Taking on the New Year …

A brand-new year brings with it both anticipation and apprehension.  Both are emotional responses to the unknown.

There are MANY things we could discuss in this year’s opening missive …

… tariffs, trade wars, a new Congress, the Fed, interest rates, the stock market, the bond market, gold, oil, taxes, Opportunity Zones, and on and on.

Most of those things are completely OUTSIDE of your control.

So as we stand together at the threshold of the New Year, rather than dive into the weeds of the daily news or pontificate on predictions of the future …

… we think it’s important to consider how to use things WITHIN our control effectively to make the MOST out of the next twelve months.

The goal is to OPTIMIZE your odds of success by focusing your best efforts on the few things you can control, and which create the most positive leverage in your endeavors.

Read that again and let it sink in.  It’s something we work on all the time.

Now let’s take a look at this idea from a real estate investing perspective …

Everything starts with your goals.  But not really … because before you can set a MEANINGFUL goal, it’s critical to choose your values, mission, and vision.

Values, mission, vision, goals, focus, and effort are all things YOU can control.

Sadly, most people don’t proactively and strategically identify their values, mission, and vision.

Instead, they bounce from thing to thing … role model to role model … idol to idol … hoping to stumble onto the secret to happiness.

That’s why we put so much emphasis on taking time to create your future.

Once you have your values, mission, and vision clear, NOW you can set meaningful goals … what are often referred to in business as “key objectives.”

These are activities YOU can control … things you CAN do … which are specific, measurable, and have a deadline for completion.

For example, “owning more real estate” is NOT a goal.  “Buying four properties by the end of the year” is better.

But “acquiring 100 doors by the end of the year” is even more powerful because it creates possibilities and leverage … while focusing your activity on the REAL heart of real estate investing.

Think about it …

If your goal is to “buy four properties”, you might end up with four single-family homes … which is only four tenants, or “doors”.

And saying “buy” puts a subconscious limitation on HOW you acquire the properties.

But focusing on “acquiring 100 doors” is VERY different because you might achieve it through only ONE property, which provides time leverage.

This goal also focuses you on what REALLY matters … acquiring TENANTS.

Remember, it’s not real estate that makes you rich … it’s the rent.  Even equity is a derivative of income.

And when you think in terms of “acquiring” instead of simply “buying”, it opens your mind to seeing alternative acquisition possibilities … like options or syndication.

After all, you can acquire a property without paying for it. 

For example, if you syndicate 1,000 doors for a 10% share, you effectively gain 100 doors personally.

But instead of paying to own them, you get PAID to own them.  BIG difference.

So it’s actually easier and faster to think bigger.  Yet most people believe just the opposite.

Of course, thinking and feeling are interconnected.  That is, how you think affects how you feel … and how you feel affects how you think.

Blair Singer says, “When emotions run high, intelligence runs low.”

So if you’re afraid of an uncertain future or of making a mistake, you’ll tend to think about avoiding risk.

But investing is about navigating risks … not avoiding them.

Similarly, if you’re hyper-enthusiastic, you may only think about the upside and fail to think about the risks  … or strategies for navigating them.

We think passion and logic go together.  The most successful investors we’ve seen know how to balance both effectively.

It comes down to knowing the difference between what you can and should control, and what you can’t.

The future is always in motion and largely out of our control, so we can NEVER be certain.  Striving for certainty in an uncertain world is a recipe for paralysis.

On other words, it’s ineffective to worry about things we can’t control.

Better to stoically observe uncontrollable events, and then focus our passionate attention on things we CAN control in a way which maximizes possibilities and leverage.

We KNOW there will be LOTS of things happening in the new year.  We just don’t know what they are.  However, we can sure they’ll present both challenges and opportunities.

But it’s not the uncontrollable events themselves which most effect our results … it’s how we choose to react to them.

History tells us there will be ups and downs, and there will be winners and losers.  In the same set of circumstances, some will prosper and others will fail.

The individual challenge is figuring out how to define what winning looks like on a personal basis, and then doing what’s in our control to win on our terms … in whatever environment we face.

It takes clarity, knowledge, connections, emotional control, and the discipline to focus on those few strategic things under your control that provide the most leverage.

It’s simple, but not easy.   If it were, more people would do it.

Our experience and observation is that the best place to start is by putting great ideas in your mind, getting around the right people as much as possible … and narrowing your focus to the very few things that make the most impact.

So as you enter the new year … be sure the time and resources you invest in developing the real estate between your ears is commensurate with the size of your investing goals.


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!

Preparing for the Future of Interest Rates and the Dollar

We’re concerned about interest rates … and you should be too.

Consistently rising interest rates affect your ability to borrow money for investments.

In this episode of The Real Estate Guys™ show, we dig into how the Federal Reserve and central banks affect interest rates. We talk about the future of the dollar. And we discuss how rising interest rates affect YOU.

We met with two knowledgeable experts in the economics field. You’ll hear from:

  • Your interested host, Robert Helms
  • His uninteresting co-host, Russell Gray
  • James Grant, economic expert and author of eight books on the U.S. financial system
  • Nomi Prins, former Wall Street analyst, journalist, and six-time author

Listen

 


Subscribe

Broadcasting since 1997 with over 300 episodes on iTunes!

real estate podcast on itunesSubscribe on Androidyoutube_subscribe_button__2014__by_just_browsiing-d7qkda4

 

 


Review

When you give us a positive review on iTunes you help us continue to bring you high caliber guests and attract new listeners. It’s easy and takes just a minute! (Don’t know how? Follow these instructions).

Thanks!


James Grant on interest rates and securities

James Grant was named by Ron Paul as his likely candidate for Chairman of the Federal Reserve. Over the years, he has been a voice of reason … he calls himself “a ‘yes, but’ guy in a ‘gee whiz’ world.”

We got right into the subject of interest … interest rates.

