Nine lessons from Lehman Brothers …

This past September 15th marked the 10th anniversary of the collapse of the iconic Wall Street investment bank, Lehman Brothers … after 158 years in business.

While there were several notable events which heralded the arrival of the greatest financial crisis since the Great Depression of 1929 …

… Lehman’s failure can arguably be considered the “shot heard around the world”.

As recounted in David Stockman’s epic tome, The Great Deformation, the guys in charge of the Federal Reserve and U.S. Treasury at the time, Ben Bernanke and Hank Paulson, proclaimed …

… “the financial system had been stricken by a deadly ‘contagion’ that had come out of nowhere and threatened a chain reaction of financial failures that would end in cataclysm.”

Apparently, Bernanke and Paulson weren’t followers of Robert Kiyosaki or Peter Schiff.

Because both Kiyosaki and Schiff appeared on national television warning people … that in spite of all the rosy economic reports, there was BIG time trouble brewing.

In fact, in this now infamous interview with Wolf Blitzer on CNNKiyosaki specifically warned about a Lehman Brothers collapse.

And in this contentious TV appearance, Peter Schiff was mocked by well-known economist, Art Laffer, for his passionate concerns about the dangerous proliferation of sub-prime mortgages.

Of course, Kiyosaki and Schiff both turned out to be right.  But as you may have noticed, they’re not on financial TV too often any more.

We’re guessing it’s because their viewpoints don’t fit the Wall Street “sunshine” narrative.

That’s why we make it a habit to get together with these guys … and others … who aren’t singing from the Wall Street hymnal.

Meanwhile, it’s hard to believe Lehman collapsed 10 years ago.

There are Millennials now well into their business and investing careers who were just in high school back then … and have no real recollection of what happened or why.

So just as Americans commemorate the anniversaries of tragic events such as Pearl Harbor and 9/11 to honor heroes, mourn victims, and remember important lessons …

… perhaps the anniversary of the fall of Lehman is a good time to consider what can and should be learned from economic policy gone bad.

“Those who fail to remember history are doomed to repeat it.” 
– George Santayana

We’re certainly NOT mourning the loss of Lehman.  Extinction is a healthy part of the cleansing process when cancerous enterprises infect a financial system.

And there’s probably an argument to be made that Goldman Sachs, AIG, and other foolish actors should have been allowed to fail too.

After all, when you look at how and why they got into trouble, to bail them out is essentially absolving them of the consequences of their reckless behavior.

Worse, it creates moral hazard … enticing Wall Street gamblers to continue to take big chances with their clients’ savings …

… knowing they keep all the upside but can push the downside to Main Street, both directly and indirectly through government bailout.

And as many real estate investors discovered the hard way, Wall Street’s gambling addiction absolutely impacts our Main Street investing.

Real estate didn’t cause the Great Financial Crisis … it was a victim of it.

Of course, the crisis also created fabulous opportunities for the aware and prepared.  There’s ALWAYS a bright side for the aware and prepared.

Investors like Kiyosaki and his real estate guy, Ken McElroy, made fortunes buying up bargains in the wake of the crash.

It’s usually the smart money that cleans up messes made by dumb money.

But we’re not here for a post-mortem on the 2008 financial crisis.  We’ve covered that extensively and you can find those episodes and blog posts in our archives.

Today is all about facing the future empowered with important lessons from the past …

Lesson #1:  Listen to all points of view with an open mind. 

Be mindful of normalcy bias, confirmation bias, echo chambers, and of course, sales agenda.

When the downside is left out of the discussion, you’ll end up with potentially disastrous blind spots.

But if all you see is doom and gloom, you don’t act.  And that’s bad too.

Lesson #2:  Study and think for yourself. 

Your financial future is too important to rely solely upon the Cliff’s notes and conclusions of financial pundits.

There are plenty of understandable investments, including our obvious favorite … real estate.  There’s no reason to abdicate the responsibility of understanding to others.

Sure, you can delegate the work of investing to others.  But not the understanding.

YOUR financial education is important, whether you get your hands dirty with the deals or not.  So make financial education a priority.

Lesson #3:  It’s never as good as it seems … and it’s never as bad as it seems.

It’s easy to get lazy in a boom … and paralyzed in a bust …  so keep looking for opportunities and keep your money working … in both economic sunshine and rain.

Lesson #4:  Take what the market gives you.

The market’s bigger than you are, so you can’t make demands.  It’s going to do what it’s going to do.  And it will change.

