.

But it wasn’t real estate’s fault … it was how the portfolio was structured.

Otherwise, how do you explain people like Ken McElroy and many others who THRIVED with real estate investing during the same period?

It’s easy to ride an upside wave on a sunny day when a rising tide is lifting all boats.  Everyone’s an expert sailor in good weather.

But when the storm comes, you find out who really knows how to sail and has prepped their ship for the INEVITABLE tough times.

However, there’s a BIG difference between being in just a rowboat versus a truly seaworthy vessel.  The rowboat is much more easily tossed about in rough water.

So with everything going on in the world … and real estate getting tossed into the conversation of bubbles about to burst in all “asset classes” … we thought it’s a good time for …

Making the Case for Real Estate

This could be a book, so we won’t expound each point.

We’ll leave it to you to think, research, debate, and discuss these items with your friends … even and especially those who are prone to disagree.

Real estate is eternal, essential, and easy to understand. 

It’s been around forever and will continue to be necessary to support human existence.

The business model is simple … people or businesses use your property and pay you rent.  No Ph.D. needed.

Real estate markets are inherently inefficient.

That might sound bad, but it’s good.  The less of a commodity something is, the easier it is for pricing to be more subjective than objective.

Real estate markets are really hard to manipulate.

Many paper asset markets are “influenced” by power players to create spreads through profitability.

Because traders can’t deal in large blocks of properties to push prices around … they don’t.

Real estate is supported by the power players.

To the extent real estate can be manipulated, all the incentive for anyone big enough to do it … government, central banks, industry … is to support it.

No one attacks real estate to drive it down.

Real estate is financeable with cheap long-term debt.

Even 20% down with an 80% loan, producing 5 to 1 leverage, is considered “conservative” … and qualifies for some of the cheapest long-term money in the market.

There’s no margin call if a property’s value drops.  As long as you keep making those payments … using the tenant’s money … you’re okay.

Real estate mitigates counter-party risk.

This is a REALLY important point because we’re guessing the VAST majority of paper asset investors are quite unaware of the counter-party risk pervading their portfolios.

Bank accounts, brokerage accounts, insurance contracts, bonds (and any mutual fund or investment containing bonds) are FULL of counter-party risk.

When you own real estate, you own it.  It’s a real asset, not a promise.  It’s not someone else’s liability, where if they default you have nothing but an IOU.

Real estate allows you to switch out debtors.

Some might argue if a tenant defaults on their lease, it’s the same as if a bond issuer defaults on their payments.

No.  Real estate is VERY different.

To our previous point, if a bond issuer defaults, your bond is worthless.  It’s only a promise whose value is dependent on the counter-party (the bond issuer).

When a real estate tenant stops paying, you still have the property.  You can evict the tenant and replace them with someone who will pay.

Good luck doing that with a bond.

Real estate provides a hedge against both inflation and deflation.

You might have to put your thinking cap on for this one.

Obviously, with inflation, real assets go up in dollar value.  Inflation is why a 3-bedroom home purchased in 1960 for $10,000 is worth $200,000 today.  The dollar got weaker.

Deflation is the opposite.  The dollar gets stronger (try not to laugh) and it takes LESS dollars to buy the same real asset.

So now, a $200,000 property might fall to $100,000 or less.

But if you only put 20% down … or $40,000 … and the tenants (whose paychecks goes farther as prices are falling) pay off your property …

… at some point, you have a property that’s paid for.  So you’re in for $40,000 and the property is “only” worth half what you paid for it, or $100,000.

Did you lose?

Real estate provides certainty in an uncertain world.

We could go on and on, but there’s the point …

There’s no guarantee with investing.  It’s about taking thoughtful, mitigated risks for an attractive risk-adjusted return.

And while you can’t just throw a dart at a map, pick any property and haphazardly structure the deal, financing, and management …

… history says properly structured properties in solid markets are proven long-term winners no matter what’s going on in the world.

Your mission, should you choose to accept it, is to …

… focus your education and networking on finding markets, teams, and properties which provide a high level of certainty in uncertain times.

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.

Is This Why Oil Prices Are Down? – Thoughts For Investors

Oil matters to real estate investors.  And not just for the obvious impact on the price of gasoline and your tenants’ budgets.

It’s MUCH bigger than that.  Let’s take a look…

On November 13th we saw this headline:

 Crude Oil Getting Slammed

This caught our attention because we’ve been watching oil for many reasons.

