Boots-on-the-Ground Market Insights: Alternative Lending

Boots-on-the-Ground Market Insights: Alternative Lending

September 2020

There’s a lot of competition in the marketplace to find yield … but how long will that stay around?

Listen in as Russell Gray, Co-Host of The Real Estate Guys™  Radio Show,  and alternative lender Billy Brown, discuss the mood in the lending world and how you can best position yourself for long term success!

In this month’s update, Russ and Billy discuss … 

• Current mood of lenders
• Refinancing and asset backed loans
• Leverage points and underwriting
• Single and multi-family new construction properties
• Hotels, offices and light industrial properties
• And MUCH more!

Simply fill out the form below to access this edition of Boots-on-the-Ground Market Insights: Alternative Lending …

First Name * Last Name * Email * Phone Comments WATCH NOW

Ask The Guys — Pandemic Landlording, Equity Management, and More

It’s time for Ask The Guys … the episode where you ask, and we answer!

We’re tackling timely topics … like how to manage property and portfolios during the coronavirus pandemic … and more!

Remember … we aren’t tax advisors or legal professionals. We give ideas and information … NOT advice. 

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

• Your doctor of discussion and host, Robert Helms
• His nurse of knowledge and co-host, Russell Gray

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Using your mortgage as a tool

Our first question comes from Suzanne in Sonora, California. 

She says, “Hey guys, I’m 56 years old. I have a duplex valued around $270K with $210K of equity. I read Rich Dad, Poor Dad, and I’ve used equity lines in the past to buy other properties, but I’m at a knowledge impasse.”

Suzanne says her problem has to do with mortgage payments. If she takes out more equity lines to buy more properties, eventually all her profits are spent on making loan payments. 

Is she doing something wrong?

Well, Suzanne, you’re really not doing anything wrong. 

A mortgage is a tool. But like any tool, it has to be used for the right job, and it has to be used correctly. 

The obvious risk here is that you take equity out of a property and then you finance it using short-term financing … and then you make a long-term investment. 

So, a basic rule of thumb is … don’t borrow short to invest or lend long unless you are a bank. Otherwise, you can end up with a cash flow problem. 

The other thing to keep in mind is the state of the market. When you’re playing this game at the top of a market, when the cap rates are very low, the cash flows on new properties are very low. 

The danger you run is that if the economy takes a downturn … like we are experiencing right now … rents go down, and you end up with negative cash flow and negative equity. 

So, the idea is that when you pull equity out, you want to lock in long-term, permanent financing. 

The other secret to doing this is what we call arbitrage … purchasing a reliable stream of cash flow that will take care of making the payments and providing you a positive net result. 

If all your payments are being used to make equity payments, then you probably haven’t made the smartest investment with the equity you extracted. 

The real key here is to borrow long and invest shorter. Focus on the quality and durability of the income and the recourse. 

Multifamily or industrial warehouses?

John in Fargo, North Dakota, wants to know if we had the opportunity to invest in syndicated deals in the upper Midwest, the Dakotas, or Minnesota in new construction multifamily or new construction industrial warehouses … which would we lean toward?

Well, we’re not going to give you advice on what to do … we don’t give advice. But it is a fair question. 

New construction multifamily is a bread and butter product where there are great loans available and an absolute need that rarely goes away.

New construction industrial warehouses are places that store stuff we need. 

Here are a few things to look at as you make your decision. 

First of all, the market is going to matter a ton … so what is the current supply? What’s the current demand? What trends are happening that are going to influence the market?

For example, if a trend is that more loans are available at lower prices, then that means people that were multifamily tenants might become buyers. 

On the other hand, if you see that certain businesses are withering and certain businesses are thriving under something like COVID-19, does that mean there will be more or less demand for warehouses?

All things being equal, some of the safest investments are in housing because people need a roof over their head. 

And like any syndication deal … the team is a big factor. Make sure the people you are partnering with know what they are doing. 

What to do with laid-off tenants

John in Helena, Montana, says, “Due to recent events, I have a couple of laid-off tenants who have done the right thing and reached out to say they will struggle making rent. Do you have any creative ideas to keep me from being the last bill paid?”

Creativity is really part of the big picture here. 