So when the world changes, you’ll need to adapt.

Resist the temptation to doggedly adhere to a now less effective strategy simply by taking on excessive risk … or reducing your return on investment targets.

There are almost always alternative opportunities you can move to.

Sure, it takes time and effort to learn new niches.  But so does recovering from a bad deal, or earning back lost opportunity from putting your portfolio in sleep mode until your preferred niche comes back to life.

Lesson #5:  Cash reserves aren’t idle. 

They’re actively providing insurance coverage for a liquidity crisis.  That’s worth something.  Think of the lost opportunity cost as an insurance premium.

So no matter how hot your niche is, be cautious of being over-invested.  If you think having cash reserves is expensive, try being illiquid when credit markets seize up.

Besides, it’s no fun staring at a market full of bargains, but without any purchasing power left.  You never know when the market’s going to have a BIG sale.

(That’s another reason why we LOVE syndication.  When YOU don’t have the resources to capitalize on bargains, you can always find investors who do.)

Lesson #6:  The economy and the financial system are NOT the same thing.

There’s a big difference between economic indicators … and the strength and stability of the financial system.

Study BOTH for clues about opportunities and risks.  In the boom leading up to the financial crisis, the economy was HOT.  But the financial system was frail.

Sound familiar?  It should.  History may not repeat itself, but it often rhymes.

Lesson #7:  Defense wins championships. 

The old sports adage very much applies to investing.

Billionaire stock investor Warren Buffet says Rule #1 is, “Don’t lose money” and rule #2 is, “Remember Rule #1”.

Billionaire real estate investor Sam Zell says a secret to his success is his skill at understanding the DOWN side.

Remember, there’s ALWAYS a downside.  Ignoring it doesn’t make it go away.  And if you don’t see it, it just means you’re not seeing the while picture.  Get experienced eyes on the deal to help you.

Lesson #8:  You can’t make a profit on property you don’t own. 

If you fail to buy property because of fear … or you lose a property because of greed … you’re not going to grow your portfolio or achieve your financial goals.

So yes, look at the downside.  But then look for ways to mitigate it.

When you’re done, weigh the upside against the downside … compare it to other opportunities concurrently available … and if it looks good, do it.

Over-thinking can be just as bad as not thinking.

Lesson #9:  Never over-expose your portfolio to any one deal … no matter how good it looks.

Firewall sections of your portfolio through entity structuring, selective and restrictive use of personal guarantees, and syndication.

As you can see, there are MANY lessons to gleaned from reflecting on financial history … and listening to smart people with diverse perspectives, experiences and expertise.

Until next time … good investing!


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Cash flow controls while equity happens …

As the end of 2017 approaches, it’s a great time to reflect on the past year as we prepare for the new year ahead.

In this case, we thought it might be fun to look back an entire decade … and consider where things were in 2007 and where we are today.

Way back in 2007, the world was slowly sliding towards the greatest financial crisis in most people’s lifetimes.  We just didn’t know it.

And who could blame us?

After all, the world’s most powerful banker at the time … the wise and powerful Ben Bernanke, then-Chairman of the Federal Reserve Bank of the United States …  gave a reassuring speech on May 17, 2007 …

“… we believe the effect of the troubles in the subprime sector on the broader housing marketing will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or financial system.”

Of course, today we know the economy went over the cliff less than a year later.

So now, it’s 10 years later and where are we at?

According to this Bloomberg article …

Home Prices in 20 U.S. Cities Rise by Most Since Mid-2014

Eight cities have surpassed their peaks from before the financial crisis …”

“… growth in property values has been consistently outpacing wage gains, crimping affordability … That could eventually become a headwind to faster price appreciation.”

But why worry?

After all, as recently as June 2017 … just about 10 years after Ben Bernanke’s speech … CNBC reports these comments from current Fed chair Janet Yellen:

Fed Chair Janet Yellen said Tuesday that banks are ‘very much stronger’ and another financial crisis is unlikely anytime soon.”

“She also made a bold prediction: that another financial crisis the likes of the one that exploded in 2008 was not likely ‘in our lifetime.’”

And this more recent Bloomberg article reports additional reassurances from Ms. Yellen:

With stocks trading at record highs, Yellen downplayed the threat of financial instability.”

In fact, Bloomberg quotes Ms. Yellen:

Although asset valuations are high by historical standards, overall vulnerabilities in the financial sector appear moderate, as the banking system is well capitalized and broad measures of leverage and credit growth remain contained …

Kind of reminds us of Han Solo in the original Star Wars …

Everything is under control. Situation normal. Had a … malfunction. But uh, everything is perfectly alright now. We’re fine … how are you?”