Are rates going up? “Rates tend to trend over the long term,” James says.

They’ve been on the down-swing since the 1980s, but they may be on the up-swing again … and although rates are currently rising, James emphasizes we’ll have to wait and see whether the trend continues.

James says investors should look to the bond market for clues.

A 10-year treasury bond delivered a yield of 1.37 percent in 2016 … the lowest yield since the year 1311, according to a study by the Bank of England.

In the early 80s, a 30-year security would’ve netted you a 14 percent yield. That’s a big difference.

Today, almost every security is priced next to nothing when investors account for taxes and inflation, James says.

Who manipulates interest rates? The Federal Reserve.

“It’s an act of malpractice that the Fed and central banks worldwide are manipulating these rates,” he says.

And real estate cap rates are driven by interest rates.

To James, this means we now live in a world of great danger. “We live in a kind of hall of mirrors,” he says.

On forecasting the future and investing in gold

James notes forecasts are for people who think they know what’s going to happen … when the reality is, no one actually knows.

“We can’t know the future, but we can know how it’s being handicapped in the present,” James says.

He finds it helpful to remind himself of how our descendants will think of us.

And he says, “Successful investing is about having everyone agree with you … later.” Investors must imagine plausible outcomes before the market catches up.

We asked him his thoughts on gold investing. “Gold is interesting because it’s where people flee,” James says. “But it’s really an investment, not a flight asset.”

Gold is a way to step outside of orthodox institution investments. “Gold is simply money to me. It’s a cash balance. It’s something the central bankers can’t debase.”

To hear more from James Grant … and keep your eye on interest rates … check out Grant’s Interest Rate Observer, an independent journal covering financial markets.

Nomi Prins on the Federal Reserve and the world market

Journalist Nomi Prins was a member of Senator Bernie Sanders’ panel of advisors on Federal Reserve reform. She’s coming at this from a different angle than James Grant … but both guests are incredibly informed, with lots of great things to say.

In 2007, Nomi wrote that there could be a problem if financial institutions and the government continued the credit derivative system and high leverage.

No one wanted to hear it. But then ’08 happened.

Nomi says that over the last 10 years, “The Fed has subsidized a lot of credit problems that existed before the ’08 crisis by creating electronic money.”

That has raised the level of artificial leverage.

And THAT means the next market collapse will come from an even higher height than in ’08, she says.

Even worse, many central banks around the world created electric money and dropped rates when the Fed did. Nomi examined this situation in her book Collusion.

“We’re in a very precarious situation going forward,” she says.

Quantitative easing … the introduction of new money onto the market … causes inflation and collapses markets, starting with emerging markets.

In order to retain capital, central banks in these countries have to raise rates and increase the value of their currency. That’s what’s happening now.

This, in turn, lowers the value of foreign currencies relative to the value of the dollar. So, any debt these countries have has to be paid back or renewed at a higher rate.

Apparently, however, the U.S. is back to quantitative tightening now, says Nomi.

The Fed’s statements and its actions and reports tell different stories.

Fed Chair Jerome Powell SAYS current quantitative tightening is official. That means the government will continue to sell … but not re-invest … assets.

But in reality, the Fed is selling much more slowly than they’ve said they will.

The reason? “They know that if they sell too much too fast, rates will increase too fast, and the value of assets will go down too fast,” Nomi says. “They want to be in a holding pattern.”

More on quantitative easing, coming crisis

Nomi wants people to know there is NO correlation between GDP growth and quantitative easing. However, there is a very high correlation between quantitative easing and the stock market.

She thinks the next financial crisis will look like a bunch of smaller crises that add up to big gaps in liquidity and credit availability.

Nomi says she sees a few things happening around the world … bond defaults are creeping up in emerging markets, and certain countries are starting to have major credit problems.

“I think all of that will come to bear on the Fed.” And because of that, Nomi says, “I think their language will start to move toward growth slowing.”

Think two rate raises over the next year, instead of the forecasted four.

She predicts extreme appreciation is not going to happen. Rates will stay low, although they might continue to rise a bit relative to the Fed.

What about real estate? “Commercial real estate may have more leverage, so rate hikes will have more impact.”

Instead, Nomi recommends “any area where rent can overcompensate for an increase in cost.”

She says there are currently opportunities in emerging markets where there’s still room for upward growth in prices.

Mexico City, for example, is a place where prices are low, the government has a strong growth strategy, and there is opportunity in the near team.

Lessons learned

Debt doesn’t operate in a vacuum. Interest rates have a HUGE impact on whether your investments will be successful.

You don’t need to understand ALL the mechanics … but you should have a basic understanding of WHAT will affect interest rates and WHERE they’re headed.


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!

Beware of bubble genius …

Hard to believe it’s nearly 10 years since Fannie Mae and Freddie Mac collapsed and were taken over by Uncle Sam.

Time flies when you’re getting rich.

It’s been a GREAT run for residential real estate investors … especially apartment investors.  Free money in the punch bowl can really juice up a profit party.

But after 10 years of equity happening to real estate bull market riders … it’s a good time to think about where we are, where things are headed, and what to do next.

And looking forward comes in two parts:  external and internal.

The external is the world of variables outside your control.  Like driving down the freeway, there are lots of other drivers whose actions affect YOUR safety and progress.

But the key to your success isn’t what’s going externally. It’s how YOU navigate those external circumstances … based on what’s going on inside of you.

It’s about financial and emotional intelligence.

Because what you think and believe affects what you do … and what YOU do has the greatest impact on the results YOU experience.

One of the biggest dangers of riding a wave of easy money into gobs of equity is thinking you’re an investing genius.

We know … because it’s happened to us … and we see it happen all the time.

It’s much harder to be humble, curious, teachable and innovative when you already think you’re smart.

It’s important to know the difference between luck and skill.

True financial genius is being able to make money when everything externally is falling apart … like a pro race car driver deftly navigating a multi-car melee at 180 miles an hour.