First, we like the idea of investing in passive income generated by essential commodities like food and energy.

Oil, gold and food are commodities which help investors protect purchasing power from inflationIt’s a way to diversify income away from wages.  We wrote about that in our special report on oil.

Oil, like gold, is one way to both monitor inflation and hedge against it.  As the dollar gets weaker, oil rises in dollar terms because it takes more dollars to buy the same oil.

Of course, inflation hasn’t hit dollar denominated oil or gold yet, but that doesn’t mean it won’t.  And if the long term trend of the dollar is down, then a temporarily strong dollar could be a buying opportunity for things like oil and gold.

In the case of gold, Russia, China and India are gobbling up most of the world’s production.  Americans are buying record amounts.  Yet the price drops…in spite of low interest rates and trillions of dollars of QE.

Weird.  We thought prices went UP when demand grows faster than supply…and especially when the currency supply increases too.  Hmmm….Rising demand against decreasing supply causes prices to rise. Falling demand against increasing supply causes prices to fall.

In the case of oil, some argue the price collapse was the result of a huge and sudden surge of supply against a sudden decrease in demand.

Odd that no one saw that coming when there are plenty of smart people bird dogging both production and consumption.

But maybe there’s something else affecting oil? Let’s take a look at why oil prices are down.

Like the dollar, oil has developed into a useful weapon in geo-political conflicts.

It’s been reported the Saudi’s are using the price of oil against Russia and U.S. frackers.

Oil has become a significant weapon in geo-political conflictsCollateral damage are countries like Venezuela, who are heavy oil exporters too.  In fact, it looks like low oil prices are forcing Venzuela to sell its gold to raise cash to pay its bills.

Wow.  That’s great timing.  Just when supplies of gold were shrinking relative to demand…a bunch of gold is coming to market.

But U.S. real estate markets depending on the fracking business…like North Dakota…aren’t as lucky.

That’s why we didn’t get too excited about North Dakota’s real estate boom.  Too much of a one trick pony.  More diversified markets like Dallas and even Houston are probably better bets.

Sure, they feel the pinch of a depressed oil industry, but there are other strong economic drivers to prop those markets up.

BUT…there’s a part of the oil story which has the potential to affect real estate investors EVERYWHERE.

That’s why THIS Business Insider headline caught our attention:

TROUBLING: Oil and gas companies are edging toward default

ANY time we see the word “default” in this hyper-leveraged daisy-chained world, we pay attention.

That’s because financial markets are FULL of debt derivatives.  These are the things Warren Buffet described as financial weapons of mass destruction.

Simply defined, a derivative is a debt instrument secured by a debt instrument… secured by a debt instrument secured by a debt instrument …through MANY layers…until finally you get to someone real…who actually owes the original debt.

Remember how back in 2008, Joe Lunchbucket’s sub-prime mortgage set off a chain reaction of derivatives implosions?Sub-prime defaults set off a chain reaction of bond defaults which eventually crashed the housing market

The entire house of cards was erected on the fundamental belief U.S. real estate prices were so solid they could support the weight of trillions of dollars of derivatives.

After all, hyper-leverage is highly profitable…as long as prices hold up.

Of course, when prices pull back, leverage is a double-edged sword…which can create HUGE losses.

Yet even when sub-prime mortgages started to blow up, markets were told not to worry.

Check out these now infamous assurances from former Fed chair Ben Bernanke:

Ben Bernanke assured the financial markets the sub-prime contagion would not spread. Oops.“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,” said Bernanke, according to a text of his remarks posted on the Federal Reserve web site.

Source: http://www.builderonline.com/money/mortgage-finance/bernanke-subprime-fallout-wont-spread_o 

No surprise the Fed has taken down the page with the speech transcript the article originally referred to.

Could it be that oil companies are the new Joe Lunchbucket?

After all, no one expected the Saudi’s would launch an all-out price war against Russia and U.S. frackers.

But they did.

And now, according to this Business Insider article based on the work of a JP Morgan analyst…

“…one in seven loans to oil and gas companies are edging toward default.Some analysts fear that many oil companies are edging towards default on their bonds

And…

“It is likely to get worse still for banks. The SNC review was done in the second quarter, and there have been further credit rating downgrades, defaults, and oil-price drops since then.”

That’s just peachy.

A month prior, Business Insider published another article based on comments by Deutsche Bank…

DEUTSCHE BANK: A wave of defaults may be just around the corner

The credit markets have been showing signs of contagion, as Chinese growth concerns and slumping commodity prices lead to widespread selling.  That has Deutsche Bank wondering if there is likely to be a wave of companies failing to pay interest on their bonds.

