Certainty in uncertain times …

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

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

And that was just last week.

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

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

History says that’s not a winning strategy.

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

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

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

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

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

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

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

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

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

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

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

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

Making the Case for Real Estate

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

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

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

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

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

Real estate markets are inherently inefficient.

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

Real estate markets are really hard to manipulate.

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

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

Real estate is supported by the power players.

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

No one attacks real estate to drive it down.

Real estate is financeable with cheap long-term debt.

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

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

Real estate mitigates counter-party risk.

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

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

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

Real estate allows you to switch out debtors.

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

No.  Real estate is VERY different.

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

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

Good luck doing that with a bond.

Real estate provides a hedge against both inflation and deflation.

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

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

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

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

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

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

Did you lose?

Real estate provides certainty in an uncertain world.

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

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

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

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

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

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

Until next time … good investing!


 More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.

Lessons from Puerto Rico for real estate investors …

“Those who do not remember the past are condemned to repeat it.”

   – George Santayana


This is one of our favorite quotes.  It’s simple yet powerful wisdom … useful for individuals, businesses, governments … and certainly for investors!

We could take this theme in a thousand different directions, but this CNBC headline caught our attention this week …

Here’s how an obscure tax change sank Puerto Rico’s economy

With tax reform in today’s financial headlines … and our memories of what happened to real estate after the 1986 tax reform …

… we think it’s a good time to consider the impact of tax policy on the economy, jobs, and real estate.

As for Puerto Rico … it’s a huge mess after Hurricane Maria.  Lots of infrastructure and real estate have been destroyed.

Of course, the financial mess in Puerto Rico was in the news long before Maria showed up.  The natural disaster just made the financial disaster a whole lot worse.

Let’s dig in and look for lessons for real estate investors …

The CNBC article points out, “Even before a devastating hurricane … the government was struggling with an economy in shambles …”

And, “That fiscal mess has its roots in the repeal of a controversial corporate tax break that helped spark an exodus from the island that sent its economy into reverse.”

Yikes.  Will people and businesses really move just because of some “tiny” tax law?

Yes.  Yes, they will.  It turns out taxes (and avoiding them) are kind of a big deal to people and businesses.

In this case, a tax break, “enacted in 1976, allowed U.S. manufacturing companies to avoid corporate income taxes on profits made in U.S. territories, including Puerto Rico. Manufacturers … flocked to the island.”

This lead to an economic and employment boom in Puerto Rico.

Of course, when politicians see money they just can’t help themselves.  The Puerto Rican politicians started spending, and borrowing to spend even more.

Meanwhile, back in the U.S., the CNBC article says …

But by the early 1990s, the provision faced growing opposition from critics who attacked the tax break as a form of corporate welfare.”

So in 1996, a ten-year phasing out of the tax break began and “plant closures and job losses followed.

Which bring us to tax policy and real estate investors …

The law had nothing to do with real estate or investors … but then again, it had EVERYTHING to do with real estate investing …

… because real estate investments are highly dependent on JOBS.

And whether you think it’s fair or not, corporations make decisions about where to do business (or not) based partially on tax policy.

In this case, tax breaks attracted corporations to set up shop and were good for jobs and real estate.  The removal of those breaks had the opposite effect.

Of course, the law in question was passed and repealed at the federal level.  It wasn’t under Puerto Rico’s control.

But Puerto Rico got the lesson.

So in 2012, Puerto Rico passed Act 20 and 22 … effectively becoming an attractive tax haven for both businesses and individuals.

We first heard about this from Summit at Sea™ faculty member Peter Schiff … who moved his asset management company and himself to Puerto Rico to save taxes.

He’s not the only one.  We have several other friends who’ve done the same thing.

Right now, the tax law still exists … though much of Puerto Rico doesn’t.

We think there’s probably a way to combine those two circumstances to create an opportunity for real estate investors.

Of course, back in the U.S., tax reform is in the air again …and corporate tax breaks are in the mix.

Will corporate tax breaks bring businesses to the U.S. and create an employment boom? If so, where?  And will the breaks be permanent or temporary?

It’s too soon to tell, but it’s something we’ll be watching closely.

Meanwhile, there’s another lesson from the Puerto Rico story …

We know a tax break brought in a tide of corporate investment, and the removal of the tax break decades later took the tide back out.

But there was a lot of opportunity in between.

Of course, to catch a wave, you need to be watching the horizon.  And when you see the wave forming, you need to paddle quickly into position.

In Puerto Rico, as in Florida, Houston, and the several Caribbean islands all decimated in varying degrees by the back to back hurricanes …

… there’s going to be a big tide of capital flowing in to repair everything.

And because of the scope of the problems, the season of rebuilding could last quite a while.

Recently, we talked with our boots-on-the-ground turnkey property provider in Orlando, and he says he sees a lot of opportunity in his market right now …

Problem properties are popping up with pricing that leaves some meat on the bone for investors.

That’s good news … not just for investors, but for the community at large … because investment capital is needed to help with the recovery process.

The same is true in Houston, Puerto Rico and other areas ravaged by the storms.

Of course, conditions in each market are different.  Orlando is in far better shape than Houston which is far better shape than Puerto Rico.

All that to say there are different levels of distress, bargains, risk and reward in each market.

Unfortunately for the average individual part-time investor, the gap between seeing opportunity and being able to take advantage can be too big to bridge.

For most U.S. citizens, their “investment” into these disaster zones will be a de facto donation through their taxes, as federal relief funds pour into each area.

Of course, many kind-hearted individuals will make modest personal donations, which is admirable.