That’s REAL skill.  Anyone can rocket down an open road.

Fannie Mae’s chief economist Doug Duncan told the audience at Future of Money and Wealth he thinks recession is likely in the not-too-distant future.

And Doug made those comments after reminding everyone his last year’s Summit predictions were all essentially spot on.

So based on both his pedigree and track record, Doug’s qualified to have an opinion.  And we’re listening.

“The time to repair the roof is when the sun is shining.” 
– John F. Kennedy

The sun’s been shining on real estate investors for ten years now.  Maybe you’re one of the many who’ve made tons of money.  We hope that trend continues.

But as our friend Brad “The Apartment King” Sumrok reminds us … it’s time to approach today’s market with a little more sobriety.

Money and margins are both getting tighter.

This means paying better attention to detail, increasing your financial education, and being careful not to rationalize marginal investments to bet on positive externals.

In other words, beware of being a bubble market genius … and thinking what worked in a bull market will work when things change.

Better to work on sharpening your skills at finding and creating value.

Of course, real estate is FULL of pockets of opportunity … the polar opposite of a commodity or asset class where everything’s the same and moves together.

Real estate’s quirkiness befuddles Wall Street investors … but thrills Main Street investors.

A case in point are apartments …

On the one hand, lots of brand new inventory is coming on the market … and it’s putting pressure on landlords to offer profit reducing concessions.

On the other hand, more affordable existing stock is attracting lots of interest… from both tenants and investors.

So “housing” isn’t hot or cold.  And neither are “apartments”.  Real estate defies that kind of simplistic description.

Of course, it takes financial education to recognize the difference between momentum and value.

It also takes time, effort, and relationships to actually find the markets, team and properties to invest in.

For most people, that’s way too much trouble.  They’d rather sit in their crib with their trading app … or turn their financial future over to a paper asset advisor.

That’s all peachy until rates rise, recession hits, and paper prices plunge.

History … and Doug Duncan … says the inevitable bear market is getting closer.

Of course, as we’ve previously commented … when paper investors get nervous, one of their favorite places to seek safety with return is real estate.

So for active and aspiring syndicators … it really doesn’t get any better than right now.

Think about it …

MILLIONS of baby-boomers are retiring.  They need to invest for INCOME.

And they’re sitting on stock market equity, home equity, and retirement accounts …

… holding many TRILLIONS of wealth needing to (literally) find a home withreliable income and inflation protection.

Their paper asset providers will try to meet the need, but their toolbox isn’t properly stocked.  They can’t do private real estate.

But as boomers struggle at squeezing spendable money out of sideways or stagnant stock markets, they’ll look towards dividends and interest.  Cash flow.

The challenge with dividend stocks is … in a volatile market, investors face capital loss on share prices.  Worse, dividends can be cancelled.

Compare this to rental real estate, which produces far MORE reliable income than dividends with LESS price volatility.  And no one is cancelling the rent.

So dividend stock investors would LOVE income property … IF it just wasn’t so darned hard to find, buy, and manage.

What about bonds and bank accounts for income?  (Try not to laugh out loud)

Remember, a deposit is a LIABILITY to a bank.  When you deposit money in the bank, the bank needs to create an offsetting ASSET … a loan.

But the Fed has stuffed banks full of reserves … and there aren’t enough good borrowers to lend to.

Banks don’t need to offer higher interest to attract deposits.  So they don’t.

As for bonds …

Yes, it’s true bond yields are edging up, which means bond holders earn a little more income … but at a what price?

Rising bond yields also mean falling bond values.  So bond buyers are understandably very nervous about capital loss on their bonds.

WORSE …, bonds carry the added risk of default or “counter-party risk.”

A bond default is TOTAL loss. Yikes.

Real estate to the rescue …

The relative safety and performance of income property or income producing mortgages secured by real estate is extremely attractive right now.

The biggest problem for passive paper investors is real estate is hard to buy, messy to manage, and takes more financial education than just knowing how to click around an online trading app.

And THAT is the BIG opportunity for skilled real estate investors to go bigger faster with syndication.

Whether you decide to explore the opportunities in syndication or not … it’s important to stay curious, alert and proactive.

Most real estate investors we know are preparing for the next recession … because that’s when true financial genius pays the biggest rewards.

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.

Rising rates, oil, and an angry Amazon …

Even though the Fed skipped a rate hike last meeting, someone forgot to tell the 10-year Treasury yield, which has broken over three-percent … DOUBLE where it was just two years ago.

In case you don’t know, the 10-year Treasury yield is arguably the single most important interest rate on Earth … certainly for real estate investors.

Of course, oil broke over $80 a barrel last week also … in spite of dollar strength.  So while dollar-denominated gold dipped … oil rose.

It makes us wonder what oil will do if (when) the dollar starts falling again!

Now before you check out, let’s consider what all this means to Main Street real estate investors.  

Obviously, interest rates matter because most real estate investors are liberal users of mortgages.  Higher rates mean higher payments and less net cash flow.

But as we often point out, rising rates also affect your indebted tenants.  Higher rates mean bigger payments on credit card, installment, and auto debt.

And speaking of auto-debt, sub-prime auto loan defaults have spiked above 2008 levels.  It seems consumers at the margin are starting to struggle.

Now back to oil

If you’re an oil investor … or you buy real estate in areas whose economies are

strongly supported by the oil industry … higher oil prices can be a GOOD thing.

For everyone else, it means gas … and all petroleum derived products … andanything produced or transported with oil-derived energy … are all getting more expensive.

And for your working class tenants … the cost of filling up their commuter cars is getting worse too.

So until all this “wonderful” inflation makes its way into wages, working class people are still getting squeezed.

All that to say, it’s probably a good idea to tread lightly on rental increases unless you’re very sure your tenants can handle it.