These are the same questions which were raised about Greece and Puerto Rico when they were defaulting on their debt.

You may recall, we weren’t overly concerned about those.

After all, everyone KNEW those guys were broke…so we didn’t think the Wall Street gamblers were reckless enough to lever up on them.

But like the U.S. real estate market, we’re concerned Wall Street might have been more confident in oil companies.

After all, what could go wrong with oil?

Here’s the point (and thanks for sticking with us to the end)…

Real estate values – and especially housing – are VERY influenced by credit markets.  

Housing prices are vulnerable to credit market shocksWhen credit gets tight, values fall.  When credit is loose, values rise.

Real estate investors and homeowners have been watching equity happen since 2009 as credit markets loosened.

But if something comes along…like oil bond defaults…credit markets might seize up again.

Of course, this is no big deal if you’re prepared. In fact, it’s a great time to go bargain shopping.  Lots of people made a lot of money buying in the wake of the 2008 crisis.

But if you’re illiquid with thin equity and tight cash flow on your properties, you might end up trapped with no capacity to take advantage of the sale.

We’re not saying oil bond defaults will be the new sub-prime that triggers a crisis.  But they could. And, it always helps to understand the bigger picture as to why oil prices are down.

So if you can see the writing on the wall…The writing on the wall says to be prepared

Better to be prepared and have it not happen…than to have it happen and not be prepared.

We’ll continue to watch this situation…and suggest you do the same.

Ahhh…real estate investing used to be so simple.  But no more.

Today, it’s wise to pay attention to the broader financial markets and industries which have the potential to severely impact interest rates, employment and credit markets.

And if you want to compress your learning curve, we invite you to invest a week to sharpen your understanding of economics, investing and real asset portfolio strategies aboard our 14th annual Investor Summit at Sea.  Click here now to learn more.

Until next time, good investing!

10/11/15: Ask The Guys – Markets, Condos, Deflation and the Future of Money

The future of money, inflation, and deflation are just a few of the recent questions topics we’ve received from you, our listeners. So many great questions piled up in our email grab bag, Walter could barely carry them into the studio.  Of course, Walter’s got those skinny little bird legs… So, let’s dive into your questions on real estate markets, condos, deflation, the future of money and how it affects you as an investor.The Real Estate Guys email grab bag

In the studio behind the silver microphones of The Real Estate Guys™ radio show:

  • Your intrepid educator and host, Robert Helms
  • His inept communicator and co-host, Russell Gray
  • The ageless Godfather of Real Estate, Bob Helms

Choosing a Good Real Estate Market

It’s no secret that real estate prices have risen in many markets.  And because of this, investors are looking for places where properties are more affordable.

Long time listeners know we think all things being equal…affordable markets will be a safer place to be in the next decade or so.

To find the best market, it's important to compare two or three.BUT…all things aren’t equal in all markets.

So when a young listener asks our opinion of Detroit as a real estate investment market, we had to take a step back and discuss what makes one market preferable to another.
After all, “good” has to be answered in the context of, “Compared to what?”

So tip #1 is…pick at least two markets to compare.  Not seventeen.  Just two or three.

Next, look for economic drivers.

What makes that market tick economically?  There should be several things.  If there aren’t, then you need to move on.

Look at population and migration trends.Population growth and migration trends are two factors to consider when evaluating a real estate market for potential investment

More people equals more demand for real estate.  Growing population and people moving in means upward pressure on rents and prices….and vice versa.

Look at infrastructure.

Schools, transportation, healthcare and retail are biggies.  The more and better of these essential “bones” that exist in a market, the more likely people and businesses will want to move there…or stay.

Consider the financial health of the government.

The financial health of local government can have an impact on the quality of life, the value of real estate and burden of taxes on businesses and residents.Is it able to provide essential services, improve infrastructure and maintain an environment conducive to economic growth?

A municipality that can’t afford to pay its police or maintain its roads, parks, etc…is likely to impose higher taxes now or in the future.  That chases away businesses and people.

You get the idea.

Of course, with that said, because of the inherent inefficiencies in trading real estate, it’s always possible to find a deal that makes sense.

We just think fighting the local market trends isn’t worth it.  As much as a hassle as investing out of area is, it’s easier than swimming upstream against a declining market.