But to get LARGE amounts of private capital into each area to help rebuild, it’s going to take an investment opportunity.

And we think private syndicators have a role to play.

Motivated real estate entrepreneurs with skills and availability have an opportunity to start a private investment fund to aggegate private capital and make profitable investments in each of these areas.

Busy qualified investors who don’t have the time or skills, but see the opportunity, can make an investment in these private funds and earn a profit while helping heal ravaged markets.

This is the kind of capitalism that makes a positive difference in the world …  people helping themselves by helping others.

Or as our good friend Gene Guarino often says, “Do well, by doing good.”

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.

Investing, infrastructure and you …

Timeless real estate wisdom says three things matter most when deciding what to buy … location, location, location.

It’s tongue-in-cheek, but the point is real estate derives its value from demand.

The key is choosing properties most likely to surge in demand relative to supply.

Of course, deciphering supply and demand means looking at demographics, economics, migration, and the potential for increases in supply.

The concept is simple.  But understanding actual market dynamics is more complex.

Still, it’s worth the effort because real estate investing is about buying and holding a property for the long term.

And even if your time horizon is shorter, you still need new buyers coming into a market to take you out.

So getting the market right matters a lot more than simply making sure the property’s free of termites and the plumbing works.

When it comes to residential rental real estate, some major demand factors are jobs, affordability, and quality of life.

Sure, everyone would LOVE to live in Tony Stark’s mansion in Malibu … it’s got a GREAT location and is low in supply.  But it’s not affordable.

And with so many retail jobs being automated or Amazoned … and manufacturing jobs still more off-shore than on …

… what kind of jobs and geographies offer the kind of growth potential likely to support working class folks?

We’re keeping our eyes on infrastructure for clues.

Both the Obama administration and now the Trump administration have said U.S. infrastructure needs attention.

It’s not a blue or red only issue, so maybe something will really get done.

We’ve commented before on Trump’s plan to spend a trillion dollars on infrastructure … and though it may seem to have fallen off the radar, infrastructure might be making a comeback.

First, even though the Fed backed off on the last rate hike, they’re still talking about reducing their balance sheet.

That’s code for tightening “monetary stimulus”.

This puts pressure on President Trump and Congress to fire up some “fiscal stimulus” … which is code for good old-fashioned government spending.

And while the military is quite likely to be on the receiving end of a chunk of it, we think some funding will probably find its way into infrastructure.

Of course, we’re not the only ones paying attention to this possibility.

Check out this headline from Bloomberg …

Buyers Bet on Infrastructure, With or Without Trump

The article is about one big company buying up another big company to get in position to feed off government spending on infrastructure.

“This rush to get positioned for an infrastructure-spending boom is a striking contrast to the stalled progress in Washington on legislation of any kind, let alone Trump’s proposed $1 trillion infrastructure plan. But like the private-equity firms raising buckets of money for infrastructure-focused funds, industrial firms are wagering the country’s roads, bridges and sewer systems have gotten so bad they can’t be ignored for too long.”

Of course, the big question for real estate investors is … where???

Some clues can probably be gleaned from the prospectuses of the private-equity and industrial funds … all of whom are presumably spending considerable resources on researching their mega-investments.

But there are also clues in the news.

The New York Times published an article claiming Trump Plans to Shift Infrastructure Funding to Cities, States and Business.

More recently, Reuters reports U.S. Construction Spending Falls as Government Outlays Tumble.

U.S. construction spending unexpectedly fell in June as investment in public projects recorded its biggest drop since March 2002 … The decline pushed public construction spending to its lowest level since February 2014.”

So even though Uncle Sam wants to spend money on infrastructure, they’re not doing it in earnest … yet.

But think about this …

Big companies and private-equity funds are getting positioned for big infrastructure spending.  They expect it to happen.

President Trump says he wants to spend a trillion dollars in infrastructure.

We can’t imagine Congress not wanting to spend money.  It’s what they do best.  Then again, getting anything done is what they do worst.

But everyone seems to agree infrastructure is in bad shape. And we’re guessing some places are in worse shape than others.

So like the big players, we think at some point, the need is going to force the spending … ready or not.

Now if the Feds don’t pay … or if Trump puts more responsibility on the states … it seems like those states which already have the best infrastructure … or the best economic ability to build or improve it … will have a big advantage.

And because we’re always looking for an advantage, we decided to look up those U.S. states in the best fiscal shape.

Not surprisingly, several of our favorites are in the top ten …

  1. North Dakota
  2. Wyoming
  3. Texas
  4. North Carolina
  5. South Dakota
  6. Vermont
  7. Tennessee
  8. Indiana
  9. Utah
  10. Florida

Of course, when picking a market to invest in there’s more than just fiscal strength.

Affordability, market size, business and landlord friendliness, quality of life … and your boots-on-the-ground team … are all important considerations also.

Nonetheless, with record levels of debt at every level, rising healthcare costs, pensions in crisis, and fiscally cancerous unfunded liabilities growing daily …

… we think companies and governments in relatively good financial shape are best positioned to make critical investments, gain competitive advantages, and attract an unfair share of population and business.

The goal, as Wayne Gretzky says, is to skate to where the puck is going.

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.

What do Trump and Sanders primary wins say to real estate investors?

Trump and Sanders and a Bigger Economic Picture

In the recent New Hampshire primary vote, Trump and Sanders brought home big wins. Donald Trump summed it up in his New Hampshire victory speechTrump and Sanders NH Primary Wins - Donald Trump won the New Hampshire Republican primary by a large margin

If we had 5 percent unemployment, do you really think we’d have these gatherings?