But of course, these are the fairly obvious concerns.  But there’s something even MORE ALARMING circling on the horizon …

Pension Problems Potentially Pinching Property Owners

(Sorry.  Peter Piper purposely pressured us to print that prose. ‘pologies …)

In a recent post, we highlighted a SHOCKING proposal by the Chicago Fed to punish property owners by imposing an additional one-percent property tax … to pay for Illinois’ severely under-funded pension plan.

Of course, Illinois isn’t only the place with pension problems, so be on the lookout for a punitive tax proposal coming soon to a neighborhood near you.

This is why we continually point out it’s REALLY important understand the markets you’re in.

It’s like buying a condo in a troubled complex, but never bothering to review the HOA financials …

YOU might be hyper-responsible, but if the HOA’s in trouble … you could be too, because they have the the power to assess YOU to pay for it.

As we pointed out at Future of Money and Wealth, governments sometimes do desperately dumb things when they’re facing financial challenges.

Don’t Slap an Amazon

The latest case in point comes to us from the super-city of Seattle … home of Amazon, Starbucks, Boeing and several other mega-employers.

You may have heard, the city council of Seattle voted 9-0 to impose a “head tax” on all businesses doing over $20 million in GROSS revenue.

The original tax proposed was over $500 per person.  But after businesses complained, they backed off to “only” about $275 per head.

The purported purpose of the tax is helping the homeless, which is a noble cause.  But regardless of how you or we feel about it, what matters is how the employers feel … and they’re NOT happy.

Amazon fuming after Seattle votes to tax high-grossing corporations to help the homeless

“ ‘We are disappointed by today’s city council decision to introduce a tax on jobs,’ [Amazon Vice President Drew Herdener] said in a statement.

 “ ‘While we have resumed construction planning… we remain very apprehensive about the future created by the council’s hostile approach and rhetoric toward larger businesses, which forces us to question our growth here…’ ”

 Starbucks Corp., another of the 300 businesses that will have to pay the job tax, seconded that.

 Think about this …

These are two pre-eminent brands and major economic drivers for Seattle and its surrounding neighborhoods … and there are 298 other big businesses also affected.

While they’re not likely to all pack their bags and move out in the middle of the night, Amazon’s comments make it clear they’re also not committed to staying or growing.

Again, it doesn’t matter how YOU feel about these companies, the homeless problem, or the role of government in redistributing wealth …

… what matters is how employers feel and what they choose to do when slapped with taxes or regulations.

Because if these companies go in search of a friendlier environment, one area will lose current and future jobs … and others will gain them.

As real estate investors, we want to be on the right end of that shift.  That’s why we’re always watching for clues in the news.

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.

Profits, jobs, and opportunity …

In spite of rising rates and concerns about bubbles … real estate is looking pretty good right now.  At least the right real estate in the right markets.

Of course, “real estate” can mean a lot of different things.  In this case, we’re talking about good ol’ fashioned single-family residences.   Houses.

Yes, we know mortgage rates are rising.  But that just means it’s harder for renters to buy a home … which keeps them renting … from YOU.

And if you proceed with caution, there are some reasons to pursue single-family homes even though prices have recovered substantially from the 2008 lows.

Consider this Yahoo Finance headline:

Small business earnings hit all-time high, NFIB declares

“Small business earnings rose to the highest levels in at least 45 years last month, according to the results of a survey from the National Federation of Independent Businesses (NFIB) …” 

“ …  the 17th consecutive month of ‘historically high readings.’”

That’s good news for small business owners … and for the U.S. economy.  It’s commonly believed that small business drives a majority of job creation.

So perhaps this CNBC headline isn’t a big surprise …

Job openings hit record high of 6.6 million

Of course, job creation is good for landlords.  It’s a lot easier for tenants to pay rent when they actually have jobs.

But there’s the issue of wages.  Even though the unemployment rate fell below 4% … which is considered “tight” … wages still haven’t risen substantially … yet.

Meanwhile, life is getting more expensive as rising interest ratesgas prices and healthcare premiums are among several factors squeezing household budgets.

While jobs are good, it’s hard to save up for a down payment when living costs are going up faster than paychecks … which keeps people renting.

And if all that isn’t a big enough challenge, there’s the problem of high housing prices.  Obviously, higher prices also make it harder for renters to become homeowners.

So all that’s not horrible news for landlords … especially those who are investing in more affordable markets and property types.

But there are two more parts to the story …

First has to do with a deeper dive into the jobs market.  The April jobs report didn’t seem great at first blush.

But in the past, the reports looked great at first, then you’d drill down and discover the jobs created were low-wage service industry jobs.

Notably, recent jobs reports reflect a subtle but important shift in the composition of jobs.

So while the quantity of jobs created might be not bad … the quality is actually looking pretty good.

According to this Wall Street Journal article, manufacturing added 24,000 workers in April … after adding 22,000 and 31,000 in the last two months.

“While manufacturing employment has been generally declining for decades, hiring picked up in the sector over the past year.” 

Way back our 2011 blog, What Washington Could Learn from Real Estate Investors, we argued that not all jobs are equal. We like what’s happening.

Seems to us if the American economy can keep this up, it’s a tailwind for housing … in spite of rising rates, inflation, and high debt levels.

And speaking of wind …

As we discussed at length during Future of Money and Wealth, the entire financial system is based on debt.  So to grow the economy, debt MUST grow.

The why and how of all that is too big a topic for today’s discussion, but if you take it at face value, it really explains a lot.  It also has some big ramifications for real estate.

After 2008, lenders ran away from real estate … but debt still needed to expand.  So new debt-slaves borrowers were needed.

Student debt soared.  Sub-prime auto loans spiked.  Credit cards hit record highs. Corporations borrowed heavily to bid up their own stock.

But today, students are reconsidering the value of a financed college education.  Auto sales are slowing.  Credit card losses are mounting.

Corporations are slowing down their borrowing … with nearly 14% of the largest companies unable to pay their interest payments from earnings.