“Live where you want to live, but invest where the numbers make sense.” – Robert Helms

Condo Conundrum

Another listener is considering investing in a residential condominium.  Like any product type, there are pros and cons.

One of the positives about condos is they tend to be more affordable than single-family homes.  So you potentially get more bang for your investment buck.

You also have the power of the group.  Depending on the size and configuration of a complex, you can have common amenities like a pool, fitness center, tennis courts, green areas, etc.

These are things many tenants would find attractive, but the costs are shared by all owners.Condos present some unique challenges for real estate investors.

On the downside, there are some things every condo investor should be aware of.

First and foremost is the financial condition of the Homeowner’s Association or HOA.

If the HOA isn’t collecting its membership dues or not collecting enough, then all those fancy amenities fall into disrepair.  Or worse, essential things like roofs, driveways and landscaping can deteriorate.

When these major expenses come up and the condo association can’t pay the bill, the owners could end up getting a “special assessment”, which is essentially a cash call.

And if you don’t pay, the HOA can place a lien on your property, impeding your ability to sell the property…or worse, the HOA can initiate a foreclosure to satisfy its lien. Yikes!

Also, on the subject of HOA’s…

Be sure to look over the HOA’s meeting minutes to see if any major issues of concern are being discussed.  If there’s trouble brewing, you probably want to know about it BEFORE you buy.  You can’t expect that the seller or the seller’s agent have read them…much less disclosed anything problematic.  Check it yourself.

It’s also important to pay attention to the percentage of renters in any given complex.

That’s because when the percentage gets too high, the condo becomes “unwarrantable”.  This is lending lingo for saying that conventional lenders won’t loan on it.

Now you might not care when you buy or own, but when you get ready to sell, if your potential buyers can’t get a loan, it limits your options for getting out.  This means a lower price…if you can sell it at all.

So it’s certainly possible to make money in residential condo investing…and many people do…it’s very important to do your homework BEFORE you pull the trigger.

Inflation or Deflation?

We got a great question from a long term listener wants to, know, “Is inflation or deflation coming?

Investments must be structured so you profit and are protected whether there's inflation or deflationThe short answer is yes.  In fact, they’re both already here.

The bigger answer is more complicated, but worth delving into because it’s very relevant to real estate investors.

Inflation and deflation affect everything from interest rates, to wages and rents, to property values...and more.

In an effort to keep it simple, we get inside what causes prices to rise or fall.

The factors which drive prices UP include appreciation, leverage and inflation.  And they are all different.

Factors driving prices down are the inverse:  depreciation, de-leverage and deflation.

Here are the quick definitions:

Appreciation is when more demand is out weighing supply.  Depreciation is when supply is out weighting demand.

Remember, an economy is just one big auction with bidders and sellers.  The more people who “appreciate” an item and bid for it…especially against a static or shrinking supply…the higher the price will rise.

Of course, if supply increases relative to demand, the sellers lower the price to attract buyers, and prices fall.

It’s true for stocks, houses, labor, commodities and pretty much everything.

But there’s more…

Inside “demand” is “capacity to pay“.  After all, if you can’t afford something, it doesn’t matter how much you demand it.

This is where “leverage” comes in.  And leverage dramatically affects “capacity to pay”.

When people who want something they can’t afford today with the money they already have, financing allows them to bring future earnings into the present.  Those funds are used to bid UP the price.

A big part of the explosive rise in the cost of college has come from the explosion in student debt.  A lot of money from the future came into the present and bid up the cost of college.

The same thing happened in housing over the decades following the Depression.

If you can find someone really old, ask them about home loans in the 40’s.  They were maybe 5 or 10 years.  Today, they’re 30 years.  In Japan, they can be 100 years!

That’s a lot of future money (leverage) coming into the present to bid up prices.

Of course, when people can no longer afford to go into debt…or are unwilling to…then all that purchasing power goes away.

And LESS leverage means downward pressure on prices.

The third component of price change is the supply of currency (not debt, just cash) that is in circulation.

The MORE money being circulated, the more can be used to purchase things.

And if the amount of things doesn’t change, the net result is it costs MORE to buy the SAME things.  This is inflation.

Of course, the reverse is true.  But since the central banks control the printing presses and are committed to INFLATION, the probability of true deflation is unlikely.

But that doesn’t mean prices won’t fall. Just take a look at oil.

Because the SUPPLY of oil exploded with the fracking industry, while the DEMAND for oil didn’t grow as quickly, the price of oil dropped.

