At this rate, something’s gotta give …

Real estate investors tend to like low interest rates.  

After all, low rates mean lower payments for the same size mortgage … or a bigger mortgage for the same payments.  Nice.

The current Wizard of Rates is Fed chair Jerome Powell.  And he just showed up on 60 Minutes and told everyone …

“‘We don’t feel any hurry’ to raise rates this year.”

Many Fed followers consider this a bit of an about face.

And those who use the Fed’s actions as a barometer of economic health and stability are asking what this more dovish stance means.

After all, isn’t the motive of low rates to goose a sluggish economy?  So then what’s all that healthy economy talk?

Also weird is that just over six months ago, Powell stood at a podium and defended his plan to RAISE rates.

Then two months ago he said, ‘The case for raising rates has weakened …”

Last summer, he apparently couldn’t see six months ahead … and now all of the sudden he’s clear for a year? 

Maybe the answer is here …

Fed Chair Powell: ‘The US federal government is on an unsustainable fiscal path’
– Yahoo Finance, 2/26/19

Summit faculty member Peter Schiff constantly reminds us … the economy is addicted to cheap money and Uncle Sam is addicted to spending.

Of course, addicts … and their enablers … sometimes take extreme steps to keep the party going.

So that could mean more money printing … because that’s how the Fed keeps rates down.  And as any debt-ridden household knows, lower interest rates help make a giant debt load a little easier to service.

That’s probably more important than anyone’s letting on.

Because with record corporate, consumer, and government debt … there’s a lot of cheap money junkies out there.

So … maybe the Fed’s just trying to keep them all supplied?

Of course, we have no way of really knowing what data or philosophy is driving Jerome Powell’s decisions.  We just watch and react.

But based on all the green lights flashing across stocks, bonds, oil, and precious metals … it looks like asset price inflation is the bet du jour.

At least for now.

But even though it’s party time in the Wall Street casinos, real estate investors need to play the game differently.

We don’t have the luxury of jumping in and out of positions on a moment’s notice.  Besides, that’s not our game.

We’re not trying to buy low and sell high.  Real estate investors work to find a spread between the cost of capital and the cash flow on capital invested.

So let’s switch from the macro view and get a little closer to Main Street … and glean some lessons from self-storage investors.

But before you tune out, this isn’t about self-storage … it’s about how real estate investors are reacting to an big influx of capital. 

Because as cheap capital floods any market (niche, geography, asset class) it affects prices and yields.   So sooner or later, investors move around searching for opportunities.

And that’s what’s happening in self-storage … 

Self-Storage Investors Start Looking at Smaller Markets to Capture Higher Yields
National Real Estate Investor, 3/11/19

This headline caught our attention because of what the Fed is doing with interest rates.  And as we dug deeper, we found some notable excerpts …

“Investors are being more careful about which assets to bet on …”

“ … worried about the number of new … properties …”

 “To avoid competition from new properties coming on-line … buyers have turned their attention to secondary markets …”

“ … buyers in overbuilt markets are taking more time to underwrite their deals, double-checking assumptions about future leasing and rent growth.”

There’s more, but let’s stop and process these thoughts …

First, these are lessons investors in ANY income-property niche should take note of.  So it’s not just about what’s happening in self-storage.

Notice the attention to supply and demand. 

We see lots of rookie real estate investors crunch the numbers of the property … but completely ignore the inventory pipeline of the market.

And of course, there’s also the supply of prospective renters in a market.  That’s why we also look at population and migration trends.

The article also highlights something we’ve been talking about for a while …

People, businesses, and investors will “overflow” from mature primary markets into emerging secondary markets in search of affordability.

The danger is getting into an emerging market ahead of a migrating problem.

Think about it …

If investors are moving into secondary markets to find better opportunities than in an over-built market … what happens when builders move in for the same reason?

Cheap money makes building easy.  Developers love it.

But Austrian economists warn of “malinvestment” … when bad investments look good primarily because money is cheap.

All long-term debt needs stable long-term cash-flow to service it.  If supply exceeds demand, and rents and cash flows fall … debt can go bad fast.

So when looking at markets, pay attention to the capacity of market to absorb more inventory without collapsing rents.

Because if you go in with optimistic underwriting (tight cash flow) and supply expands faster than demand and rents fall … you could be in trouble.

That’s why self-storage investors are “taking more time to underwrite their deals”.  Maybe you should too.

Hot markets can be intoxicating for investors.  It’s easy to jump on a hot trend hoping to catch a nice ride …

Despite these worries … investors keep paying higher and higher prices … relative to income.  Cap rates … are at their lowest point on record.”

“They continue to trend lower even though interest rates have begun to rise …”

“There is a tremendous amount of capital chasing yield.

That’s what happens when interest rates are low.

Don’t get us wrong.  We’re not complaining.  We like low-cut interest rates as much as the next guy.  But hot markets can be fickle. 

So the moral of this muse is to stay sober and diligent about your underwriting … and be very wary of using short term money to invest long.

Until next time … good investing!


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Rent control … a sign of the times?

A very big real estate story splashed across mainstream news recently, but got buried underneath (insert the sensational political headline you’re sick of) …

Oregon Okays First Statewide Mandatory Rent Control Law

 Associated Press, 2/28/19 

Okay, we admit this is a government policy … so it’s political.

But politics is easy to laugh at when it’s happening in cyberspace.  It’s a little less funny when it hits hard on Main Street.

For thousands of Main Street landlords in Oregon, politics just landed hard … right in their portfolio.

Of course, as is often the case, there’s more to the story than meets the eye.

So even if you don’t own property in Oregon … or won’t for much longer 😉 … there’s a lot to glean from this watershed legislation.

We could debate whether or not government should step into a “free” market and regulate the price of anything … from housing to healthcare to haircuts.