In fact, a recent Bloomberg article quotes Gregg Lippman of “Big Short” fame as saying corporate debt will trigger the next financial crisis.

“ … corporate debt and equities will face the biggest pain when the next downturn comes. Investments linked to consumer debt, unlike the last crisis, will be relatively safe …”

“The consumer is in much better shape than corporates. Consumers are less levered than they were pre-crisis. Corporates are more levered than they were pre-crisis …”

So let’s wrap this all up and put a bow on it …

If it’s true debt MUST expand, lenders will be looking for where they can make loans.  Remember, your debt is their “investment”.

There are already tremors in the debt markets.  Lenders will be looking for quality.

Similarly, there are tremors in the stock markets.  Investors and consumers will be looking for an alternative for their wealth building (remember, consumers consider their home an investment).

So we think there’s a good chance the focus will shift to real estate again.  Just like it did in the early 2000s.

Yes, we know the run-up from 2000 – 2008 ended badly.  But not for everyone.

If you buy the right markets, use sustainable financing structures, and pay attention to cash flow, there’s an argument to be made that single-family homes still have solid potential for long-term wealth building.

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 margin is calling …

Shhh … do you hear it?  It’s the margin calling …

“Margin” is a term we hear all the time but can be a little confusing … because it means different things depending on the context.

But margin comes up often in financial conversations because it’s an important concept … and worth taking a look at.

In stock trading, margin is debt secured by the stocks you’re buying.  It’s like the way real estate investors use mortgages to acquire property.

Typical margin leverage with stocks is fifty percent.  So you put in half and borrow the rest.  If the stock goes up, you get to keep ALL the gain … just like real estate.

BUT … if the stock goes DOWN … you get a “margin call” … which means you need to bring in cash to restore the loan-to-value ratio.  No fun.

We’re sure glad that doesn’t happen in real estate!

The term “margin” has another important meaning.  It’s the “edge” or “fringe” … things that are farthest from the center of the target.

So when you think about your personal budget, you have things at the core … food, clothing, shelter, medical care, etc.

Out at the far edges … the margin … are highly discretionary, non-essential expenditures.  These are things you can easily live without, but you enjoy when you’re flush.

These are the first things to get cut when you’re squeezed.

Households, corporations, even governments all have “core” expenses and activities … and “marginal” expenses and activities.

Again, when prosperity recedes … things at the margin fall off the target.

Our point in all this is you can learn a lot about the direction of the economy simply by watching what happens at the margin.

Make sense?

That’s why this headline caught our attention …

Rising Home Prices Push Borrowers Deeper Into Debt

– Wall Street Journal, April 10, 2018

“ … higher mortgage rates make homeownership out of reach for many,

pressuring lenders to ease credit standards.”

“ … rising debt levels are a symptom of a market in which home prices are rising sharply in relation to incomes, driven in part by ahistoric lack of supply that is forcing prices higher.”

Hmmm … some of that doesn’t make sense to us.  But before we go there, consider this headline …

Home builder confidence slides for fourth straight month

– MarketWatch, April 16, 2018

“The 69 reading is still quite strong. In the go-go days of the housing bubble, between 2004 and 2005, sentiment averaged 68. Still, the fact that confidence is declining so steadily is notable. When NAHB’s index started to fall in late 2005, it was one of the signals that foreshadowed the coming housing bust.”

“ … builders are keeping the pace of construction slow and steady. And they’re worried about their costs.

And then there’s this one …

US home building rose slightly in March, led by apartments

– Associated Press via ABC News, April 17, 2018

“… driven by a big 16 percent gain in apartment buildings. Single-family home construction slipped 3.7 percent.”

“There is a severe shortage of existing homes, which has pushed up

prices in cities around the country … That’s lifting demand for new homes.”

Again, a few things here that don’t make sense to us.  And we could probably write a book just on the excerpts from these three news articles.

But let’s see if we can unpack all this briefly …

First, rising mortgage rates and prices are causing people at the margin of prospective home-ownership to remain tenants. Not great for them, but not bad for landlords.

Usually when prices rise based on DEMAND, builders ramp UP production to profit by selling into the increased demand.

So it seems to us home-builder confidence should be growing.  But it’s not.

That makes us think the number of people who can afford to buy isn’t growing either … it’s shrinking.

That’s because when prices rise faster than incomes, the ability to borrow eventually peaks.  Falling interest rates can delay the problem by getting more mortgage for the same payment.

But now that rates are rising, it seems people at the margin are getting pushed off the back of the affordability bus.

That may also explain why apartment building is growing, but single-family home building is declining.

It may also explain why Freddie Mac is lowering lending standards.

They can’t create jobs or increase incomes, but they can make it easier to borrow in spite of rising rates … and they are.

Freddie’s making it easier for first-time home buyers to get in and push up the market from the bottom.  It’s like the air inlet in an inflatable jump house.

The concern is when lower lending standards act as the air pump trying to compensate for higher interest rates and insufficient income … how long can the debt inflation go before it tapers off … or worse?

Don’t get us wrong.  We LOVE passive equity.  It’s fun to buy a property and just watch the equity grow.

But the market giveth and the market taketh away … unless you’re smart enough to get your equity off the table with cheap long-term debt while both are still available.

As John F. Kennedy said, “The best time to repair the roof is when the sun is shining.”

The sun is shining on real estate right now.  Enjoy it. But be sure you’re preparing your portfolio for stormy weather.

It’s probably smart to have some cash on hand … to be prepared for credit markets to tighten unexpectedly … and to lock in long-term rates where you can.

It’s also wise to pay close attention to cash-flow and avoid dependence on market factors to increase rents or values.

Make sure your deals pencil TODAY … based primarily on things you can reasonably control.

Sure, you might have to walk on some marginal deals … even though they’d be “winners” as long as the tide is high and the sun is shining.