He could be right.

In spite of “glowing” employment reports and a Fed so confident in the “strength” of the economy it raised interest rates a “whopping” 25 basis points for the first time in nearly a decade…the ire of the electorate (and the stock market) could be telling a much different story.

John Burns Consulting recently issued a report confirming something we’ve been projecting for quite some time:

Americans Are Leaving Big Cities for More Affordable Cities in the South and Northwest

When it comes to real estate, for homeowners or renters (and therefore for landlords), the basis for growth isn’t from foreigners snapping up U.S. real estate as a safe haven…or from hedge funds pumping billions of dollars into single-family home speculation…The real driver underneath fundamental real estate strength is real growth in both jobs and wages.

But in spite of the 4.9% unemployment rate touted by the government, that same government says labor participation is historically very low.

Look at this chart from the Bureau of Labor Statistics:

trump and sanders win - U.S. labor participation rate has seen falling substantially for the last 10 years

U.S. Labor Participation Rate – Source: Bureau of Labor Statistics

Boomers to blame? 

Some say the decline in labor participation is due to baby boomers retiring, but the government’s very own stats don’t support this assertion…

From 2004 to 2014, the only age group to INCREASE in labor participation was age 55 and OLDER.

Labor participation for anything UNDER 55 was actually NEGATIVE.

Clearly, baby boomers aren’t driving down the labor participation rate.  They’re the main group propping it UP!

What about wages?

Back in October 2014, Pew Research revealed that real wages have been stagnant (at best) for decades:

Trump and Sanders and the economy - purchasing power chart

Source: Pew Research Center

More recently, the Bureau of Labor Statistics reported real earnings notched up a tad, but a big chunk of the tiny gain came from a lower CPI (Consumer Price Index).

So small pay raises supplemented by lower prices produced a slight increase in purchasing power.

Is that enough to sustain the robust rental increases landlords have been enjoying the last couple of years?

No.  That’s probably why people are moving to more affordable markets.  A trend we expect to continue.

As you can see, it’s easy to get lost in the statistical weeds.

But the New Hampshire results are telling an easy to understand message on both sides of the aisle.

This economy isn’t booming for working class folks.

Trump and Sanders NH Primary Wins - picture of bernie sanders

Presidential candidate Bernie Sanders

So the voters want to kick the bums out, make America great again, return the power to the people, and stick it to the Wall Street elites…which explains (at least partly) the surprising popularity of candidates like Trump and Sanders.

Will the Fed continue to raise rates in an attempt to instill confidence?  

Based on the market’s reaction, it’s hard to imagine they will.  After all, the stock market’s been throwing a hissy fit since the December “hike”.  Just like Peter Schiff said they would.

As we discussed in a recent newsletter, the Fed rate increase resulted in a DECREASE in mortgage rates.

That’s because investors dumped stocks for the “safety” of bonds, pushing yields down (yields or interest rates DECREASE when the prices of the bonds are bid UP by growing demand).

Great!  Cheaper money is always nice for real estate investing.

It’s a reminder that bad times can be great times for investors, so don’t be dismayed by economic uncertainty.

Oil’s still not well…

Another big concern for 2016 remains the impact of lower oil prices on the credit markets.Falling oil prices threaten to implode the bond markets.

If oil prices remain suppressed for whatever reason, while it’s great for consumers (your tenants), it makes it harder for indebted oil companies (employers) to meet their debt obligations.

No surprise U.S. oil bankruptcies have spiked 379%!

And if Wall Street levered up on oil bonds the way they did with sub-prime mortgage bonds, a meltdown in oil bonds could trigger another epic financial crisis…maybe even The Real Crash Peter Schiff has been warning about.

We don’t know.  We just keep watching.

For real estate investors, the message is the same as it’s been for a while…

Affordable properties in tax and business friendly states with good infrastructure, diverse economic drivers, and quality of life amenities will probably see a disproportionate influx of people and businesses.

So while real estate, like everything else, will be impacted by a financial crisis…it isn’t an asset easily dumped by panicked investors.

And the powers that be, from governments to central banks to big business, are all highly motivated to prop up real estate.

Even better, if you’ve locked in super cheap mortgage money for the long term, and picked properties which conservatively cash flow, you’re in a position to ride out a storm.

And if you’re really prepared, you may have converted some of your equity into cash in case prices fall.

As he told us before he was a Presidential candidate, Donald Trump says in the down times, it’s always good to have some cash on hand to go bargain shopping.

For now, the Trump and Sanders freight train seems to be telling us Main Street isn’t drinking the “all is well” Kool-Aid.

So our focus remains on markets, properties and financing structures which position real estate investors to prosper in an economy that isn’t yet on solid footing for Main Street.

After all, that’s where our tenants live.

Until next time…

Good Investing!

11/24/13: Follow the Money – Clues Where the Economy is Headed

John Denver once sang, “Life on the road is kinda laid back.”

Not for us.  But thank God we’re real estate guys.  For you youngsters, this is a reference to a classic John Denver tune, Thank God I’m a Country Boy.   You know…John Denver?  Rocky Mountain High?  Blond hair, little boy haircut, high voice?  No?  Just stay up late one night and watch some infomercials about 70’s music….

Anyway….

This episode is from yet another out-of-office experience for The Real Estate Guys™.  This time, we’re in the fabulous city of New Orleans for the 2013 New Orleans Investment Conference.  We attended this event last year and it was so much fun, we came back this year.  The to-die-for grilled oysters at Drago’s may have influenced our decision.  😉   We’ll be back in 2014!