But it doesn’t matter if WE think they should or shouldn’t.  They do.

And as a broken financial system keeps growing a wedge between haves and have-nots … we’re guessing more politicians will try to legislate affordability.

So like it or not (we don’t), rent control is something every investor everywhere should be watching out for.

Let’s take a look at how rent control works in the real world …

Real estate investors buy property to produce income and build long-term wealth.  The more income a property produces, the more it’s worth.

In order to create more wealth, real estate investors need to create more income … which means creating more value that a tenant is willing and able to pay for.

The essence of real estate investing is using capital to acquire long-term cash flow.  This is how real estate investors think.

Make sense so far?

Politicians, whom we’re guessing are NOT real estate investors, think investment starts and ends at acquisition.

Unless you’re Warren Buffet, paper asset investors don’t buy stocks with the intention of improving the cash flow.

You just buy, own, and sell.  Maybe collect some dividends along the way.

But when value-add real estate investors buy properties in poor condition with lousy amenities …

… they’re excited about the potential to make further investments into the property AFTER the acquisition.

For example, a property without a washer and dryer might rent for $50 a month less than one with that amenity included.

So for perhaps $600 per unit additional capital invested, a landlord could acquire $600 per year cash flow.

That’s a good ROI.  It’s also a nice amenity for the tenant.

You could say the same about covered parking, self-storage, a laundry room, a workout room, free wi-fi, and on and on.

Rent control caps the owner’s ability to create positive returns by improving properties.  So guess what?  They don’t.

So crappy properties stay crappy … because the incentive to improve them is removed.

And as nicer properties deteriorate, there’s not much incentive to maintain them above the bare minimum.

With profit potential capped on the revenue side … and no cap on the fixed expense side …

… as margins get squeezed, property owners have no choice but to cut services and defer maintenance.

So rent control makes both landlords and properties cheap.  In a bad way.

And because there’s always more people on the low-end of the economic scale (part of the reason Oregon is doing this) …

… there will always be a line of people waiting to get into these “affordable” rentals … even though they’re crappy.

And with little market pressure on landlords to compete for tenants, there’s even less incentive to improve properties, add services and amenities, or lower rents.

But it gets “better” … or actually worse …

As property values decline … or stagnate relative to rising costs of labor and materials … incentives for developers to build new inventory declines too.

Rising values are what attract developers to create more supply … which is the answer to moderating rising values.

Yes, it’s sad when marginal tenants’ incomes don’t grow as fast as rents … or other inflating necessities.

But capping the property’s growth doesn’t pull the tenants up.  It pulls the properties down.

It’s a bad scene. That’s why nearly every investor we know stays away from rent control areas.

But it’s also important to consider WHY this is happening …

The Fed dropped interest rates to zero for nearly a decade, then pumped trillions of dollars into the financial system … primarily to inflate asset values (stocks, bonds, real estate).

It worked … at least for some people.

Those paying attention, with both resources and financial education … snapped up the money, rode the equity train, and got much richer.

You might be one of them … or hope to join them.  We hope you succeed.

You can’t blame people for playing the game using the rules and circumstances in their own best interests. But politicians do.

But the real issue is the financial policy wizards thought these now richer folks would then spend the money … and build businesses … and prosperity would trickle down to Joe six-pack and Larry lunch-bucket. 

In many ways, it worked.  The problem is the wealth didn’t allocate very evenly.  It never does.

Certain markets got a disproportionate share of the goodies. 

And even though Oregon wasn’t really on the list … it was nearby … and so became a collateral beneficiary /victim.

Lots of cheap money ended up in tech stocks, which blew up real estate values in tech hubs like Seattle and Silicon Valley.

As prices shot up, folks in those uber high-priced markets got pushed off the back of the bus … and gravitated to nearby “affordable” places like Oregon, Nevada, and Arizona.

Of course, the folks already in those nearby affordable areas end up competing with the new people who see everything as cheap … and easily bid things up.

It’s a regional variation of gentrification … with its roots in paper asset bubbles blown up by cheap stimulus money.

But politicians are notoriously myopic when it comes to “fixing” things … especially financial problems.

As Peter Schiff says, “Good economics is bad politics, and good politics is bad economics.  That’s why you always get bad economics from politicians.”

Sadly, there are signs it could get worse as politicians try to contain the consequences of an over-financialized economy.

So even though we tout the opportunity to invest in affordable areas ahead of the crowds, it’s REALLY important to stay aware of the political climate.

If you bought into Oregon ahead of the migration …

… you’re now the proud owner of a property where the state government views you more as a public utility to be regulated than a free entrepreneur to be incentivized.

So you’ll either need to get out while the getting’s good … or not as bad as it could get … or start brushing up on your C-class property management skills.

Until next time … good investing.


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Seven lessons for better investing …

With less than 7 weeks remaining in 2018, we’re taking a short break from our obsessive-compulsive perusal of the financial news.

Because with an exciting New Year about to begin … full of hope, challenges, and opportunities … it’s a great time to focus on some important fundamentals.

Lesson# 1:  Invest in yourself first and frequently

Think of the amount of money you put into fixing up a property in the hopes of generating a few thousand dollars of profit or cash flow.

How much MORE important are YOUR education, skills, and network over the rest of your career?

For a fraction of what you’ll spend sprucing up just a single property, you can increase your sales skills, gain more strategic clarity, expand your economic education, and grow your professional network.

Any ONE of those things can pay you back 10x or more in just a few years.  Plus, investing in your education and networks sets you up for …

Lesson #2:  Focus on relationships, not transactions

Sure, we understand you need to do deals … to produce profits … so you can pay the bills and keep investing.  But transactions are really just a by-product of great relationships.

When you put the transaction over the relationship, you risk killing the goose that lays the golden eggs.

And remember, every person you know knows MANY more people you don’t.