But if the tide goes out and the storm comes, then marginal boats sink.  And if they’re tethered to your best boats, they ALL sink.

Now if you just can’t resist taking a chance on a marginal deal … consider structuring it so it can’t take down the rest of your portfolio if things don’t go as planned.

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.

Home prices surge … and subprime is BACK …

We’re just two weeks removed from our incredible Future of Money and Wealth conference … an it was an EYE-OPENER.

(If you missed it, you’ll be glad to know we video-taped the ENTIRE event and it’s in postproduction right now.   Click here to pre-order at a really great price.)

Meanwhile, now that we’re getting back to our normal routine, we noticed some real estate related news that looked interesting …

Home prices surge to a near four-year high, Case-Shiller shows 
– MarketWatch, April 24, 2018

“Rather than moderating, as many economists expected, home prices are accelerating.  The 6.8 percent annual gain … was the strongest since mid-2014.”

“ … finally broke above the peak it last touched in 2006.”

Hmmm …. is that good?

It kind of feels good.  Then again …

Subprime mortgages make a comeback—with a new name and soaring demand
CNBC, April 12, 2018

“The subprime mortgage industry vanished after the Great Recession but is now being reinvented as the nonprime market.”

A rose by any other name?

“allow … borrowers to have FICO credit scores as low as 500 … can take out loans of up to $1.5 million … can also do cash-out refinances … up to $500,000. Recent credit events, like a foreclosure, bankruptcy or a history of late payments are acceptable.”

“ … will also securitize them for sale to investors.”

Uh oh.  We’re having flashbacks …

“Big banks are also getting in the game, both investing in the securities and funding the lenders …”

Like “too big to jail fail” banks?

“It’s large financial institutions. A lot of people with private capital sitting on the sidelines …” 

Okay.  Let’s take a deep breath and try to figure out what’s really happening, and how it might impact all us lowly Main Street real estate investors …

First, does this mean another grandiose sub-prime implosion that drags the global economy into yet another Greater Recession?

Not sure we’d bet on that happening again.  At least not the same way.

Peter Schiff tells us he thinks the real crash will be the dollar.  He thinks when the debt markets implode, central banks will destroy the dollar in a vain attempt to reflate asset prices and save banks.

Wow.  That’s pretty apocalyptic.  But hey, it’s Peter Schiff.

James Rickards thinks the stage has been set to replace the dollar on the world stage with the IMF’s SDR.  Not sure what that means?  Read Currency Wars and The Death of Money.

But no one we’ve talked to think it’s all going to happen in a day. It’s a process.  And if you’re paying attention, you can see it coming and take pre-emptive action.

Of course, that’s a big topic and too much to dissect in this missive.  That’s why we hosted Future of Money and Wealth … and video-taped the whole thing.

Some of what we learned is that as the dollar begins to fail, dollar denominated bonds would fall out of favor.  After all, who wants to loan “strong” dollars today and get paid back late with weaker dollars?

Foreigners buy fewer U.S. longer-dated Treasuries at auction 
– Reuters, April 23, 2018

Well, THAT’S interesting.

Less bidders on bonds usually means interest rates rise …

Mortgages, other loans get pricier as 10-year Treasury rate tops 3% 
– USA Today, April 24, 2018

Okay, that’s getting closer to home … literally.

But usually when the world isn’t buying bonds (and yields rise) … the money goes into stocks and stocks go UP.  But they went DOWN.

Hmmmm…. it seems the paper players of the world aren’t wild about bonds or stocks.

Since stock investors aren’t piling into bonds for safety, where are they going?

Could be cash … for now.  That would explain the aforementioned, “… a lot of people with private capital sitting on the sidelines.”

We can’t claim to be paper asset experts … far from it.  But it seems to us if there’s cash on the sidelines, the issue isn’t liquidity as we’ve heard some say.

And if there’s plenty of cash … and plenty of stocks and bonds to buy … then maybe the issue isn’t liquidity or inventory, but quality.

Think about Detroit real estate at it’s worst.  There was PLENTY of properties.  And they were cheap.

You could buy a whole house for $2500.

But few did.  In fact, they bull-dozed lots of properties because on one wanted them.

The problem wasn’t price or availability, it was quality … or lack thereof.  No sale.

So MAYBE paper asset investors are a little afraid of stocks and bonds right now.  Maybe they’re starting to look for more real alternatives.

That’s what happened at the turn of the century.  Stock and bond investors poured into real estate and mortgages.  From their perspective, they’re safe.

Real estate is like that loyal, sometimes boring best friend in high school.  When things are free and easy, you hang out with your party pals … but when life gets hard, it’s that old faithful best buddy you lean on.

There’s a LOT of debt in the world right now.  More than ever before.  Much of it created in the last 10 years … providing the jet fuel for some pretty powerful paper pricing runs.

Of course, some of the cheap money has also made its way into real estate.  So real estate’s been good too.

But it’s quite possible the party is coming to an end.  Rising rates and declining stock prices could be warning signs.

And yes, a slowdown will probably impact real estate PRICES … especially for homes, which get overbid in good times.

However, incomes and rents are often less affected by downturns, making income producing properties much more stable in slowdowns.

And if you’re smart enough to lock in low cost long term financing, you’ve got a real competitive edge in a rising interest rate environment.

Meanwhile, if history is any indicator, when the paper party ends … it usually means an increased interest in real assets … especially real estate.

At least for now, it seems to us the volatility caused by rising interest rates is a MUCH bigger deal to the paper crowd than for real estate investors.

BUT … even Main Street investors should be paying attention to Treasuries, interest rates, the dollar, gold, and energy.  They’ll provide early warnings for bigger concerns real estate investors should be aware of.

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 the end of easy money …

We’re just back from another incredible Investor Summit at Sea™ … and it was EPIC!

With 234 people, 2018 was our biggest ever … and many have already reserved their place for next year.  Click here to get YOUR name on the Advance Notice List.