Meanwhile, because the DEMAND for properties to rent has grown (U.S. home ownership is at the lowest level since 1967) relative to SUPPLY of units available to rent (builders haven’t added as many new units as there are people wanting them)...rents have gone UP.

So for those who call rising prices “inflation” and falling prices “deflation”, BOTH are happening at the same time.

Of course, now you know there’s a lot more to rising and falling prices than just inflation and deflation.

The art is to look at anything you’re investing in and ask how ALL the factors are most likely to affect it.  And then invest accordingly.

Yes, we wish it was simpler too.  But it is what it is…which is why we study all the time.

Could the Yuan replace the Dollar? How would that impact the future of money?China has been pushing for the yuan...aka the renminbi...to replace the U.S. dollar as the world's reserve currency

Another topic we study is currency and the future of money.

Because most of the world transacts most of its business in…or based on…the dollar, we pay attention to it.

Lately, China’s been making moves to push its currency (the yuan or renminbi) to be on par with the U.S. dollar, the British pound and the Japanese yen.

The head of the International Monetary Fund has already publicly stated it’s not a question of if, but a matter of when this will happen.

One listener wonders what to make of all this.

Join the crowd.  We spend quite a bit of time contemplating this very thing.  In fact, one of the major discussion topics on our next Investor Summit at Sea™ will be “The Future of Money”.

At this stage, the trend for the demand of the dollar as a currency (medium of exchange) is actually going down.

At the same time, the supply of dollars has gone up…thanks to trillions of dollars injected into the economic system through multiple doses of quantitative easing by the Fed.

Based on that alone, you’d think the value of the dollar would FALL.  After all, less demand and more supply means a falling price.

So then WHY has the dollar been so strong? And how will that impact the future of money?

Because people are using it not just as a currency, but as a store of value.  So while demand for the dollar as a currency has fallen, demand as a store of value (a safe haven) has increased.

So back to the listener’s question…what happens if the yuan becomes a reserve currency?

Is the Yuan eventually going to overtake the dollar as the world's reserve currency and the future of money?If the yuan becomes a reserve currency, it legitimizes its role not just as a medium of exchange, but also as a store of value.

And if China backs the yuan…even partially…by gold (in addition to its substantial reserves and robust manufacturing economy)…it’s conceivable that many investors would dump dollars and buy yuan.

Consider that Britain is issuing the world’s first yuan denominated bonds.  It’s just a clue that the yuan is moving ever closer to becoming a serious player on the world stage.

So if demand for the dollar falls against the backdrop of the trillions printed in the wake of the 2008 financial crisis, then the value of the dollar could fall SUBSTANTIALLY.

Worse for dollar holders, is that once the world begins to lose faith in the dollar as a store of value, the rush for the exits begins.  And this exacerbates the fall of the dollar.  It’s an ugly downward spiral.

What does that mean to you as a Main Street real estate investor?

The first and most likely impact will be a rapid rise in interest rates and in the dollar denominated value of anything real.

If you own real assets, like real estate and precious metals, then you’ll preserve your relative position.

The dollar value of those things will go up, but it won’t mean anything because the dollars won’t be worth as much.

It’s like that $50,000 3 bedroom house from 1970 that’s now worth $500,000.

The house didn’t get bigger or more useful.  The dollar just fell, so now it takes more of them to buy the same real value.

But even though you aren’t richer in real terms, you’re better off than if you didn’t own the house.  So owning anything real when a currency is losing value is a safer place to be.

Next, if you’ve used low fixed rate financing, as interest rates rise, you’re not affected.When a currency collapses, owing real assets is far safer than owning paper assets.

In fact, you have a competitive edge because anyone trying to buy when interest rates are high will have to charge much higher rents in order to cover their costs.

So you can offer low relative prices to your tenants in a time of economic weakness and still be positive cash flow.

Your tenants will probably be very grateful and loyal, so you’ll have less vacancy and less hassles.

All this to say…the more you understand what’s happening, why it’s happening, how it affects you and what you can do about it…the less scary all of these changes are.

Because change is coming whether you’re ready or not…and whether you do anything or not.  Obviously, it’s probably a good idea to pay attention and take appropriate action.

We’ll be here watching, reporting and commenting on the future of money and other topic.  So stay tuned to The Real Estate Guys™ radio show.  And if you really want to compress your learning curve, take the big leap and join us on our next Investor Summit at Sea™.

Meanwhile, listen into this enlightening edition of Ask The Guys!

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