For now, in the mobile studio-in-a-box for this jazzy episode of The Real Estate Guys™ radio show:

  • Your Duke of Discussion, host Robert Helms
  • His Dizzy co-host, Russell Gray
  • Best selling author and radio personality, Charles Goyette
  • Top performing mutual fund manager, Frank Holmes
  • New Orleans Investment Conference organizer and precious metals commentator, Brien Lundin

When you walk around the streets of New Orleans, which is VERY fun to do, you’ll see (among many things) collections of jazz bands performing.  It doesn’t take long to realize that the key to producing great music is the diversity of the ensemble.  Strings, winds, horns and percussion – and variations of each of those – all coming together to create a sound that’s unique to jazz.

We’ve been real estate guys for a long time.  And pre-mortgage meltdown, we were narrowly focused on all things real estate.  We lived, like many real estate investors, in a bubble (pun intended) – only seeing things from one point of view.  It’s like a one instrument jazz band.  It’s okay, but not as rich as full complement of instruments.

After being blind-sided by the crash (yes…we know we’re in good company, but that’s not much consolation when cleaning up the mess), we made a concerted effort to expand our minds by studying foreign markets, other asset classes, and trying to understand how global, economic, and yes, even political, factors affect real estate investing.  It’s something we thought was missing from most real estate related commentary and we’ve tried to fill that gap.

Along the way, we’ve met and interviewed many amazing and smart non-real estate people, like Peter Schiff, Herman Cain, Mike Maloney, Mark Skousen, Steve Forbes, and many more.

We’ve learned a ton.  And we’d like to think we’ve helped expand the perspectives of real estate investors around the world.  After all, the podcast version of the show is heard in over 180 countries.  Amazing.

But a funny thing happened as were preparing to go back to the New Orleans Investment Conference this year.  Conference organizer, Brien Lundin invited us to speak not once, but twice, on real estate. We’re obviously used to talking about real estate, but not to resource investors.

Our first talk (with the help of Summit at Sea™ faculty member John Turley) was about offshore real estate investing.

Our second talk was an updated version of a presentation we did at Freedom Fest 2012 on using real estate to short the dollar.  We expanded the discussion to include the idea of Real Asset Investing™ in the face of a fragile dollar.  You’ll be hearing more about this in the months ahead.  We think there’s a bubble brewing and the Real Asset Investing™ strategy is designed to not only provide protection, but produce profit.

Both talks were very well received even though the New Orleans Investment Conference isn’t really a real estate conference.  It’s more about resource investing (precious metals, mining stocks, oil and gas, etc.).

So why were The Real Estate Guys™ invited to speak at the New Orleans Investment conference?

Apparently, just as we’ve seen the benefit of studying other asset classes, the non-real estate investing community is beginning to see the wisdom of real estate as an investment, which to us, makes perfect sense.  After all, isn’t real estate the ultimate resource?

Of course, while we at the conference, we attended lots of sessions.  In addition to all kinds of investing experts, there were engaging panels and debates featuring a pretty well known cast of characters including Ben Carson, Charles Krauthammer, Ron Paul and our 2013 Summit buddies Mark Skousen and Peter Schiff (Peter’s coming back on our 2014 Summit at Sea!).

Even though you might think these guys all sing from the same songbook, there was quite a bit of disagreement among them, which we thought was helpful (and highly entertaining).  Next year, former Fed Chairman Alan Greenspan will be there.  We’re guessing that one will be entertaining too!

After listening to the sessions, we came up with the theme of “follow the money” for this episode.  And as much as we’d like to interview EVERYONE at the conference, everyone was very busy, and with only one hour for the episode we focused on three guests.

First, we talk with first time guest, Charles Goyette.  Charles is the author of the best-selling book, The Dollar Meltdown.  He just released his latest book, Red and Blue and Broke All Over – Restoring America’s Free Economy.  Charles is also the co-host of a daily radio commentary featuring legendary former Congressman and Presidential candidate Ron Paul.

You can probably tell by the book titles and his association with Ron Paul, Charles is a free market, small government, individual liberty guy who’s concerned about the direction of the U.S. economy.  While he doesn’t think America will fail, he thinks there are some choppy roads ahead.  He says the answer is to free the markets from overly burdensome government intervention.

One of the best practical tidbits he shares is how to know a bubble from a boom.  It’s quite simple he says.  Just follow the money that’s driving the growth.  Is it from production or from printing?  If economic activity (measured in people working, products and services being produced) is driving the growth, it’s a boom.

However, if monetary stimulus (i.e., quantitative easing, artificially low interest rates, financial speculation) is the source, then get ready…it’s a bubble.  And he contends that while the Fed might attempt to mitigate or avoid a bubble bursting, ultimately the market is bigger than the Fed.  So it’s wishful thinking to believe the Fed can overpower market forces to stop a bubble from bursting.

Obviously, bubble watching is important to real estate investors.  When a bubble bursts or just passes lots of gas, it can be very disruptive to job creation, interest rate stability (especially if you have adjustable loans), and availability of capital to finance your real estate purchases and sales.

The theme of Charles’ new book is that freedom creates prosperity.  That connection is less obvious, but equally important (if not more so) than how to recognize a bubble before it bursts.

Charles Goyette’s contention is that when people are free to innovate and produce, and are left enough of the fruits of their labor and risk taking, that they will become highly productive.  In turn that high productivity creates abundance, affordability and excess capital to be re-invested in greater production and efficiency.  All of that means jobs, and the purchase of all the things necessary to build and maintain a thriving community.  Best of all, the prosperity extends farther down the socio-economic ladder to the working class (our tenants).