So even if the person in front of you isn’t ready to do a deal today, someone they know might be.

This is where YOUR education and network come into play …

When you know things other people don’t, but need to … or when you know people other people don’t, but need to …

… YOU have something of great value to enhance a relationship or work through one contact to reach another.

Most people won’t give you a referral if they think you want to sell their referral something.

But they’ll happily connect you if they think you will HELP their referral.  That’s based on trust, which is based on the relationship.

It sounds so easy … and it is.  But for some reason, most people focus on the small value of the transaction and miss the HUGE value of the relationship.

Lesson #3:  Emphasize mission and values

The old adage says, “People don’t care how much you know, until they know how much you care.”

It’s true.  But it goes further …

People do business with people and brands they trust.  And when you focus on mission and values, and filter all you say and do through them …

… over time, you’ll create a trustworthy reputation.

Of course, a good, trustworthy reputation will attract more people into your life … and that means more relationships, and ultimately, more deals.

Lesson #4:  Build a business and portfolio that works for YOU … and not vice-versa

We’re old enough to remember when Michael Gerber’s now classic title, The E-Myth, was the hot new business book.

But the timeless lessons are as applicable today as ever.

Too many people … employees, entrepreneurs, and investors … do the “two-step.”

They set out to do whatever they can find to make money based on the belief that if they can just make enough money, THEN they can go do what they REALLY want.

The problem is when you don’t love what you do, either you let off the gas and never really succeed …

… or worse, you lose yourself in service to a business, portfolio and lifestyle you don’t really enjoy.

And then you just hold your breath until the day you can sell it or retire on your investments.

Better to ask yourself EARLY what’s really important to you … how you want to live … what you love to do … and then build a business and/or portfolio around THAT.

It’s a harder problem to solve, but you’ll LOVE the answer when you find it.

Lesson #5:  Develop and maintain a clear vision

We all run around with pictures in our mind. How we see the world … how we see ourselves … what we’re working to accomplish.

The challenge for many is the picture is fuzzy.

It’s like driving in the fog.  You have a sense of direction … but aren’t exactly sure how to get there.

You’re feeling your way … scared to go too fast and miss a turn or fall into a ditch.

Yet some people are taking bold action and moving aggressively through life.

What’s the difference?

Clarity.

Bold action takers can “see” exactly where they’re going, what they’re building, and WHY … and that vision inspires and emboldens them to move towards the goals with enthusiasm and confidence.

We say, “When you have clarity of vision, strategy and tactics become evident.”

So when you’re not sure what to do, focus on your vision.  Just seeing the end from the beginning is often enough to tell you what to do next.

Lesson #6:  Always see the downside

Really?  Doesn’t focusing on the negative create paralysis?

Only for amateurs.  Pros are more afraid of what they DON’T see than what they do … because you can’t avoid or manage risks you aren’t aware of.

Billionaire real estate investor Sam Zell says everyone sees the upside.  That’s what they look for and what motivates them to go for it.

But Zell says his success comes from being able to see the DOWNSIDE too …  and then making plans to mitigate it … even if it means walking away.

Pessimists ONLY see the downside and can’t act.  Optimists only see the upside and hope for the best.

We’re pretty sure hope is not an investment strategy. Be a realist and get good at seeing and managing risk.

Lesson #7:  Always pay attention to cash and cash flow

Profit and net worth are important.   Cash and cash flow are essential.

A business mentor of ours once taught us that cash is like oxygen, while revenue is like water, and profit is like food.

You can survive for a long time without profit … if you have revenue and cash.

You can survive for a little while without revenue … if you have cash.

But run out of cash … and you’ll be dead very soon.

Pre-politician Donald Trump once told us it’s always good to have cash in the downtimes. We say, “Cash Flow controls and Cash Reserves preserve.”

So have some liquidity at all times. Write off the lost opportunity cost on the cash as an insurance premium.

And do NOT count on credit for liquidity. We did that once … and it didn’t end well.  Lenders tend to cut off credit when you need it the most.

Bonus Lesson:  Use firewalls to avoid portfolio contagion

Let’s face it.  Some investments are more risky than others.

But if you don’t have firewalls, then just ONE risky investment can implode your entire portfolio.

You might have a solidly built, cash-flowing portfolio of properties, and a high net worth with good liquidity, and hedges against inflation and deflation.

But just ONE lawsuit, or personal loan guarantee on just ONE risky deal, or pulling money out of performing property or business to feed a loser …

… and EVERYTHING goes … UNLESS you use legal structures, mental discipline, and emotional control to isolate risk.

It’s a bigger topic than we have time for here, but we address it in ourIntroduction to Strategic Real Asset Investing webinar.

You can get the webinar as a free bonus when you order the Future of Money and Wealth video series … which is a great primer on several risks ALL investors should be paying attention to right now.

Until next time … good investing!


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The mid-term morning after …

If you’re an American, unless you’ve been in a coma or living under a rock, you know the United States just had one of the most energetic mid-term elections in quite some time.

The day after, both sides are disappointed … and both sides are claiming victory.

One of the advantages of being older is we’ve seen this movie before.

In our younger days, when elections didn’t go our way, we thought it was the end of the world.  Today, not so much.

It doesn’t mean we don’t care.  We do.  And certainly, politicians and their policies have a direct impact on our Main Street investing.

But it’s in times like these we’re reminded of the beautiful, boring stability of real estate.

Because while all the post-election drama and speculation plays out, people still get up and go to work and pay their rent.

And though the Trump-train just got slowed … like Barack Obama before him, big chunks of his agenda got pushed through early … and are likely here to stay for a while.

In other words, it doesn’t look like Obamacare or the Trump tax reform will be repealed any time soon.

More importantly, investors of all stripes … paper and real … now know what the lay of the land is for the next two years.