All tenants have decisions to make every day about where they put their money … and most tenants aren’t sitting on months and months of savings. 

The average tenant probably has less than a few weeks of savings. 

We’ve had several multi unit buildings over the years, and we always had a tenant who was our boots on the ground and eyes on the street. 

We’d say, “If you’ll do some things like just pay attention and be available and take the trash to the curb, we’ll lower your rent by a couple hundred bucks.”

It’s not free rent like an apartment manager … but it’s a nice discount. 

So, if you have someone who can’t pay you in dollars … you don’t want to forgo the rent … but you can practice some forbearance. 

Find other ways for them to contribute to your investment. Try cutting rent to a third for now and they can owe the rest later. 

You absolutely want to have an open dialogue … especially with people who were proactive and came to you with an open dialogue. 

This is a great opportunity to build your brand … to build a reputation as the kind of landlord people want to rent from. 

You also have to think of the other side of the equation, because you have your own mortgage payments and taxes to take care of. Disrupted rents affect you too. 

Be very aware of what your options are with your specific lender in terms of any relief YOU might get. 

Remember, everybody is going through this. There seems to be an unprecedented level of community cooperation. Be proactive with your lender and other people you’re going to need to pay. 

It’s also smart to talk to your attorney so that whatever arrangement you come to with your tenant can be binding. 

More Ask The Guys

Listen to the full episode for more questions and answers. 

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

More From The Real Estate Guys™…

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Old Capital Lending

Old Capital Lending

 

Your Multifamily Lending Experts. A Trusted Source to get Your Apartment Loans Funded 

What we like best about the Old Capital Lending team is that they do one main thing … and they do it REALLY well. 

That’s Commercial Loans on Multifamily Apartment Buildings! 

They’ve been the go-to provider for real estate investors looking for apartment loans for over 20 years … Have we mentioned they do this really, really well? 

You can tap into their extensive network of equity and lending sources …Fannie Mae & Freddie Mac agencies, life companies, conduits, wealthy individuals, family offices, institutional investors, and even hard money lenders. 

Their sources trust their underwriting practices and decades of experience … That means YOUR DEAL gets FUNDED. 

Syndicators can benefit from the Old Capital Lending team’s experience funding apartment projects for syndicators … helping you structure your “capital stack” just right. 

Their prudent advice and proactive transaction management drives investors to come back to them again and again for deal after deal. 

The Old Capital Lending team regularly contributes to our Secrets of Successful Syndication event! 

Simply fill out the form below to discuss your Apartment Loan questions with their expert team …

First Name * Last Name * Email * Phone How can we help you?   MEET THE TEAM

Reviews

Here’s what your fellow investors are saying …

“Once again Old Capital came through on their word and executed flawlessly. I always trust your professional opinion and feel confident when you’re on the deal. I would be glad to recommend you to any brokers or investors looking for a trustworthy debt source. Thanks again for your work, I am looking forward to the next one.”  – Michael W., Dallas, TX

“We want to thank you so much for getting this refinance done. Not only was it pretty quick, but painless to boot. If we need any assistance, you’ll be the first one we’ll call. Thank you again, for all the effort and energy that help make this finally happen.”  – Bill K., Santa Barbara, CA

“Old Capital was great to work with. They were able to help secure the financing needed for my first multi-family purchase and get started off on the right foot. It was a pleasure working with Old Capital on this transaction and they guided me through a smooth purchase.”  – Al M., Phoenix, AZ

Investor’s Capital Group – Billy Brown

Investor’s Capital Group – Billy Brown

 

If your banker says it’s a no-go on your loan … You’ve still got options!

Real estate investors seek infinite returns using money to make money … but how do you get your hands on OPM?  (that’s short for “Other People’s Money”)

What do you do if your banker says no … And you don’t want to give away equity in your deal?

That’s where Billy Brown comes in.

They can help you with both Bridge and Permanent lending solutions for your SFR portfolios, multi-family, self-storage, mobile homes, hospitality, retail, and office deals in most states in the U.S. … and have solutions for foreign investors as well!

As a real estate investor himself, Billy Brown knows the importance of creative and reliable lending.

Billy educates other realtor and investor groups throughout the country on how to become more profitable using the right lending tools and works hard to help investors like YOU make deals happen.