All of that bodes well for the local real estate market.

So, if Charles is right, a savvy real estate investor can look at the “freedom factor” of any given market and index its future growth prospects to its relative freedom factor strength (compared to other markets).  Later in the show, Frank Holmes talks about this exact phenomenon in Texas, which is home to some of the fastest growing cities and strongest real estate markets in the U.S.  So maybe Charles is on to something!

Speaking of Frank Holmes…

Frank is the next guy we talk to.  Long time listeners may recall our first interview with Frank a few years back.  We were impressed with his vast and amazing knowledge of global markets and the performance of his managed funds.  Now, here we are three years later, and Frank is still sharp as a tack, his funds are still top rated, and he’s as positive and optimistic about the future as anyone we’ve met.

Frank also takes up the theme of “follow the money”.  He says there’s big money on both sides of the political debate (big government versus small government) and both are super smart.  Dumb people seldom accumulate money and those that do don’t manage to hold onto it very long.  So whether or not you like their politics needs to be set aside so you can objectively ask, “What is the smart money doing and WHY?”

Did we mention that Frank’s a smart guy?

He goes on to give us important insights into the impact of the Unites States new found position as an energy producing powerhouse.  We’ve been following the oil and gas business for multiple reasons (local market job creation, support industry job creation, impact of production on absorbing inflation and slowing the dollar’s descent) and thought we were pretty sharp.

But Frank adds a new perspective we hadn’t previously considered.  Did we mention that Frank’s a smart guy?

He explains to us that the American economy has a HUGE competitive edge over foreign markets because of our cheap energy.  That’s right. CHEAP ENERGY.

Yes, we know that $4 gas doesn’t seem cheap.  But that’s an American paradigm.  Canadians pay $6 a gallon.  And it can be worse in other parts of the world.  And then there’s natural gas, where the edge is even bigger.  Foreign markets can pay as much as 3 times as much as American citizens and business.  Yikes!

“So what?” you might ask.  As did we.

The “so what” is that cheaper energy mitigates some or all of the disadvantage of cheaper labor.  Hmmmm……

We’ve been concerned that a falling dollar means rising (denominated in dollars) commodity prices (like food and energy, which are conveniently left out of the Consumer Price Index…but that’s a different rant…).  Rising prices combined with soft labor means tenants can afford less rent – and certainly are going to be resistant to rent increases.

So while Frank didn’t persuade us that we shouldn’t be prepared for a soft rental market, he did move us from “worried sick” to “moderately concerned”.  Maybe with a little more time, we could get up to “cautiously optimistic”.

As for Frank, he’s very optimistic about the U.S. being competitive in global markets.  We hope he’s right because that means less downward pressure on labor, which of course is positive for rental income. 🙂

Last on our dance card is Brien Lundin.

We’ve really enjoyed getting to know Brien and his team.  They’ve been producing the New Orleans Investment Conference for many years and our interactions with him have been great.  He’s a real pro and is well respected in the investment community.

When he’s not producing the New Orleans Investment Conference, Brien writes a newsletter on precious metals.  We don’t talk too much about metals on this episode, but you can expect to hear more from Brien on The Real Estate Guys™ radio show, podcast and blogs.

For now, we reflect on another successful conference, the integration of real estate and resource investing, and we look forward to next year’s 40th anniversary New Orleans Investment Conference which will feature former Fed Chairman, the legendary Alan Greenspan.  THAT will be amazing.  We can’t wait!

Meanwhile, listen in to this episode of The Real Estate Guys™ radio show…brought to you from the floor of the New Orleans Investment Conference.

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9/25/11: Finding the Right Market with the Right Jobs

Tenants who actually have jobs are far more likely to pay rent than those who don’t…unless you’re renting to Section 8 or retirees.  So you don’t have to be a rocket scientist to know that the durability of your rental income will be closely linked to the durability of the local economy.

And while a lot of real estate”investors” have been focused on flipping distressed properties to foreigners and newbies, if you’re a long term buy and hold investor, then finding the right market with the right jobs is job one.  After all, if you get a “great deal” on a cheap property in an economically declining market, how bright is your investment’s future?

So how do you know if a local market is attractive (or repulsive!) to businesses and job growth?  To find out, we decided to visit with a guy whose full time job is to reach out to businesses and recruit them to move to his city and set up shop.

The voices on this scintillating session on The Real Estate Guys™ radio show:

  • Your right on host, Robert Helms
  • Your left over co-host, Russell Gray
  • The Godfather of Real Estate, Bob Helms
  • Special guest, the CEO of the Greater Memphis Chamber of Commerce, John Moore

During a recent trip to Memphis (we were doing some advance work for our upcoming field trip), we had the opportunity to sit down with  two representatives from the Chamber of Commerce.  We learned so much, we thought you would like to hear about it.  So we invited them to call in to the show and tell us about what makes Memphis magic.  We must have made a good impression because they gave the job to their CEO!

Even if you aren’t interested in Memphis (cash flow can be SO boring), you can still learn a lot from this episode, which you can then apply to whatever markets you’re in to.  (If you have one you really like, use our Feedback page to tell us which one(s) and why.  Who knows?  Maybe The Real Estate Guys™ will do a field trip to your town?)

So what makes a market place attractive to businesses?  We know that a company will move to find a more favorable business climate, but what does that look really look like?  And is it really all up to the government, or is there more?

We find out that there are a variety of factors, some of which have to do with taxes and regulation, but many others that have to do with location and who the neighbors are.  Sometimes there are important synergies between businesses, so companies will set up shop simply to be near each other.  Mr. Moore gives us a couple of great examples.  Very interesting!