Early indications (based on the all-green dashboard of Wall Street) reveal there’s cash on the sidelines waiting to see what happened … and now that gridlock is the answer… money is pouring into everything.

We know that sounds counter-intuitive.  But while political activists push change … too much change too fast makes money nervous.

Investors and entrepreneurs need to make decisions about long-term risk and reward.  And when the world is changing too fast, those decisions are harder to make.

Way back in the lead-up to the 2010 mid-terms, we penned this piece about a concept we call “healthy tension.”  Just change the team colors and it’s just as applicable today as it was back then.

The point is that money and markets like gridlock.

At this point, from an investing perspective, it doesn’t really matter if any of us like or dislike what happened … politically.  It’s done.

Now we all just need to decide what it means to us and how to move forward … because life goes on.

So bringing it all back to Main Street …

We’re guessing all the great Trump-tax reform benefits for real estate investors… from bonus depreciation to Opportunity Zones … are here to stay.

And as we said just a week ago …  there’s probably a lot more money headed into real estate.  Nothing about this election appears to change that.

So gridlock inside the beltway means stability on Main Street.

Sure, it might be a little boring.  But real estate investors are used to boring.  And when it comes to long-term wealth building … boring is good.

Until next time … good investing!

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There’s MORE money headed into real estate …

In the swirling sea of capital that makes up the global economic ocean we all invest in …

… big fund managers are pay close attention to a variety of factors for clues about the ebb, flow, and over-flow of people, business, and money.

Right now … it seems like a BIG wave of money could be headed into real estate.

Of course, compared to stocks, these things aren’t simple to see and track.  And they’re even harder to act on.

Stocks are easy … if interest rates fall and money floods into stocks, you just buy an index fund and enjoy the ride.

Just remember … the dark side of easy and liquid is crowded and volatile.

So unless you’re a seasoned trader, trying to front run the crowd to both an entrance and exit in stocks can be a dangerous game.

But real estate is slow.  It’s inefficient.  It moves slowly.  There’s drama.

And yet, the BEAUTY of real estate is its messiness.  Embrace it.

So here’s why we think more money could be flowing into real estate soon …

Opportunity Zones

We’ll be talking about this more in the future, but the short of it is the new tax code creates HUGE incentives for current profits from ANYTHING (including stocks) to make its way into pre-identified geographic zones.

According to The Wall Street Journal,

“U.S. is aiming to attract $100 billion in development with ‘opportunity zones’…”

“could be ‘the biggest thing to hit the real estate world in perhaps the past 30 or even more years’ …”

 Private Equity Funds

 Another Wall Street Journal article says …

“Real estate debt funds amass record war chest

“Property funds have $57 billion to invest …”

Pension Funds

This Wall Street Journal article indicates BIG pension funds are getting into the game too …

“Big investors like the California teachers pension are backing real-estate debt funds …”

One reason savvy investors watch economic waves is to see a swell building … so they can paddle into position to catch a ride.  It’s like financial surfing.

Time will tell where all these funds will land, but it’s a safe bet it won’t be in smaller properties.  MAYBE some will end up in residential mortgages, but don’t count on it.

So what’s the play for a Mom and Pop Main Street investor?

Start by watching the flow …

We’ll be watching the markets and product types the money goes into.

Then we’ll be watching for the ripple effect … because that’s probably where the Main Street opportunity will be.

For example, if money pours into a particular geography, it’s going to create a surge of economic activity … especially if the funds are primarily used for construction.

But we’d be cautious about making long-term investments in any place temporarily benefiting from a short-term surge … so it’s best to look past the immediate impact.

Think about the long-term impact … which is a factor of WHAT is being built.

Fortunately, major projects take many months to complete … so they’re easy to see coming IF you’re paying attention.

We like to plug into the local chamber of commerce to track who’s coming and going in a market place … and why.  The local Business Journal is also a useful news source to monitor.

The kinds of development that excite us include factories, office buildings, industrial parks, and distribution centers.  Those mean local jobs.

We’re less excited about shopping centers, entertainment centers, and even residential and medical projects.

Because even though they mean jobs too … they don’t DRIVE the economy.  They feed off it.

Of course, we’re not saying those things are bad … but they should reflect current and projected growth … not be expected to drive it.

Hopefully, developers are doing solid market research and are building because the local population and prosperity can absorb the new product.

Then again, when money is aggressively pumped in, sometimes developers get greedy … and areas get OVER-built.

So don’t just follow the big money.   Be sure you understand the market.

Watch for the over-flow too …

Sometimes money moving into a market creates prosperity only for some … and hardship for others.

Silicon Valley is a CLASSIC example.

As billions flood into the market through inflated stock prices, many people get pushed off the back of the affordability bus.

But even though it’s hard for those folks, they end up driven into adjacent markets which are indirectly pushed up.  It’s overflow.

That’s when you see headlines like these …

Boise and Reno Capitalize on the California Real Estate Exodus –Bloomberg, 10/23/18

“Sky-high housing prices in the Golden State bring an echo boom—and new neighbors—to other Western states.”

Sure, in Silicon Valley’s case, the flow of money is cheap capital pouring into the stock market and enriching tech companies … and their employees.

But it doesn’t matter which door the money comes in when it flows into a market.  That’s why it’s best to look at ALL the flows into a market.

And when the flow of capital drives up investment property prices in a market (depressing cap rates), even investors will overflow into secondary markets in search of better yields.

The lesson here is to watch the ebb, flow, and overflows as capital pours into both the debt and equity side of real estate through Opportunity Zones, private equity funds, and increasing pension fund allocations.

You never quite know how the market will react, but you can be sure it will.

The key is to see the swell rising early so you can start paddling into position to catch the wave.

We do it by looking for clues in the news, producing and attending conferences, and getting into great conversations with the RIGHT people.

We encourage YOU to do the same.

Until next time … good investing!