Billy and his team underwrite in-house and outsources funding through its network of bank and non-bank lenders … to speed up your approval process.

And when they deliver the funding request, it is completely packaged up with a credit memo … so there are few, if any, questions before the lender delivers OPM to your escrow.

Loans available range from $200,000 and can go up to $50 million … so get started on the path to capital for your next deal.

Whether you want a thorough financing and leverage check-up on your entire portfolio … or to cash out some equity to re-invest for more profits … or just want a peek into the possibilities for financing a current deal …

Simply fill out the form below to get your financing questions answered … Billy and his team will reach out to discuss all the possibilities!

 

First Name * Last Name * Email * Phone How can we help you?   MEET THE TEAM

“... Billy was a top notch but down to earth guy. He provided me with some great information and I’m sure we will keep in touch. Thank you guys for all that you do!!”  – Dusty W., Listener

Podcast: Unconventional Funding Solutions for Real Estate Investors

Billy Brown

Billy Brown

 

If your banker says it’s a no-go on your loan … You’ve still got options!

Real estate investors seek infinite returns using money to make money … but how do you get your hands on OPM?  (that’s short for “Other People’s Money”)

What do you do if your banker says no … And you don’t want to give away equity in your deal? 

That’s where Billy Brown comes in.

They can help you with both Bridge and Permanent lending solutions for your SFR portfolios, multi-family, self-storage, mobile homes, hospitality, retail, and office deals in most states in the U.S. … and have solutions for foreign investors as well! 

As a real estate investor himself, Billy Brown knows the importance of creative and reliable lending. 

Billy educates other realtor and investor groups throughout the country on how to become more profitable using the right lending tools and works hard to help investors like YOU make deals happen. 

Billy and his team underwrite in-house and outsources funding through its network of bank and non-bank lenders … to speed up your approval process.  

And when they deliver the funding request, it is completely packaged up with a credit memo … so there are few, if any, questions before the lender delivers OPM to your escrow. 

Loans available range from $200,000 and can go up to $50 million … so get started on the path to capital for your next deal. 

Whether you want a thorough financing and leverage check-up on your entire portfolio … or to cash out some equity to re-invest for more profits … or just want a peek into the possibilities for financing a current deal … 

Simply fill out the form below to get your financing questions answered … Billy and his team will reach out to discuss all the possibilities!

The role of housing in economic growth …

Halloween Horror Stories 2017

Halloween may be yesterday’s news, but we’ve collected a killer bunch of horror stories that will give you a good spook … no matter what time of year it is.

In this annual segment, we’ll share seven tales of real estate investing gone horribly wrong … and the lessons investors took away from their nightmarish experiences.

This blog post features four of the stories … to hear the full collection, including stories about downed trailer parks, burning buildings, and more, listen to our podcast episode!

In our 2017 edition of Halloween Horror Stories you’ll hear from:

• Your far-from-frightening host, Robert Helms
• His co-host, an all-around scary guy, Russell Gray
• Formidable five-decade investor, Bob Helms
• Our formerly frightened guests

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Drugs, guns, and squatters

Peter and Monique bought a property … only to find out it was quite a nightmare. The pair bought a C-class apartment building about a year ago.

“The issue was not the fire, or the landscaper that was shot, or the gun that was pulled on the on-site manager, or the homeless people who set up in one of the empty apartments for Valentine’s Day,” says Peter. “No, the problem was even worse than that … it was the property management company.”

Peter and Monique thought they did their due diligence.

Their property management company, which the last property owner had also used, was the biggest and best in the state.

But the numbers started telling a different story.

Still, when Peter and Monique spoke to the people at the property management company, they were pleasant and reassuring.

The numbers kept sliding … for eight months, until the couple finally decided to hire a new property management company.

The pair discovered after the fact that the former management company had been negligent on all fronts. Although the company had a set of policies and standards that looked great on paper, they hadn’t been following them.

The property managers were not screening tenants, paying important bills, or handling maintenance issues. Some leaks hadn’t been fixed for MONTHS.

One of the most difficult parts of the situation was saying goodbye to the former company, who Monique and Peter had been friendly with and liked personally.

But today, Monique and Peter have contracted with a smaller boutique property management company that an investor acquaintance recommended to them.