So what can we glean from all of this?

First, just because PhDs say everything is hunky dory doesn’t mean it is … or it isn’t.  So don’t lose sleep … or sleep too soundly … because of academic or political financial rhetoric.

Jim Rickards told us the Fed is clueless and history seems to affirm this.

But in spite of the sub-prime contagion and subsequent financial crisis … including a horrific stock market crash … after 10 years, real estate in most markets has come back.

In fact, many people made lots of money on real estate from 2008 to present.  So a crash is nothing to be afraid of … IF you’re structured to survive it … and profit from it.

The two biggest lessons about surviving come from real estate guys Robert Kiyosaki and Donald Trump.

Kiyosaki stresses the importance of cash flow.  That is, holding properties which produce positive cash flow so you can hold on to them through a severe downturn.

Donald Trump told us to always have some cash on hand.  It’s hard to put out financial fires or go bargain shopping when you have no liquidity.  And when credit gets cut off, cash is the best form of liquidity.

Of course, both those guys made a ton of money on equity.  But … it’s cash flow that allows you to control a property until equity happens.

And it’s cash that lets you buy properties when everyone else is dumping them to raise cash fast.

It’s not really complicated.  And the longer you live, the more obvious it is.

Because, as they say … history may not repeat itself, but it often rhymes.

Until next time … good investing!


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

The Biggest Scam Ever Could Be Your Biggest Opportunity!

No, we aren’t advocating becoming the next Bernie Madoff.  We just read Robert Kiyosaki’s article on Yahoo Finance called The Biggest Scam Ever.   It’s about 401k plans and he’s commenting on the cover story Time Magazine recently published on the subject.

Time says their sources estimate that 44 percent of Americans (a chunk of which are baby boomers) are in danger of going broke in their retirement years.  That’s bad news.  But it’s great for real estate entrepreneurs!

Once again, as we watch the horizon, we see waves of opportunity forming.  Do YOU see them?

Think about it.  Tens of millions of people in danger of going broke in their retirement years.  These will be seniors with social security checks.  It isn’t much income, but it’s consistent.  At least that’s the promise from Uncle Sam.

So their lifestyle will be taking a substantial dip.  Some are sitting in homes that are paid for.  Some are sitting on big fat mortgages.  Some are renting in nice areas.  All will need to do something to decrease expenses and increase their income.

Can you help them?

A few weeks back we did a radio show on reverse mortgages.  This is one of the few remaining tools available to reposition idle equity and put it to work.   The cash flow arbitrage is easy because there’s no payment required.  Better yet, there’s no danger of foreclosure.  Seniors with equity could make great investment partners to acquire cash flow real estate, which, conveniently, is readily available into today’s low price, low interest rate market – an attractive, but historically rare combination!

(By the way, we’re writing a free report on reverse mortgages, so if you haven’t already requested it, just go the feedback page and send us your request.)

We also recently blogged about the notion of buying homes via short sale from homeowners who are facing foreclosure because they can’t afford to make the high payments.  If you missed it, look it up.  Couldn’t similar strategies be employed with seniors?  We think so.  When you can help someone stay in their home for a lower payment, that’s a good thing!

Now hold on because our brains are flying around at light speed.  And rather than write a manual on how to do all this, we’ll just ask some questions to guide your thought processes.

If you think that several million seniors will be looking to cash out of their homes and rent, what areas and neighborhoods would they be interested in?   Think about weather, taxes, and proximity to medical care and airports (so they can easily go back home to visit friends and family).  What major population centers will they be moving from?  What are their options for more affordable areas nearby?

What about property types?  Think about floor plans.  Do they need lots of bedrooms or just a couple?  Do they need storage for all the stuff they’ve collected over their lifetimes?  What about stairs?

Here’s our recurring theme: Problems are opportunities when you look at them in light of available resources.   Most people get brain lock when facing problems, even though there are all kinds of resources available to turn problems into profits.  Don’t let this happen to you!   You won’t want to look back on this time in history and say, “I missed it.  If I only knew then what I know now!”   Trust us, you don’t want to “shoulda” all over yourself!  It stinks.

Lastly, we don’t understand why so many people cap on Kiyosaki when he posts his articles.  We’re betting these people have never spent any time with the guy.  Or they work for the people he rips.  In any case, if you haven’t figured it out already, we think he’s brilliant more often than not.  We look for every opportunity to spend time with him and the people he surrounds himself with.  You don’t have to agree with everything, but it will sure stimulate your thinking!  Which is the same reason we do our radio shows and post these blogs.