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The future of interest rates …

WOW … the news is FULL of things to keep an investor awake at night.

Some of it’s so exciting, you can’t wait to seize the opportunity.  Other things are so spooky, you want to pull the covers up and hope it’s just a Halloween gag.

Right now, stock market investors are learning it can be a mistake to try to ride the bull all the way to the peak … squeezing every drop of paper profit out …

… falsely believing you can beat the bears to the exit.

Stocks fall for 12 of the last 14 trading sessions – Yahoo Finance, 10/23/18

Yeah, but that’s Wall Street …

Existing-Home Sales Decline Across the Country in September – National Association of Realtors, 10/19/18

Oops.  Meanwhile …

Homeowners poised to start tapping $14.4 trillion in equity – CNBC, 10/19/18

Big banks reveal challenges in consumer credit, mortgages – Yahoo Finance, 10/15/18

“banks are seeing challenging headwinds … as charge-off rates – a measure of defaulted balances –  continue to rise.” 

So while there are MANY things to like about what’s going on in the U.S. economy …

U.S. named world’s most competitive economy for the first time in 10 years– Washington Post c/o The Chicago Tribune, 10/17/18

We remind you (and ourselves) … the economy and the financial system supporting it are two VERY different things.

That’s why you can have two camps … one saying the economy is strong … and another saying disaster is looming.  And they’re BOTH right.

Of course, “disaster” does NOT mean the end of the world … or a descent into some Mad Max post-apocalyptic anarchistic society.

Disaster can be as simple as a rapid shift in asset or currency values that the majority of people are on the wrong end of.

Just like the 2008 crisis ( a warm-up for what Peter Schiff calls The Real Crash which is yet to come) …

… those who were not aware and prepared got CRUSHED … while those who were made MILLIONS.

So “disaster” isn’t a universal experience when the economic winds shift suddenly.

It’s more a personal choice (often by default from neglect) and depends on the set of YOUR personal financial sail.

You’ll either get capsized, face severe headwinds … or you’ll catch a gust of wind at your back and sail on to new fortunes.

So watching the changing economic winds is an important responsibility of any serious investor.

Interest rates are the barometer which signals a change in the economic winds.

That’s why pro investors fixate on every move or utterance of the Federal Reserve, which is ONE of the most powerful influencers of interest rates … but NOT the only one.

No investor left behind …

 Interest rates are a by-product of the bid on bonds, which are debt securities.

So if the U.S. Treasury decides to borrow money (which they do ALL the time), the bid on those securities sets the yield.

The lower the bid, the higher the yield and vice-versa.

Falling interest rates (yields) come from a STRONG bid on bonds.  That is, there’s lots of buyers for bonds relative to the supply of bonds for sale.

When the Fed wants to push rates down, they add to market demand by BUYING bonds … bidding UP the bond price and driving DOWN the yield.

Are you with us so far?

But when the Fed wants to push rates UP, they do NOT bid on bonds (leaving demand up to the open market without the Fed’s bid).

Sometimes, the Fed will even SELL bonds they already own (“unwinding their balance sheet”) … adding to the supply offered by the Treasury (and other sellers like RussiaChina and even Japan).

And more supply and less buyers means bids go down … so yields go UP.  Make sense?

Apparently, government officials aren’t concerned about soft demand for Treasuries …

Treasury Secretary Mnuchin: I won’t be ‘losing any sleep’ if China dumps US bonds in retaliation over trade – CNBC 10/12/18

“If they decide they don’t want to hold them, there are other buyers …”

Okay then. No worries.  But …

Foreign Buying of U.S. Treasurys Softens, Unsettling Financial Markets –Wall Street Journal, 10/23/18

“Yet it is clear that the foreign pullback has helped fuel a bond selloff this fall, which has driven the 10-year yield to 3.17% and has shaken the nine-year-long rally in U.S. stocks …”

There’s a reason stocks are tanking and it has little to do with the economy.  That’s why President Trump is so upset with the Fed.

But it seems to us rising interest rates could be bigger than the Fed.  And the world looks different if the Fed loses control of interest rates.

Head spinning yet?  That’s okay.  It can be complex.  But there’s a reason big money watches the bond market like a hawk.

We try to keep is simple and just focus on the big concepts and how they trickle down to our Main Street investing …

More bonds than buyers mean rates are likely to rise.

For real estate investors, it means downward pressure on values … and more caution when using short-term financing.

Of course, when you can lock in long-term rates, today’s debt actually becomes an asset over time.  But that’s a topic for another day.

And just in case the ramblings of two dudes with mobile microphones and a fetish for news articles don’t make the case …

Last Saturday, we paid a visit to the New York home of former Director of the Office of Management and Budget or OMB (like the OMB numbers you see on your tax forms) … David Stockman.

Of course, we plunked down our mics and recorded a FASCINATING interview at his kitchen table … looking out his penthouse window at the stunning New York City skyline.

If you have any doubt Stockman is a world-class brainiac, buy a copy of his EPIC tome, The Great Deformation.

Bring your lunch and dictionary, but it’s totally worth it.  Only Robert Kiyosaki’s copy is more highlighted and marked up than ours.

You may not agree with Stockman’s politics, but he’s well-qualified to have an opinion on economic matters.  So we listen carefully.

Stockman believes even higher interest rates are coming to an economy near you.

So if there’s any doubt all this airy-fairy macro-economic babble matters to YOUR Main Street investing … think again.

And be VERY thankful these things roll out slowly.

There’s still time to re-arrange your portfolio and activities to fall squarely in the “aware and prepared” camp … and NOT in the “WTF is happening?” camp.

Of course, you can’t just float along with the crowd … unless you’re very careful to pick the right crowd.

But even then, it’s dangerous to fall asleep at the controls of your portfolio.

If you’re super studious, you can probably load up on books, podcasts, newsletters, video courses, and news articles … and you’ll be ahead of most.