Of course, as real estate investors, we’re not just interested in jobs for the sake of jobs.  Though after the last few years, ANY job looks pretty good!

But real estate investors are looking for areas where there are the kind of jobs that our ideal tenants will need to be able to consistently pay rent.  Don’t you like the sound of those words? “Consistently pay rent”… like music to our ears!

So listen in to this episode and learn about some of the things you should be thinking about when scouting out your next long term real estate market!

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The Not So Secret Formula for Stable Employment

The presidential campaign rhetoric is kicking into high gear.  Texas Governor Rick Perry says he’s a job creation whiz.  His detractors say it’s just dumb luck because he happens to govern a state with oil and gas under the ground.  But no one is denying there are more jobs happening in Texas than any other state.

Meanwhile, no one is talking about Jack Dalrymple.

Who???

Jack Dalrymple. He’s the governor of the state with the lowest unemployment rate in the USA.  And he’s the Governor of North Dakota.

North Dakota? Really??  Do you even know where North Dakota is? (Hint: It’s just above South Dakota, if that helps.)

According to a recent article by the Associated Press, “Booming oil, agriculture and manufacturing industries have helped the state keep the lowest unemployment rate since November 2008.”

Wow.  Oil, agriculture and manufacturing is the magic formula.  Who knew?

So what’s the lesson for real estate investors?

Well, if you believe like we do, that the best tenants are those with jobs, then paying attention to what, where and why job are happening is obviously important.

In this case, North Dakota’s experience is affirming what we’ve already come to realize:  markets with industries that are strongly linked to the geography are less likely to move off shore.  Oil and agriculture fit that bill.

So when you’re researching prospective markets to buy rental property, pay close attention to which businesses are “primary” (pulling money in from outside the area) and how “linked” they are to the geography.  And of course, those businesses need to provide the kind of jobs that renters need.  Match your property choices and price points to what the employees of the local businesses can best afford.

If that all sounds like common sense, that’s because it is.  But as the legendary football coach Vince Lombardi always reminded his championship teams, winning is matter of mastering the fundamentals.

 

 

Five Lessons Washington Could Learn From Real Estate Investors

With all the news about the debt ceiling crisis, it’s hard not to think about policy making. And while we think there are some great lessons available for real estate investors, we also think the politicians would benefit from looking at the situation like a real estate investor.

Since we recently interviewed two presidential candidates (watch for those interviews to be released soon!), maybe some policymakers are paying attention to our lowly blog?  Who knows.  But you’re here (which we appreciate), so let’s get on with it.

Lesson #1:  Add New Customers

For a real estate investor, this means acquiring more revenue producing units.  Notice that this isn’t “raising rents”. Raise rents in a weak economy and you LOSE customers, not gain them.  In fact, if you tell tenants you’re thinking about raising rents, new people won’t move in and existing tenants will start looking for someplace else to live.

For Washington, businesses are “customers”.  Like tenants, businesses and the people they employ get up every day and go to work.  Then they send a portion of their earnings to Uncle Sam (in the form of taxes) just like a tenant sends a real estate investor a portion of his earnings in the form of rent.

So if a new tenant will not move in or an existing tenant will move out if rental increases are being hinted at, is it any surprise that businesses aren’t being formed, won’t hire, or move out of the country when higher taxes (or other similar government imposed burdens) are being threatened?  Consider how General Electric and Google have organized themselves (legally) to move their profits off shore, or how Amazon recently canceled contracts with all their California based affiliate marketers.  Did those companies want to invest time and effort to do those things? No.  But they decided is was the lesser of evils.

As a landlord, if you want to attract new tenants, you must provide a safe, affordable place to live. If Washington wants to “create jobs”, the focus needs to be on providing a safe, affordable place to do business.  We look to acquire rental real estate in places that are friendly to business.

Lesson #2: High Overhead Slows Growth

The bigger your real estate portfolio grows, the more people you’ll need to help you manage it.  These include your tax advisor, estate planning attorney, asset protection attorney, insurance broker, mortgage broker, etc.  You’ll also have property managers, maintenance people and a bevy of sub-contractors.

All these people must be supported by your rental income.  But you have to add tenants before you add team members.  If you get it backwards, you go broke, even though you have a “big” business.  “Big” isn’t necessarily profitable.

When you watch the news coming out of Washington, ask yourself if Uncle Sam is growing government in response to a growing number of businesses, or independently of economic growth.  In other words, private sector employment should be growing first and faster.  If not, then expenses will go up and revenues won’t and you’ll be hemorrhaging cash.  And if you think raising rents on your tenants in a soft economy is the answer, go back to Lesson #1.

Lesson #3:  Cash Flow is Not Profit

As a real estate investor, it’s important to make payments on time.  It preserves a strong credit rating, which is a very useful tool for investing.  But if your rents decline and you’re using credit lines to make your payments, it may seem to you and the outside world that you have everything under control.  However, you’re headed for disaster.

At some point, you’ll run out of credit.  And even if your lenders are dumb enough to keep raising your credit limit, all you’re doing is delaying the inevitable because each month more of your available cash flow goes to interest until that’s all there is.  The real problem is that you’re not running a profitable business.

When an investor is faced with this problem (and it happens all the time), he has some choices:

  • Increase revenue.  This can be done by raising rents on the existing tenants (if the economy will permit it – see Lesson #1) or by acquiring new profitable tenants (if you act before you’ve depleted your remaining cash and credit).
  • Decrease expenses. This is hard to do, but it’s going to happen anyway if you don’t fix the problem, so better to be proactive.