They have weekly check-ins with the property management company, which has been staying on top of issues, so far.

Lesson: Don’t trust a property management company just because someone else trusts them. Do your due diligence … and then let the numbers inform your decisions. And always keep tabs on your property manager with regular check-ins and in-person visits.

The money pit

Felicia is a doctor and frequent traveler. She’s also a real estate investor.

She’s a busy lady. So, when her real estate agent found a great deal on a portfolio of eight homes while Felicia was out of town, Felicia didn’t hesitate to say yes.

Four properties were in good condition and already had tenants, while the other four were fixer-uppers. Not a problem … Felicia figured she could use the profits from the first four homes to fix up the second set of four.

The fixer-uppers were in C- and D-class neighborhoods, and Felicia discovered that her attempts at repairs were constantly thwarted … because every time her contractors left equipment and materials outside, they were stolen.

She was sinking money into the properties at a horrifying rate. Finally, Felicia asked how much it would cost to do all the repairs.

She got a $50,000 loan from her bank and used it to complete the repairs … only to discover that her 50k was gone and the buildings still weren’t ready for tenants.

At that point, she had to decide whether to keep digging herself into an even deeper hole. She decided to sell.

Felicia says if she could have done it differently, she would have made sure her investing partner was on board before proceeding with the deal. She found out after the fact that her partner hadn’t even made on-site visits while she was out of town.

She also would have had a general contractor or inspector go through the fixer-uppers and give her a quote and a time frame for repairs.

And finally, she would’ve made sure she was well capitalized so she could finance the repairs.

Lessons: Do your due diligence before purchasing a property. Understand your partner and make sure they’re all in. And if you do get into a bad situation, make sure you have the awareness to know when to stop.

The chilling chop saw massacre

Michael M. was driving by his property one day when he saw something truly horrifying … his tenant had fired up a chop saw and cut a ragged hole into the brick wall of his building.

An apartment on top and mini-market on the bottom, the property didn’t have any big problems … until one hot day when the mini-market tenant to put in an air-conditioning unit themselves.

Michael said he did a few things when he found out.

He was tempted to be offended that his tenant had permanently altered the building … so his first order of business was to get over his initial shock and anger.

Next, he talked to the tenant. He collected the tenant’s hefty security deposit and made it very clear that any unapproved alterations would be cause for removal.

Then, he hired some professionals to fix up the hack job done by his tenant. The tenant paid the bill.

Lesson: Make sure tenants are aware of the provisions of their lease and the consequences for violating those provisions. And make sure you’re covered by collecting security deposits from tenants.

A killer of a deal

BJ and Pauline’s problem started with their quest for a 1031 tax-deferred exchange.

The couple wanted to use the equity in their four-plex to buy a larger multi-unit apartment building.

They found the perfect property … or so they thought. It was a 12-unit building that fit all their criteria.

While doing their due diligence, however, the couple hired an inspector and began to realize the building would take a lot of work to get up to par.

All right, they thought … we can handle that.

Then BJ decided to do a few walkthroughs himself, without the real estate agent. On one visit, he ran into the maintenance man and got the real story about the building.

Apparently, the current property manager had recently been murdered in one of the building’s units. No one had disclosed that detail to the duo!

That manager had been involved in some “extracurricular activities,” says BJ, and most of the current tenants were there because they’d been connected to the manager’s illegal side job.

Despite their chilling discovery, BJ and Pauline didn’t throw in the towel. Instead, they used the building’s problems to their advantage.

They started by negotiating a rock-bottom price with the owner based on the information they’d discovered.

After purchasing the property, they got started on renovations and hired a new property manager. Their new manager had all the current tenants complete an application and sign a lease … so most of the former tenants moved out.

Although cash flow wasn’t great for a few months, the pair now have 7 out of their 12 apartments filled with vetted tenants. They’re hopeful for the future.

Lessons: Always visit and inspect properties yourself before purchasing. Get someone on the inside to give you the real scoop about the property and area. And at every point in the process, make sure you have a good team in place, including a quality lawyer and a diligent property manager.

Don’t get scared off …

We hope you’re not too scared. The goal of these stories is to encourage, not discourage.