And if you’re like us, you’ll do all that.

But you’ll ALSO invest to get in the right rooms with the right people so you can have portfolio-saving conversations.

Since you’ve read this far, you should consider joining us at both or either theNew Orleans Investment Conference and the Investor Summit at Sea™.

It’s where we go to get around a lot of REALLY smart people for SUPER enlightening conversations.

And it’s arguably more important RIGHT NOW than in recent memory …

,,, because for many investors, this is the first time in their investing career they’ve faced a rising interest rate environment.

You can learn by trial and error (expensive and painful) … or by gleaning wisdom from seasoned investors and well-qualified subject matter experts.

It’s probably obvious which one we advocate.

Until next time … good investing!


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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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China, gold, oil, the dollar and YOU …

There’s a BIG story developing … something we’ve been tracking for years …

… which might be about to create a SEA CHANGE for investors all over the world … including YOU.

Here’s a headline you SHOULD be aware of but might have missed …

China sees new world order with oil benchmark backed by gold – Nikkei Asian Review, September 1, 2017 

There’s SO much to say here, it’s hard to know where to start.

We’ll hit some highlights … and refer you back to some of our previous coverage of this VERY important topic.

First, let’s quickly consider …

WHY this matters to real estate investors … 

If you denominate your net worth, assets, debt, or income in U.S. dollars, then you should care VERY MUCH about the future and health of the dollar.

Ditto if you utilize debt or care about the impact of interest rates (and you should) … on your mortgages, the stock and bond markets, as well as the overall economy.

And if you’re an American or invest solely in the U.S., the health of the U.S. dollar and economy should be of even GREATER interest to you.

So yes, what China is doing with gold and oil matters a LOT to real estate investors … especially in the United States.

What’s the big deal?

First, this recent move by China is the latest in a long series of moves they’ve been making to undermine the role of the U.S. dollar as the world’s reserve currency.

This is something we’ve been tracking since 2009, when we first read about China’s concerns about U.S. debt and interest rate policy.

We continued to track China’s actions and made this the focus of our remarks in our 2013 presentation at the New Orleans Investment Conference.

Shortly thereafter, we expanded on the situation in our special report on Real Asset Investing.

We’ve also talked about it on our radio show and in our blog.

So if you’re new to this whole subject, we recommend you go back and review those reports, broadcasts and blogs.

For now, just understand China has been overtly, aggressively and systematically working to undermine the U.S. dollar’s uniquely powerful role in global finance.

This latest move is a HUGE next step in unseating the dollar’s dominance.

The rise and (potential) fall of the U.S. dollar …

If you’re unfamiliar with U.S. dollar history, schedule some time to study it.  It’s too big a topic to unpack here.

For now, we’ll simply point out that the U.S. dollar was originally backed by gold from its inception and when it ascended into its role as the world’s reserve currency at Bretton Woods in 1944.

The gold backing was broken in August 1971 when then-U.S. president Richard Nixon defaulted on Bretton Woods.  Gold soared and the dollar crashed.

The U.S. quickly cut a deal with Saudi Arabia … where the Saudis would use their influence to force oil shipments to be settled in U.S. dollars.

This “petro-dollar” deal created a huge and persistent demand for dollars …

… and protecting the petro-dollar has been a focus of U.S. foreign and trade policy ever since.

To further bolster the dollar, then-Fed chair Paul Volcker jacked-up interest rates to over 20%, which had a profound impact on the U.S. economy … and real estate.

All this to say … gold, oil, the dollar, and interest rates all impact each other … and have been VERY important to maintaining U.S. dominance around the world.

So it’s no surprise other countries looking to increase their influence in the world are interested in all those things … and you probably should be as well.

Chinese currency to be backed by gold …

So let’s take a look at some of the notable statements in the news article …

“Yuan-denominated contact will let exporters circumvent US dollar
“Yuan-denominated gold futures have been traded on the Shanghai Gold exchange as part of the country’s effort to reduce the pricing power of the U.S. dollar

“China is expected shortly to launch a crude oil futures contract priced in yuan and convertible into gold … could be a game-changer for the industry.”

“… will allow exporters such as Russia and Iran to circumvent U.S. sanctions …”

“… China says the yuan will be fully convertible into gold in exchanges in Shanghai and Honk Kong.”

Think about this …

When oil exporters … like Iran, Russia and Venezuela… can circumvent the U.S. dollar in oil trade … and get GOLD instead of U.S. paper which can be printed out of thin air …

…which do YOU think they’ll choose?

And how influential will U.S. sanctions be (i.e., getting locked out of the U.S. dollar and banking system) when countries can do business without the dollar?

How important will GOLD become as more and more international trade settles in gold-backed yuan instead of nothing-backed dollars?

How unimportant will dollars become?  Where will the bid move?

Is THIS why gold has been moving up lately?  Is this why the dollar has been falling?

Why did U.S. Treasury Secretary Mnuchin pay “a rare official visit” to Fort Knox and subsequently tweet, “Glad gold is safe!”?  All of the sudden gold is interesting to the Treasury?

Meanwhile, Germany recently completed a repatriation of a big chunk of their gold … ahead of schedule.  Maybe the rush is to pacify voters in the upcoming election … or maybe there’s another reason?

Of course, way back when China began publicly expressing concerns about the U.S. dollar … and taking steps to mitigate its own exposure to dollar denominated assets …

… several countries joined Germany in taking steps to repatriate their gold from foreign hands.  That feels a lot like a “run” on the bank … and it began long before any of the current elections.

Besides, if gold is really just a barbarous relic with no role in modern finance as some claim … then why all the fuss?

As you can see, this all raises a LOT of questions. 

What’s an investor to do?

First, simply understand the fate of the dollar has a PROFOUND impact on anyone who earns, saves, invests or borrows in dollars.