We kicked off the 2018 Summit with a two-day land conference based on our theme, The Future of Money and Wealth.  Our speakers hit it out of the park!

Fortunately, we videotaped the whole thing.  Watch for more details … or if you already know you want it, click here to pre-order the entire two-day series.

Meanwhile, it seems the world continued to spin while we were gone.  So as much fun as it might be to keep cogitating on currency, bonds, gold, oil and interest rates …

… we decided to dig into our real estate news feed and see what’s happening with our favorite investment sector.

But a funny thing happened …

A couple of related headlines jumped out as particularly interesting after a week of contemplating the future of money and wealth.

First …

CRE Valuations Are Trending Down – NREI Online, April 6, 2018

For the uninitiated, CRE is short for Commercial Real Estate.  And when the industry talks CRE, it includes large multi-family.

But even if you’re a Mom & Pop single-family home investor, you can still learn a lot from following CRE trends.

So this first article opens with …

“… real estate investors can expect that property prices will trend downward in the near future …”

“‘Value appreciation has practically stopped …”’

“However, there are variations among sectors.  Industrial … has seen rising values … malls have seen big losses …”

“Cap rates have been inching up … for all sectors except industrial …”

After two days at Future of Money and Wealth, then another seven days at the Investor Summit at Sea™, these comments make a whole lot more sense to us.

First, interest rates are rising.  But the impact on real estate is much deeper than just mortgages getting more expensive.  If only it were that simple.

So without getting lost in the weeds, consider the impact of rising rates on the overall economy …

With record levels of consumer, corporate, and government debt … rising rates put a pinch on budgets at every level.

This means it’s harder for consumers to spend more, for businesses to sell more, and for landlords to raise rents on those consumers and businesses.

And when you realize income property values are driven by income, it’s easy to understand why stagnant rent growth means stagnant equity growth.

But this article also reminds us why we LOVE real estate … “there are variations among sectors” … so while retail (malls) are losing value, industrial is gaining.

We discussed this trend in our February 14 newsletter, so we won’t revisit it here.  The point is …. when things shift, pain and profit are NOT equally distributed throughout the economy.

So if you’re alert and proactive, you can get in front of an opportunity … or out of the way of a problem … faster than investors on cruise control.

Meanwhile, while rising cap rates can come from income rising faster than prices, most of the time it’s from prices falling.

(Again … no investor left behind … cap rate is income divided by price.  Just grab a calculator and play with numbers until you understand. It’s an essential investor skill.)

So why might cap rates be “inching up” … that is, why would buyers be offering less for the income?

Conversely, why would sellers be offering more income for less price?

(That’s two different ways of saying the same thing … go back and play with the numbers until you get it.)

One likely reason is investors aren’t willing to overpay today (bid up) expecting income to grow in the future.  The numbers need to make sense TODAY.

So cap rates are like a barometer of sentiment.  Rising cap rates are an indicator of a less bullish, more bearish outlook.

If rents rise (creating more income) and/or interest rates decline (reducing expenses), then cash flows improve.

If the rents don’t rise (stagnant income) and/or interest rates climb (expenses increase), then cash flows stagnate or decrease.

So investors are saying the think either rents won’t rise, or interest rates won’t decrease (or even increase), or both.  That is, they don’t expect market forces to improve cash flows going forward.

Make sense?

Which leads to the next headline …

Competition Intensifies for Value-Add Assets, NREI Online, April 17, 2018

“… competition is becoming increasingly stiff as the industry faces the likely end of the cycle and rent growth has moderated for core assets.”

“As yields get lower and lower … two strategies have emerged … speculative building and value-add …” 

Quoting a research director at a commercial research firm …

“‘Value-add has become quite attractive … people are less afraid to take on vacancy risk and reposition buildings.’”

So let’s break this down real quick, then you can go get a snack …

When you hear “the likely end of the cycle”, it’s code for “the party’s nearly over.”

Real estate, like the rest of the economy, has been partying on easy money since 2009.

At Future of Money and Wealth, Fannie Mae chief economist Doug Duncan reminded us we’ve been in one of the longest (and weakest) recoveries in modern history.

In other words, we’re nearing “the likely end of the cycle.”  Duncan thinks the U.S. will be in full-fledged recession in 18-24 months.

So now instead of just buying a property and riding a wave, you actually have to buy smart and do some real work to improve the income … like “take on vacancy risk and reposition buildings.” 

And if you’re like our pal, the apartment king Brad Sumrok, and you’ve already been doing value-add and achieving spectacular results … be prepared to settle for “only” solid results.

Here’s the bottom line …

Rising interest rates are moderating the economy, so it’s important to focus your growth plans on things you have more control over.

This is probably not the environment to bet big on rising rents, falling rates, and lots of passive equity growth.  You’ll need to buy smart, have a good plan, and work hard.  We call it “force the equity.”

Pick your sectors, markets, properties, and financing structures for the long haul.

And remember … real estate is a highly inefficient investment vehicle with lots of nooks and crannies for good deals to hide.

So when you’re well-connected, diligently searching, and properly prepared with a solid team and resources so you can act quickly and carefully, you improve your odds of landing profitable opportunities.

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 future of interest rates …

Interest rates are a big deal for real estate investors … for many reasons.

The first and most obvious reason is because interest rates are the price of the money you borrow to invest with.  Higher rates mean higher payments and less cash flow.

Of course, even when you pay cash for your properties, your tenants probably carry consumer debt … car loans, credit card, and installment debt …

Higher rates mean higher debt payments for your tenants, so less of their monthly budget is available to pay you rent or absorb rent increases.

Also, your property values, exit options, and liquidity are all affected by interest rates.

Higher rates mean buyers have less capacity to bid up comparable properties … and fewer buyers can afford to buy your property when you’re ready to sell.