Hopefully this year’s horror stories illustrate that real estate has ups and downs … and that nothing is wrong with you if something goes wrong with a deal.

We also hope you learn vicariously from these lessons and develop strategies for mitigating risk in your own investments.

End up with a horror story of your own? Like our guests, we want you to be able to shift from thinking “Oh no!” to asking, “What can I learn from this?”

Push yourself to fail faster, get better, and always keep learning.

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More From The Real Estate Guys™…

• Sign up for The Real Estate Guys™ Free Newsletter and visit our Special Reports library.
• Don’t miss an episode of The Real Estate Guys™ radio show. Subscribe on iTunes or Android or YouTube!
• Stay connected with The Real Estate Guys™ on Facebook and our Feedback page.

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

Private Money Markets – Loan Options for Real Estate Investors

The key to successful real estate investing is your understanding of financing and lending. You MUST be able to leverage the money you own (or borrow) so you can put your capital to work.

There’s a lot of money churning around out there. Many different sources provide loans. The government and big banks are two options … but they may not be the best options for your particular situation.

That’s why we’re talking about private loans today … a smart option for non-owner-occupied properties that may not be eligible for a traditional loan.

We’ve invited an expert guest who’s worked in financing for decades. Listen in for a show that’s jam-packed with information! You’ll hear from:

• Your loan-happy host, Robert Helms
• His loanable co-host, Russell Gray
• Private lender, Tony O’Brien

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What are private loans?

Tony O’Brien worked as a stockbroker after graduating from Michigan State. In 1995, he formed his own hedge fund. Today, he helps investors who are looking to buy properties by providing financing.

He’s got his thumb on the pulse of lending markets. We asked Tony the state of lending markets today.

Tony told us the market has gone through a number of twists recently, all of which are good for individual investors.

Government and big banks, wary after the crash of ’08, no longer provide money to real estate investors who want to rehab or flip properties. Thus the rise of private lending markets.

Most traditional loans operate inside Dodd-Frank guidelines, while most private loans operate outside, giving them more leeway. That means more leeway for you to find a loan with low rates and loan-to-cost ratios that range from 50 to 90 percent.

And there are more people willing to make private loans than ever before.

When Tony says private loans, do you hear high rates? Think again. Although rates are typically higher than traditional loan rates, private money pays off because it’s quick and nimble.

How do private loans work?

Tony gave us the nitty-gritty on how private loans work.

First, what do lenders look for? Tony says that first of all, they look for integrity and trustworthiness.

“There’s no such thing as a no-doc loan,” he notes. Investors must have documents to back up their financial status.

But people who come to Tony with a property that makes sense and the right amount of money can make a deal work.

What about making sure a property is the right investment?

If a property needs work, Tony expects investors to have a rehab budget in hand. Then he’ll appraise the property to see if that budget makes sense.

Including the appraisal process, Tony’s goal is to close in 10 days … a quick and painless process for both lender and borrower.

We asked Tony about rates, fees, and points. He told us borrowers will always pay two to four points for loans.

With a credit score above 650, borrowers can expect competitive rates.

Although interest rates may be higher than rates from traditional loans, Tony emphasized that if real estate investors can borrow money at one percent a month or less, they’ve hit a home run.

Especially for short-term loans, private money markets offer money that investors can’t obtain anywhere else.

But what about long-term rehab loans? We asked Tony how he deals with refinancing.

Longer-term loans … with terms ranging from 5 to 30 years … have to be rolled over to a different lending business. Tony offers his investors a free roll forward to 30-year mortgages and shorter-term flex loans.

While Fannie Mae and Freddie Mac may look like good options, they’re only available to buyers with W-2 income … something many real estate investors don’t have. And there is a limit on the number of loans you can get.

Why use financing?

We’re always mystified when we see investors who own the majority of their properties. They’ve tied up capital in their properties instead of leveraging financing to get the most bang for their buck.

It’s not a smart move.

Private lenders like Tony WANT to give real estate investors money … in fact, Tony tries to avoid rejecting investors who don’t qualify. Instead, he mentors them and helps them look for a team or another solution so they can achieve their dreams

“We’re careful, but also optimistic,” says Tony of his approach to lending.

Eighty-five percent of his borrowers come back to borrow again.