If that’s you, then this is an IMPORTANT topic for YOU to pay attention to.

Next, be encouraged there are investment strategies which you can use to mitigate risk and generate profits … even in the face of a falling dollar.

We discuss some of these in our special report on Real Asset Investing.

Get and stay connected and informed.  That’s why we attend the New Orleans Investment Conference and produce the Investor Summit at Sea.

Right now, it’s more important than EVER to attend events like these.

It’s where you hear from thought leaders, focus deeply on important topics, get into great conversations with like-minded people and subject matter experts …

… and form valuable relationships with people who can help you implement useful strategies.

The WORST thing you can do is ignore it all and hope nothing’s going to change. The world is changing whether you know it, like it, or understand it.

How you choose to respond will determine how it changes for you.

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.

North Korea and you …

With so much craziness in the world, we thought we’d consider what it might mean for real estate investors.

After all, why should paper asset investors get all the thrills of global instability?  Real estate investing might be stable, but it doesn’t have to be boring!

Biggest sword competition …

You may have heard that U.S. President Trump and North Korean Supreme Leader Kim Jong-un recently publicly compared sword sizes.

Since both the U.S. and North Korea are nuclear powers … this has the world understandably jittery.  Though things seem to have calmed down the last few days.

Still, geo-political jitters usually amplify the two basic emotions of investing … fear and greed.

Scared money tends to flee to “quality.”  (Trapped money flees to Bitcoin … but that’s a different discussion …)

Frightened investors are more concerned about preserving capital and purchasing power (which aren’t necessarily the same thing) … than making a profit.

For much of recent history, a flight to quality meant piling into the U.S. dollar and U.S. bonds.

But with another debt-ceiling debacle on the horizon, record debt at every level, pensions in crisis, huge unfunded liabilities, and an economy sending very mixed messages …

… it’s not inconceivable the world might not continue to see the U.S. dollar and bonds as the financial fallout shelter of choice.

Meanwhile, greedy money tends to focus on front-running the scared money, and buying up the scared money’s abandoned assets at bargain basement prices.

As for real estate investors …  we sit on the sideline munching popcorn and collecting rent checks.

But that doesn’t mean there aren’t risks, opportunities and lessons for real estate investors to learn from all the drama.

War is expensive …

We recently discussed the potential shift from “monetary” stimulus (cheap money funneled from central banks to the financial markets) …

… to “fiscal” stimulus (government spending funneled into the economy on infrastructure and military spending).

Now we’re not saying Uncle Sam is purposely pursuing war to stimulate the economy.  That would be far too cynical for two happy-go-lucky real estate guys.

But IF more war happens, it’s sure to be expensive.  And because Uncle Sam already operates at a deficit and has no savings (technically “broke”) … it means a lot more borrowing.

The big question is … from whom does Uncle Sam borrow?

This matters because whom Uncle Sam borrows from to pay for more war … and how it’s done … will probably impact asset prices and interest rates.

Watch your monitors …

If Uncle Sam issues bonds (borrows) and the bids are soft, interest rates rise.  It also says something about the way the world views the dollar (not good).

Of course, this means rising interest rates in the whole swimming pool … including good debt (your mortgages) and bad debt (your tenants’ credit card and car loans).  Either or both of those affect your bottom line.

Another sign confidence in the dollar is declining will be a spike in gold prices.  

If gold catches a bid, it could mean scared money would rather hide in a barbarous relic with no yield … over stacks of paper with pictures of dead people printed in green ink.

(Not sure how green paper is less useless than yellow metal … but that’s a different debate …)

But if big money prefers gold over greenbacks, it’s a clue about the direction of the dollar.

And assuming your assets, liabilities, and income are all denominated in dollars, we’re guessing the value of the dollar is of interest to you … or should be.

Pre-emptive strike …

So what do you do when you don’t know what’s going to happen?

Here are some things to think about …

Uncle Sam already has a huge debt problem.  Another war doesn’t change anything … it just speeds it up.

In the short term, a flight to quality could be temporarily good for the dollar and drop rates by creating demand for both dollars and bonds.

If rates fall for a season (and even if they don’t … they’re pretty low right now), it might be a great time to back up the truck and load up on lots of good debt … and use it to acquire assets that conservatively yield more than the cost of the loan.

That’s effectively going “short” the dollar based at a time of temporary strength.

You can also go a little further short by adding some gold to the mix.  But remember, gold isn’t about profit … it’s about preservation of purchasing power.  

Sure, a falling dollar causes gold to go “up” in dollar terms, but so does everything else, so more dollars doesn’t put you ahead … it just keeps you from falling behind.

Side note …

If you’re not really sure about gold or how it fits into what you’re doing, join us when we speak at the New Orleans Investment Conference in October.   

Some of the biggest brains in precious metals and resource investing will be in New Orleans … along with our friends Robert Kiyosaki, Simon Black, Peter Schiff and Simon Black.  It’ll be like an Investor Summit at Sea™ reunion!

Back to our story …

Something else to consider carefully right now are the markets you’re invested in … because the idea of “flight to quality” applies to real estate markets too.

People and businesses will move to where they can get a better life at a better price.

We like affordable markets in low tax, business friendly, fiscally sound states …

… places with good infrastructure (transportation, utilities, medical, education, resources), strategic location (distribution, travel hub, geographic amenities), and diverse economic drivers.

Also, take a look at your current debt and equity structure.

It might be wise to harvest excess equity and lock in low long-term rates on properties you’re committed to owning long term.

You can then use the proceeds to pick up additional properties in growth markets … or add some cash, precious metals, or high-yield private mortgages to add some diversification into your portfolio.

Stay calm and invest on …

It’s easy to freak out when the world is weird.  But it’s been weird before and it’ll be weird again.