When we mentor investors, we encourage them to act like they’re on a space ship in trouble (think Apollo 13).  To survive, you have to make a limited amount of resources last until you can get out of trouble.  This means cutting all non-essentials quickly and deeply.  If you just lost your job, using your “free time” and credit cards to repaint the house, put on a new roof, re-carpet and update the plumbing is probably not the kind of “investment in infrastructure” that will lead to long term prosperity.  Better to go acquire more revenue producing doors.  To survive, you have to keep the main thing the main thing.  And the main thing is to increase revenue (acquire more customers) faster than you increase expenses (hire more employees).

Lesson #4:  Inflation is Not Wealth

In a financial system that is designed to inflate (a topic too big for this article), it’s easy to be deceived into thinking your successful when you’re not.  WARNING: Math Ahead. 😉

For example, if you own a rental property that has 10 units renting for $100 a month in 1960, your gross income is $1000 a month.  So the building might be worth $12,000.  Assume for now it’s paid for, so that’s $12,000 of equity for you.

If in 2010, units in that same building are renting for $1,000 a month, your gross income is now $10,000 a month.  So this property many be worth $1.2 million.  Again, it’s paid for, so it’s all equity.  Are you richer?

Well, think about that.  Let’s assume that you could buy a new car in 1960 for $2000.  So your building is worth 60 cars. ($120,000/$2000 = 60)

What about in 2010?

If a new car in 2010 is $20,000, then your building is still worth 60 cars. ($1,200,000 / $20,000 = 60)

Hmmm….in 2010, the building still houses 10 people and is still worth 60 cars.  So in terms of relative value and utility, it hasn’t changed.  But now you’re a “millionaire”.

If instead, over the years, you re-invested the income and equity (see Bob’s Big Boo Boo in Equity Happens), and you acquired 10 more buildings from 1960 to 2010, now you have a properties which will house 100 people and is worth 600 cars.  NOW you’re richer.  Why?  You have more property.

More property, not more dollars, make you rich. This is very important when dollars are losing value.  For an extreme example, think how many trillionaires there are in Zimbabwe.

So for Washington to measure economic growth in terms of dollars is very confusing.  And you can’t run a business with confusing numbers.  Did the economy grow or didn’t it?  Our we in recovery or aren’t we?

Think about it this way.  If an economy produces 1 million widgets at $100 each, then you have a $100 million economy.  If the price of the widgets increases to $120, you have a $120 million economy.  But did your economy really grow 20%?  The dollars say so, but production and employment say you didn’t.  You’re still only making 1 million widgets.  And your’re still only employing however many people it takes to build 1 million widgets.  So you didn’t grow at all.

Not to belabor the point (but we’re going to anyway), what if the widgets are $120 and you only make 900,000 of them and then lay off a corresponding 10% of your workforce?  Your economy “grew” from $100 million to $108 million (900,000 widgest at $120 each = $108 million).  An 8% increase!  But you produced less and have higher unemployment.  That’s called a jobless recovery or staglflation.

In real estate, if you own 1 property now and in 50 years you own 1 property, you might have a higher dollar denominated cash flow and net worth, but you aren’t any richer if everything else around you also inflated.  You don’t have any more property.

More property means more tenants.  Tenants who work (produce) means more productivity.  More productivity (not inflated dollars) is what makes you (and a country) richer. A wise real estate investor will focus on acquiring more tenants. See Lesson #1.

Lesson #5: Not All Jobs Are Equal

When a real estate investor considers a geographic region as a place to invest, jobs are the single most important factor.  Tenants have a much easier time paying rent when they have jobs.

But not all jobs are created equal.  And the difference is where the money comes from.

So businesses (the source of jobs) can be divided into two categories: Primary and Secondary.

A “Primary” business is one that sells products (derives revenue) from OUTSIDE the region.  That is, a Primary business pulls money in from elsewhere and funnels it into the local economy through their local vendors and employees.

So when a Primary business uses local business for office supplies, printing, temporary help, insurance, maintenance, utilities, sub-contract work, etc., they are effectively distributing the outside money into the local economy through these “Secondary” or support businesses.  Then all those employees further distribute the money as it passes through their hands and into the local economy.

But the key to a region’s prosperity is having a strong base of Primary businesses.  As investors, we avoid markets which don’t have a strong base of Primary businesses. Without Primary businesses, the Secondary businesses can’t thrive.  And each time a Primary business is lost, you lose not only the Primary business’ jobs, but many of the Secondary business’ jobs as well.  It weakens the entire regional economy.

It would be a like a family of brothers all living in the same house.  If one brother has a good job outside the home, he can hire one brother to wash the cars and mow the grass.  He can hire another to cook and clean.  He could rent another brother’s boat for a fun day at the lake.  He is the Primary earner and he can then trade his outside money for various goods and services within the household.  But he is really supporting the whole family, though no one is getting charity.  The prosperity is distributed to each brother according to his contribution.  However, all the brothers would be wise to be nice to the Primary earner.  If he moves out, everyone loses their jobs.

So imagine that one day, the Primary earning brother finds out that one his other brothers took some money out of his wallet without working for it.  He gets mad and decides to move, taking his primary income with him. Now all the remaining brothers are sitting home trying to figure out that to do next.

One brother decides to use his credit card to get an advance and then hires one of his other brother to mow the lawn.  Then that brother uses his “earnings” to hire another brother to cook and clean.  And that other brother uses his “earnings” to rent the boat.  To the outside world, and maybe to the brothers themselves, it looks the same as before.  But now they are simply trading with borrowed money.  How long can that last?