Tony recently published a book, The Comprehensive Guide to Private Money Markets. Want to get some more serious knowledge from Tony on how to borrow private money … without worrying about your rate? Listen in to get access to Tony’s guide … and more info geared toward helping YOU make more money in real estate.

More on private money markets

As opposed to a traditional mortgage application, Tony’s loans require minimal information … a simple application, documentation of your current employment, and a statement that shows what you currently have in the bank.

“It’s not intrusive, but it does make you accountable,” Tony says of the process.

We’ve talked on the show about the role of investors in helping areas bounce back from natural disaster.

We asked Tony how he’s positioned to help investors in markets like Florida and Houston that have large numbers of flood- and hurricane-damaged properties.

“We aren’t afraid of damage,” Tony told us. “It’s a numbers thing.” His lending company is positioned to start lending heavily in both locations.

Tony also told us about his new program, Money Club.

Tony realized that investors are a breed unto itself … and wanted to create an organization that benefits real estate investors specifically.

Members in his club get access to no-point loans, market information, and foreclosed property listings that are priced to sell by banks.

“It’s a one-stop shop,” says Tony.

For our last question, we asked Tony to tell us the most important things investors need to know about private money. He said:

1. “It’s available, and there’s no limit.” With the right deal, investors have a sure-fire way to get money. Tony says he can offer a loan 85 to 90 percent of the time.
2. “Money isn’t free.” Rates are higher than those you’d get from the government. Points and paperwork will always be part of the equation … you can’t expect something for nothing.

Hard-to-buy properties aren’t so hard to buy anymore … not with private money.

Unraveling the mysteries of money

Big-brained people like Tony O’Brien help us unravel the mysteries of money.

Many of you may have thought there’s only one on-ramp to the investors’ highway … we hope learning about this lending category has changed your minds.

Almost 10 years later, we’re still digesting the fallout of the 2008 financial crisis. The key to success is getting money to market.

Private money markets provide a huge opportunity to do value-added real estate.

And although you may pay slightly more to get access to that capital, you get the opportunity to invest in otherwise un-buyable properties with money that is quick and easy to access.

Enlightened? Then go out and make some equity happen!

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More From The Real Estate Guys™…

• Sign up for The Real Estate Guys™ Free Newsletter and visit our Special Reports library.
• Don’t miss an episode of The Real Estate Guys™ radio show. Subscribe on iTunes or Android or YouTube!
• Stay connected with The Real Estate Guys™ on Facebook and our Feedback page.

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 growth …

Put on your thinking cap.  This one’s going to use some brainpower.  But if your investment plans involve money and the future, it’s probably worth the effort.

During our 2017 Investor Summit at Sea™, Chris Martenson warned that a financial system dependent on perpetual growth is unsustainable in a world of finite resources.

We’ll forego discussing “finite resources”, though there’s probably a lot of opportunity there.  The New Orleans Investment Conference is a great place to learn more.

For now, let’s consider “a financial system dependent on perpetual growth” … one of the most important, yet least understood, concepts about the eco-system we all operate in.

It’s simple, yet confusing.  Here it is in two sentences …

When dollars are borrowed into existence, the only way to service the debt is to issue more debt.  If the debt is paid off, the economy ends.

Imagine playing Monopoly and each player starts with $1,500.  With four players, the “economy” of the game is $6,000.  This “start” money comes from the banker.

New money is introduced two ways:

When a player passes Go and collects $200 from the banker … or when a player mortgages a property by borrowing from the banker.

Notice all the money to play comes from the banker.

So let’s MODIFY the game ever-so-slightly …

Let’s have the banker LOAN the start and payday money to each player at 10% interest per turn.

We still have four players starting with $1,500 each for an “economy” of $6,000.  But at the end of the first round, each player now owes the bank $150 of interest.

(We’ll forget about the additional payday loans … it just complicates the math and isn’t necessary to make the point)

But borrowing money into circulation creates three (hopefully) obvious problems …

First, there’s only $6,000 in circulation.  With total debt of $6,000 borrowed plus $600 of interest owed, it’s now IMPOSSIBLE to pay off the debt using only the money in the game so far.

And if the only way players get NEW money is borrowing, this creates a cycle of perpetually expanding debt.