Meanwhile, unlike so many other styles of investing, real estate allows you to hedge most probable outcomes.

Plus, there’s the time-tested assurance that virtually every major power player in the food chain has a vested interest in supporting real estate.

No one wins when real estate loses … and even as we learned in 2008 … if a bomb goes off in real estate, the powers-that-be move heaven and earth to fix it as quickly as possible.

Sure, there’s risk.

But it’s risk that’s largely understandable, reasonably mitigated and … so long as you’re structured to weather the occasional economic storm …

… real estate is arguably the most stable and easily operated investment vehicle available to everyday people.

Until next time … good investing!


 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.

Real estate still makes sense in uncertain times …

The world is full of alarming headlines which should concern any alert investor:

Pension Crisis Too Big for Markets to Ignore

The Federal Reserve Could Reduce Its Monstrous Balance Sheet Soon – That Should Terrify Everyone

The retail apocalypse has officially descended on America

We could have pulled up more, but you get the idea.  Scary stuff.

Of course, we’re still on a high after our recent Summit at Sea™ with Robert Kiyosaki, Peter Schiff, G. Edward Griffin, Simon Black, Chris Martenson, and many other really smart people.

If you’re familiar with any of these guys, you may wonder why we’re still excited.  After all, these guys are notorious for decrying the many problems facing the global economy.

But their concerns are only half the story.

There’s also lots of opportunities available … many of which are unique to real estate

So while it may be bad timing to buy an over-priced property hoping to flip it to the greater fool for fast cash, high-priced properties create opportunities too.

If you’re the proud owner of a highly-appreciated property, you have the gift of equity.

Your equity can be repositioned from an over-priced market to a growth market through a cash-out refinance or 1031 tax-deferred exchange.

Consider this headline from the LA Times

Leaving coastal California is a ‘no-brainer’ for some as housing costs rise

The article highlights a couple who are leaving Huntington Beach for Phoenix.

There’s a lot of that going on right now.  People and businesses move around in order to survive and thrive.

The key is to get on the right side of the flow.

Of course, not everyone leaving high-priced areas will want or be able to buy.  And until they do, we’d love them to rent … from us!

So record-low home ownership rates might reflect weakness in the overall economy, but they actually create demand and opportunity for landlords in affordable markets.

There’s ALWAYS an opportunity.

Now this isn’t to say that all real estate anywhere is a good deal.  Or that maximum leverage on every property is the ideal portfolio structure.

But don’t let the doom and gloom of mainstream news dissuade you from developing your real estate investing opportunities.

Real estate is not a fad.  As long as individuals are permitted to own properties, those who do will be wealthier than those who don’t.

Real estate is real.  It’s considered by the world’s wealthy to be a safe haven asset.

So when bombs are dropping, financial markets are volatile, geopolitical tensions are high … capital seeks shelter in the dollar, Treasuries, gold and real estate.

But consider that the dollar is under attack by two very formidable forces … China and Russia. If they succeed, it could cause problems for the dollar.

Besides, the dollar is only a temporary hiding place for frightened capital.

What about U.S. Treasuries?

Debt denominated in the world’s reserve currency, and backed by the world’s biggest economy and military, tends to attract flight capital.  It’s safer than other debt.

But the U.S. is also the world’s largest debtor … with no apparent plan to stem the hemorrhaging of red ink.

And if anyone eventually creates a strong alternative to the dollar for global trade, especially in oil, then Treasuries could be in real trouble.

A weaker dollar means debt holders will want higher interest rates to compensate for the lost purchasing power.

Hopefully, that makes sense.  If not, think of it this way …

There was a time when you could buy 100 pieces of bubble gum for one dollar.  A penny a piece.

If you loaned someone a dollar, it’s worth 100 pieces of gum.  But if the dollar loses purchasing power, it might only buy 50 pieces of gum … now two cents each.

If you thought that might happen, you’d need the borrower to pay you back two dollars just to be EVEN.  And you’d probably want a little more for your risk.

That extra dollar is “interest.”  And when the currency is losing purchasing power, you need MORE interest to compensate.

Make sense?

The problem is if interest rates rise, bond values drop.  In the interest of time, we won’t explain this now, but grab a calculator and play with numbers until you get it.

So rising interest rates mean a loss of principal for capital placed in bonds.

This makes bonds a scary place to park long-term capital for wealth preservation.

And with next to no yield, safety of principal is really the primary purpose of parking cash in bonds.  No wonder foreigners have been dumping Treasuries.

How about gold?

We like gold.  It’s shiny.  There’s no counter-party risk.  It’s easily convertible into any currency.  It’s been used as money for thousands of years.  It’s survived the rise and fall of empires, currencies and cultures.

BUT … gold pays no yield.  It just sits there like a stack of cash.  And tax law can make it difficult to move in and out of.

Which brings us (finally) to real estate

We’re admittedly homers for real estate.  After all, we’re The Real EstateGuys™.

Still, we think there’s a LOT to like about real estate in uncertain times … like right now.

First, real estate is a tangible, physical asset.  Stock in a company that goes out of business isn’t worth the paper the shares are printed on.

Real estate doesn’t have counter-party risk.  If you park cash in real estate, no one else needs to do anything for the property to have value.  Your asset isn’t someone else’s liability … like an insurance contract, a bank deposit, or a bond.

Of course, if the tenant pays rent, the property becomes MORE valuable.

But what if the tenant doesn’t pay?

With real estate, you can evict a non-paying tenant and replace them with one who does.  Try to do that with a bond.

If a bond issuer owes you money and fails to pay, you can’t just replace them with someone who will.

The debt just goes bad … and you lose.

We could go on.  But you get the idea.

Real estate was valuable a thousand years ago, and it’s probably going to be even more valuable a thousand years from now … especially as more people compete over less land.

So the question isn’t really about real estate.  It’s about how much YOU will own.

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.