Sooner or later, that credit card has to be paid.  And someone better get a job outside the home and bring in some real money in, or everyone will eventually be broke and homeless.  A higher credit limit might put the problem off a while, but it isn’t a long term solution.  You can’t lose your Primary earners and expect to be prosperous long term.

A country, like a state, like a local region, like a family, better have some Primary earners. And the more, the better.  Without money coming in from the outside, deficits pile up and everyone is just passing borrowed money around and feigning prosperity while a financial time bomb is ticking in the background.  See Lesson #1.

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11/21/10: Real Estate Economics – Interviews with the Federal Reserve and National Association of Realtors

As we’re guiding our real estate sailing ship through the choppy economic seas of the past few years, we’ve learned the wisdom of having a lookout watching the horizon for threats and opportunities.

We also like to compare notes with other sailors – especially those whose lookout platforms are higher up than ours.  They can see more and farther than we can.  That’s very helpful when trying to catch a wave or avoid a storm.

So we dove at the chance to interview some high profile people – to find out what they can sea, sea, sea from their higher vantage point.

In beautiful Miami, sitting on the dock of our radio bay, watching the tide roll away:

  • Show host and captain of the good ship Equity, Robert Helms
  • The cut rate first mate, co-host Russell Gray
  • Chief Economist of the National Association of Realtors®, Dr. Lawrence Yun
  • Vice President and Associate Director of Research for the Federal Reserve Bank of Atlanta, Thomas Cunningham, Ph.D
  • President Elect of the National Association of Realtors®, Moe Veissi

Wow!  What an all star line-up!  After watching each of their presentations to the Congress, we decided to chase them down for a quick conversation that we could share with our listeners.  Though they’re all busy men, each was gracious enough to sit down for some one on one with Robert.

Dr. Yun kicks off the show with some comments on the US housing market.  He’s the first economist on earth to see and analyze the housing data gathered by the National Association of Realtors®.  He’s also able to combine the statistical data with lots of relevant anecdotal data – since he interacts regularly Realtors® around the country.  He points out some of the reasons he believes the worst of the storm is past.

Next, we talk to Thomas Cunningham of the Federal Reserve Bank of Atlanta.  Unless you’ve been in a coma the last two years, you know that the Fed has been very active in trying to stimulate the economy with lower interest rates, expanded credit facilities to banks and that mysterious “quantitative easing”.  What does it all mean?  Our mission is to find out!

While economics and monetary policy is interesting, it’s pretty high in the clouds.  So we wrap the show up with a lively conversation with the energetic President-elect of the National Association of Realtors®, Moe Veissi.  Moe shares his thoughts as he transitions from local real estate practitioner to the helm of the world’s largest trade association.

It’s all good stuff, so listen in – and be sure to tell a friend!

The Real Estate Guys™ Radio Show podcast provides education, information and training to help investors make money with their real estate investments.

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8/15/10: How Capitalism Will Save Us – An Interview with Steve Forbes

The Real Estate Guys™ sit down and talk with Steve Forbes about jobs, the economy and real estate.

We don’t know about you, but any time a billionaire, a CEO of a major company, a best selling author or a legit presidential candidate is willing to sit down and chat, our response is always, “Yes!”.   In this case, our special guest for this episode, Steve Forbes, is ALL of those things wrapped into one.  So we’re super jazzed to bring this exclusive interview to you.

In the broadcast booth at the Freedom Fest conference in Las Vegas:

  • Your Host and interviewer extraordinaire, Robert Helms
  • The just-happy-to-be-here Co-host, Russell Gray
  • Special guest, Forbes Magazine CEO, Steve Forbes

Mr. Forbes was the keynote speaker at the Freedom Fest conference and remained in attendance for the entire event.  In spite of a recent neck surgery, he was very accommodating and so Robert was able to sit down with Mr. Forbes for an impromptu interview.

Steve Forbes with Russ and Robert at Freedom Fest. Russ wrestled Steve into doing the interview, which broke Russ' glasses and injured Steve's neck. But the interview went well and we were all smiles afterwards.

We decided to ask him about his latest book, Why Capitalism Will Save Us – Why Free People and Free Markets are the Best Answer in Today’s Economy. Mr. Forbes’ thesis is that too much government is bad for business because it increases costs, diminishes productivity and takes too many resources away from creating jobs for an ever-growing population.  He calls for “sensible rules of the road” to provide a basic framework in which free people can conduct business.  Of course, the great debate is over what’s “sensible”.  His position is that less is more.

What we’re really interested in is jobs. Jobs are where our tenants get their rent money.  It’s where home buyers get the income stream to make the mortgage payments that prop up the property values that create passive equity.  Jobs are near the top of our due diligence check list when evaluating a market to invest in.  It’s one of the reasons we like Dallas right now.  Among U.S. markets, it’s doing pretty well.  Ironically, another great job market is Washington DC, but if there’s a changing of the guard over the next couple of elections, that could change.  But we digress…

So Mr. Forbes shares his thoughts on the economy, job creation and the role of government in real estate, specifically Fannie Mae and Freddie Mac.  In his position as the CEO and editor-in-chief of Forbes Magazine, he gets to talk with many of people who shape, interpret and respond to public policy.  We really enjoyed our time with him and hope you will too!

On a side note, Steve Forbes is the nicest billionaire we’ve ever interviewed.  Actually, he’s the only billionaire we’ve ever interviewed.  But he’s still a very nice guy.  So, if you’re a billionaire and want to come on the show and be nice to us, just give us a call.  Our door is always open. 🙂

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