Second, if each player paid ONLY the interest out of their $1,500 start money, after ten turns, they’ll have no money left at all.  But they still owe the original $1,500!

So you MUST GROW your asset base by more than the interest expense or you’re consumed by the debt.

Third, if all players try to free themselves from debt, they would take ALL the money in the game and give it to the banker, the game would end, and each player would still be in debt.

In this system, it’s physically impossible to extinguish the debt without extinguishing the economy and ending the game. 

Naturally, to keep the game going, the banker continually extends credit to the players.

It’s basically the way the global money system works and why people way smarter than us say it’s unsustainable.

It’s also like a Venus fly trap because any attempt to reduce overall systemic debt is deflationary, making existing debt even more burdensome.

Deflation means borrowers pay debt down with dollars worth more than those they originally borrowed.

Worse, any assets borrowed against have dropped in value.

Think of 2008 when the credit bubble deflated.  Property values fell, while the outstanding debt remained fixed.  Property owners were “underwater” (negative equity).

Meanwhile, the dollar was STRONG.  It took a whole lot LESS dollars to buy anything.

Everything was on sale and cash was king.  Lots of people got rich buying things with cash when others couldn’t borrow to buy.

Deflation is awesome when you’re sitting on cash.

You’d think lenders are happy to be paid back with better dollars.  And they are … IF they actually get paid.

But underwater borrowers often decide to default on the loan so they can keep their dollars.

So bankers HATE deflation.  No wonder the system they set up in 1913 demands perpetual expansion of debt and prices.

In fact, the Federal Reserve overtly targets 2% per year INFLATION:

“… inflation at the rate of 2 percent … is most consistent over the longer run with the Federal Reserve’s statutory mandate.”

Here’s the problem with perpetually expanding debt … it weakens an economy.

Sure, it drives inflation, but inflation weakens consumption.  When things cost more, people buy less.

Debt also requires interest.  Even at minimal rates, HUGE balances require big payments.

Interest on public and private debt take money away from production and consumption … causing both to shrink.  Just not at the beginning.

When first injected into an economy, debt gooses activity and provides a temporary high.

And as in our modified Monopoly game, once deployed, more NEW money is required just to keep the interest from consuming the economy. There’s a point where new injections produce diminishing returns.

Whew!  Thanks for staying with us.  Tape an aspirin to your forehead.

With that backdrop, consider this headline from Investor’s Business Daily

Here’s Why China’s Latest Growth Scare Should Worry You – May 30, 2017

“Credit has been growing twice as fast as nominal GDP for years. The diminishing returns suggest that many loans are going to unprofitable ventures. They also signal that sustainable economic growth is far less than current growth rates. Such a rapid deceleration from the world’s No. 2 economy would sap demand and prices for raw materials such as copper, exacerbate overcapacity issues and act as a drag on an already-sluggish worldwide economy.”

Uh oh.  “Diminishing returns” and “deceleration” in the face of rapid credit growth.

When a junkie can’t get high, they either increase the dosage to the point of toxicity … or they wean themselves from the drug.

“China is getting serious about weaning its economy off torrid credit growth, and data and financial markets already are showing early withdrawal symptoms.”

Hmmm… sounds like they’re leaning towards weaning.  We like the addiction metaphor.

China and the United States are the two biggest economies.  What either does affects the world.

Right now, headlines say China is slowing its use of debt, which in turns slows its economic growth, with a ripple effect on other economies.

Meanwhile, the Trump Administration is talking bigly about reducing the deficit and debt. Will he do it? Can he do it?

Who knows? But if the global economic system sustains itself on ever-increasing debt. and the two biggest borrowers are going on debt diets … who’s willing and able to take on a bigger share of global debt?

And if no one does, then what happens to asset values?  Is deflation on the horizon?

Last question … then you can take a nap …

Would the Fed and other central banks allow deflation … or do they roll out QE4ever (quantitative easing) in an attempt to stop it?

Meanwhile, now seems like a good time to consider repositioning equity from properties and stocks with high asset values into properties with sober valuations and strong cash-flows.

After all, stocks and even real estate values might be a roller-coaster ride, but rents are more of a merry-go-round. Boring, but a nice place to hide when feeling queasy.

Until next time … good investing!

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