The key to turning this economy around is for people to be informed, think, make good decisions and take bold action.  The people who do it first will win the biggest. Why not you?

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Home Construction Slows – Good or Bad?

The AP headline this morning says “Stock Market Slumps as Home Construction Slows”.  Oh no!  We can hear the pitter patter of mutual fund investors’ feet running to their computers to check the damage to their 401k.

Funny, but when we look at our computer, we see interest rates on 30 year fixed mortgages back under 5%.  Even jumbos are under 6%!  Meanwhile, gold, oil, car prices and CPI (Consumer Price Index) are all up.  (Hint: those are signs of inflation).

When you put all that in the blender, what do you get?  Well, it depends on what color glasses you’re wearing. (Too many metaphors? Sorry.)

Here’s the deal plain and simple: In the US, home and apartment construction is not growing as fast as the population.  Rents are not falling as fast as prices.  Interest rates are ridiculously low.  Toss in gobs of people unemployed, which means they’re missing payments and wrecking their credit.  They won’t be able to buy a home for awhile, so if they can’t keep the one they have, they will be renting.

So what do we have?

• A growing population and influx of people going from homeowner to renter means more demand for residential rentals.

• Less new apartments and homes coming on line mean less supply.

• More competition for fewer rental units means upward pressure on rents, in spite of a weak job market.  Why?  Because people need a place to live.  Next to food, it’s pretty high on most people’s priority list.

• Low interest rates means if you or your investment partners are credit worthy, you can get great (i.e., low) long term interest rates on loans just before what many believe will be an inflationary cycle.  Inflation means anyone in debt will win as the value of the dollar falls.  This is why China is a little miffed at Uncle Sam.   China holds a lot (if you think a trillion is a lot) of US debt and are concerned about a falling dollar.

• Low interest rates also mean lower payments.  Lower payments make it easier to get a property to cash flow without 80% down.  To quote from that fabulous book Equity Happens, “Cash flow controls mortgages. Mortgages control properties. Properties will make you wealthy over time.”  This is true with or without inflation (i.e., appreciation), because you are using the tenant’s money to pay off the loan.   No other investment lets you do that.

Additional opportunities exist for the extra ambitious.  We call it finding and forcing equity.  How?  With less new units coming on line and many banks and overextended owners letting their properties fall into disrepair, there are opportunities to buy someone else’s problem cheap.   Then, fix it up, rent it out and wait.  If things go your way, you may be able to refinance to get your original investment out – and now you’re in for free.  Kiyosaki calls this “infinite return”.  We like it.

Of course, it’s not all rosy.  Unemployment is still a concern.   And financing (especially refinancing) is harder to qualify for.  But, if it were easy, then everyone would do it and there wouldn’t be opportunity.  Hey, wait a minute.  It’s easy to buy mutual funds, isn’t it?  And everyone does it, don’t they?  Hmmmmm…..

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11/15/09: Is Gold All that Glitters? Exploring the Relationship Between Debt, Dollars, Gold and Real Estate with Special Guest Mike Maloney

It’s hard not to be impressed with the growth of gold over the last several years.  But did you know that there’s a relationship between gold and real estate prices?   On this broadcast, The Real Estate Guys explore the relationship between debt, dollars, gold and real estate!

Sitting behind the golden microphones for this episode:

  • Host, Robert Helms
  • Co-Host and Financial Strategist, Russell Gray
  • The Goldfather of Real Estate, Mr. Bob Helms
  • Rich Dad’s Gold Advisor, Mike Maloney

In the wake of a weakening dollar, gold has been breaking records.  But what does that really mean for your real estate, mortgages and cash reserves?  We start the show with a discussion of inflation and what causes it.  Readers of Equity Happens know that when the money supply increases faster than the supply of goods and services, price inflation occurs.  Mike Maloney gives us a very interesting historical perspective while clarifying the important differences between money and currency.

Like Russ, Mike Maloney is a guy that likes charts and graphs.  He is also a student of history.  He tells us what “fiat” currency is and what it’s track record is.  You do not want to miss this!

Mike also explains the relationship between gold and real estate prices.  He says historical patterns exist and they can provide valuable insight into the future.  If you want to make profits, you need to figure out where and which way the money is flowing.  If you’re on the wrong end of the move, you lose.  Get it right and you win big.  But what happens if you decide not to play?  Is your money really safe in the bank?