For these reasons and others, most real estate investors and their mortgage advisors pay very close attention to interest rates …  especially when financing or re-financing.

But there are other very important reasons for real estate investors to care about the future of interest rates …

Interest rates are a barometer for the health of both the currency and the overall economy.

Last time we looked, most real estate investors transact and denominate wealth in currency (dollars for Americans) … and your rental properties, tenants’ incomes, and overall prosperity all exist inside of the broader economy.

So the potential for big changes to either the currency or the overall economy matter to real estate investors just like they do to paper asset investors.

In fact, based on the amount of debt most real estate investors use, interest rates are arguably even MORE important to real estate investors.

We’re just a couple of days away from our Future of Money and Wealth conference … with nearly 400 people coming … and right now we’re thinking a lot about the dollar and interest rates.

Peter Schiff is speaking.  Peter wrote Crash Proof in 2006 and released it in 2007.  Back then, he loudly warned of an impending financial crisis whose roots would be in the mortgage market.

Sadly, back then we didn’t know Peter, and we didn’t read his book.  Then 2008 happened, and we were blindsided by the financial crisis.

So now we read more … a LOT more.

We make time to listen to people like Peter Schiff, Robert Kiyosaki, and Chris Martenson.  And we work hard to share them with our audiences.

A very interesting book we just finished is Exorbitant Privilege by Barry Eichengreen.  He’s Professor of Political Science and Economics at Cal Berkeley.

Eichengreen published Exorbitant Privilege in 2011, which means he probably wrote it in 2010.

Keep this in mind as we share these prophetic excerpts from Chapter 7, “Dollar Crisis”…

“What if foreigners dump their holdings and abandon the currency [dollar]?  What, if anything, could U.S. policymakers do about it?”

“It would be nice were this kind of scenario planning undertaken by the Federal Reserve and CIA … it would have to start with what precipitated the crash and caused foreigners to abandon the dollar.”

Note:  Eichengreen probably didn’t know at the time that James Rickards, former attorney for Long Term Capital Management (the hedge fund at the center of the near financial meltdown of 1998), was participating in precisely this kind of planning, which Rickards describes in his book Currency Wars, published a year after Exorbitant Privilege.

Back to Eichengreen’s prophetic 2011 commentary …

“One trigger could be political conflict between the United States and China.  The simmering dispute over trade and exchange rates could break into the open …

“… American politicians … could impose an across-the-board tariff on imports from [China].”

WOW … Eichengreen wrote that at least 7 years before this March 22, 2018 headline from CNBC:

Trump slaps China with tariffs on up to $60 billion in imports: ‘This is the first of many’

Back to Eichengreen in 2011 …

“Beijing would not take this lying down.”

CNN Money on April 3, 2018:

China to US: We’ll match your tariffs in ‘scale’ and ‘intensity’

Eichengreen in 2011:

“Or the United States and China could come into conflict over policy toward rogue states like North Korea and Iran.”

If you’ve been following the North Korea drama, you probably know this one’s been back and forth.

Last summer, China seemed to side with North Korea.  Then they tried to take a neutral position.

But recently Kim Jong Un paid a secret visit to China.  Of course, no one really knows what that was about.

But based on recent trade policy it seems the U.S. isn’t sucking up to China for help with North Korea.  So maybe the U.S. and China disagree on North Korea?

Now STAY WITH US … because the point of all this is … according to Eichengreen …

China’s relationship with the United States and the U.S. dollar has a DIRECT impact on the future of YOUR money, interest rates, and wealth.

And if you’re like most Main Streeters, you may not completely understand the connection …

… just like we didn’t understand what Credit Default Swaps had to do with our real estate investing in 2008 … until everything suddenly imploded …

… despite reassurances from the wise and powerful man then behind the curtain of the Federal Reserve, Ben Bernanke.

And the point here isn’t Iran, or North Korea, or tariffs, or trade wars … it’s about whether China gets upset enough with the U.S. and opts for the nuclear option …

Eichengreen in 2011:

“… China [could] vent its anger and exert leverage … by … dumping [Treasuries] … would send the bond markets into a tizzy … interest rates in the United States would spike.  The dollar would crater … could cause exporters, importers, and investors to abandon the dollar permanently.”

Obviously, there’s a LOT more to this topic than we can cover today.

Our point for now is that way back in 2010-11, Eichengreen envisioned a scenario in which conflict with China could create a dollar crisis.

As you can see, today’s headlines are living out his concerns.

When you read Eichengreen, like Jim Rickards, he talks about things reaching a tipping point … where everything happens fast.

We lived that in 2008 and it was NO FUN.  But that was only because we were on the wrong end of it.  While we got slammed, others made fortunes. They were informed and prepared.  We weren’t.

So be cautious of normalcy bias and complacency when it comes to contemplating the possibility of a dollar crisis.

Better to be prepared and not have a crisis … than to have a crisis and not be prepared.

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 Future of Money and Wealth

The world economic order is under-going massive change right now.  We’re literally watching it unfold in the daily news.

Yet few investors really understand what’s happening and why … or what they can do to both grow and protect wealth during these historic times.

 

“Those who can’t remember the past are doomed to repeat it.” – George Santanya

 

In two power-packed days our all-star line-up of notable experts will explain …

 

  • How the U.S. dollar is under attack and what it means to Main Street investors

  • What are the best and worst investments based on what’s happening now … and where it’s headed

  • How savvy investors are preparing to be on the right side of an historic wealth transfer most people don’t see coming

 

Remember, the flip side of crisis is opportunity.  But pretending everything is fine … and not being prepared in case it’s not … can be dangerous and expensive.

 

“Maintain unwavering faith you can and will prevail in the end, regardless of the difficulties, and at the same time, have the discipline to confront the most brutal facts of your current reality.” – Jim Collins, Good to Great

 

Click here now to learn more about The Future of Money and Wealth >>

 

 

Next Page »