Another fascinating discussion revolves around the “base” money supply and why real estate prices have fallen even though the money supply has grown.  Does this mean real estate is “over” or is this a lull before a new wave of appreciation?  Mike tells us what he thinks and why.

As we’ve said for quite some time now, the rules of the game have changed.  But a bend in the road is not the end of the road unless you fail to make the turn.  Tune in to this golden opportunity to pick up some nuggets of wisdom from Rich Dad Gold Advisor Mike Maloney.

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

Is Gold All that Glitters?

The AP reports that gold hit an all time high of $1,118 per ounce today. Do you understand why?  Do you REALLY understand?  And what does gold have to do with real estate (besides that you dig gold out of the ground)?

Great questions!

Gold’s rise is a prime refection of a falling dollar.  Why?  Because when the dollar “falls”, it takes more dollars to buy anything that’s real.  It’s called inflation.  Supply and demand play a factor, so just because the dollar falls, doesn’t mean that gold is going to respond immediately and proportionately.  But in general terms, a falling dollar means inflation of things that are real.  Things like gold, oil and real estate.  Typically, gold really takes off when people are nervous about the dollar.  So take that for what it’s worth.

The Real Estate Guys don’t claim to be experts at gold, but it’s something we’re very interested in.  We watch the demand for gold, oil and treasuries because they give us insight into where cash is moving.  When cash moves into real estate or mortgages, then it helps push real estate values up and equity happens.  Do you see the connection?

Russ just got back from the Rich Dad Art of a Deal conference with Robert Kiyosaki. Rich Dad Gold Advisor Mike Maloney was there and we invited him to be on The Real Estate Guys show.  We figure it he’s smart enough for Mr. Kiyosaki, we’re interested in talking to him.  We want to pick his brains on your behalf and find out what he thinks about the movement of cash and its effect on real estate.  Sound interesting?  Then stay tuned to The Real Estate Guys!  To make sure you don’t miss an episode, subscribe to our free podcast.  And while you’re at it, sign up for the newsletter – and tell a friend.  When you help us grow the audience, we are able to continue to bring you quality guests and programming.  Thanks!

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The Rich Dad Real Estate Summit

9/13/09 Scottsdale, AZ – Nearly 150 enthusiastic people gathered in Scottsdale for the 2 day Rich Dad Real Estate Summit hosted by best selling author Robert Kiyosaki and conducted by Rich Dad Advisor and real estate entrepreneur Ken McElroy. The Real Estate Guys were on hand to not only observe, but participate in this inaugural boot camp which is dedicated to teaching active and aspiring real estate investors how to succeed in the “new” real estate economy.

The event featured a host of highly qualified experts in various aspects of real estate investment including property management, financing, deal sourcing and analysis, and taxation. The event started at 9 am on Saturday morning and ran well into the evening. We didn’t get back to our hotel room (at the very nice Scottsdale Plaza Resort) until close to 9 pm, but even then we weren’t done! We had 5 different real life investment deals to review in preparation for the next day when we would divide into team and prepare and present offer letters to the panel.

Though it sounds intense, the Rich Dad team did a great job keeping the energy up with lively music, regular breaks with refreshments provided, and the trademark conversational breaks where we would discuss the topic at hand with other students sitting at our table. Not only did this break up the monotony of lecture, but it really helped reinforce our understanding of the material. Teaching is a very effective learning tool. In fact, when we were talking with Robert Kiyosaki during a recording session on Monday, he said one of the reasons he works so hard teaching is because he learns so much!

In the afternoon of the 2nd day, the crowd was divided into teams and each team was assigned one of the case study properties on which to write a Letter of Intent (LOI). It was like being on The Apprentice! The pressure was mounting to finish the analysis and craft an offer that would be strong enough to win, but without overpaying for the property. As the announcer counted down the time, the tension mounted. People were running to the front of the room to submit their offer before the time ran out!

A representative from each team was called up to sit with their competitors in front of the panel of judges. One by one, each had just 2 minutes to present the offer. Then the panel would begin to question and negotiate. Having been through this process many times ourselves, we can tell you is that very realistic!

There were far more lessons than could ever be contained in this short report, but even with all of the experience we have in the real world of real estate, The Real Estate Guys definitely discovered some new things. Plus, we made lots of new friends!

Overall, we thought it was a great event – well organized, well produced and lots of fun. We can’t wait to go to the next one!