Now the Fed’s up to $400 billion …

Last week the Fed pumped over $200 billion of freshly printed cash into the repo market.

Since then, the Fed’s upped the ante to $400 billion … and counting.

For those young or asleep during the 2008 financial crisis …

… back then, the Fed provided an infusion of $85 billion per month to keep the wheels on the financial system bus.

Today, they’re pumping in nearly that much PER DAY.

That’s MIND-BOGGLING.

They’re trying to keep interest rates DOWN to their target. Of course, interest rates matter to real estate investors. We typically like them low.

But this isn’t about real estate. It’s more about banks who hold debt (both mortgages and bonds) on their balance sheets.

As we explained last time, when interest rates rise, bond values fall

… and a leveraged financial system with bonds as collateral is EXTREMELY vulnerable to collapse if values drop and margin calls trigger panic selling.

The Fed seems willing to print as many dollars as necessary to stop it.

And that brings us to an important question …

If the Fed can simply conjure $400 billion out of thin air in just a week … is it really money?

This matters to everyone working and investing to make or save money.

For help, we draw on lessons learned from our good friend and multi-time Investor Summit at Sea™ faculty member, G. Edward Griffin.

Ed’s best known as the author of The Creature from Jekyll Island. If you haven’t read it yet, you probably should. It’s a controversial, but important exposé on the Fed.

In his presentation in Future of Money and Wealth, Ed does a masterful job explaining what money is … and isn’t.

In short, money is a store of energy.

Think about it …

When you work … or hire or rent to people who do … the energy expended produces value in the form of a product or service someone is willing to trade for.

When you trade product for product, it’s called barter. But it’s hard to wander around town with your cow in tow looking to trade for a pair of shoes.

So money acts as both a store of value and a medium of exchange.

The value of the energy expended to create the product is now denominated in money which the worker, business owner, or investor can trade for the fruits of other people’s labor.

This exchange of value is economic activity.

Money in motion is called currency. It’s a medium of transporting energy. Just like electricity.

When each person in the circuit receives money, they expect it has retained its (purchasing) power or value.

When it doesn’t, people stop trusting it, and the circuit breaks. Like any power outage, everything stops.

So … economic activity is based on the expenditure and flow of energy.

This is MUCH more so in the modern age … where machines are essential to the production and distribution of both goods and information.

Energy is a BIG deal.

This is something our very smart friend, Chris Martenson of Peak Prosperity, is continually reminding us of.

Here’s where all this comes together for real estate investing …

New dollars conjured out of thin air can dilute the value of all previously existing dollars.

It’s like having 100% real fruit juice flowing through a drink dispenser.

If someone pours in a bunch of water that didn’t go through the energy consuming biological process of becoming real fruit juice in a plant…

… the water is just a calorie free (i.e., no value) fluid which DILUTES the real fruit juice in the dispenser.

Monetary dilution is called inflation.

Legendary economist John Maynard Keynes describes it this way

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Inflation waters down real wealth.

Fortunately, real estate is arguably the BEST vehicle for Main Street investors to both hedge and profit from inflation.

That’s because leverage (the mortgage) let’s you magnify inflation’s effect so your cash-on-cash ROI and equity growth can outpace inflation.

Plus, with the right real estate leverage, there’s no margin call. Meanwhile, the rental income services the debt.

Even better, the income is relatively stable … rooted in the tenant’s wages and lease terms. Those aren’t day-traded, so they don’t fluctuate like paper asset prices.

Effectively, you harness the energy of the tenant’s labor to create resilient wealth for yourself. And you’re doing it in a fair exchange of value.

Of course, the rental income is only as viable as the tenant’s income.

This brings us back to energy …

Robert Kiyosaki and Ken McElroy taught us the value of investing in energy … and markets where energy is a major industry.

First, energy jobs are linked to where the energy is. You might move a factory to China, but not an oil field. This means local employment for your tenants.

Your tenants might not work directly in the energy business, but rather for those secondary and tertiary industries which support it. But the money comes from the production of energy.

Further, energy consumers are all over the world, making the flow of money into the local job market much more stable than less diverse regional businesses.

It’s the same reason we like agriculture.

While machines consume oil, people consume food. Both are sources of essential energy used to create products and provide services.

So when it comes to real estate, energy, and food … the basis of the investment is something real and essential with a permanent demand.

Though less sexy and speculative, we’re guessing the need for energy and food is more enduring than interactive exercise cycling.

Real estate, energy and agricultural products, are all real … no matter what currency you denominate them in.

And the closer you get to real value, the more resilient your wealth is if paper fails.

Right now, paper is showing signs of weakness. But like a dying star, sometimes there’s a bright burst just before implosion.

Remember, Venezuela’s stock market sky-rocketed just before the Bolivar collapsed.

Those who had real assets prospered. Those who didn’t … didn’t.

Are we saying stocks and the dollar are about to implode? Not at all. But they could. Perhaps slowly at first, and then suddenly.

If they do and you’re not prepared … it’s bad. It you’re prepared and they don’t … not so sad. If they do and you’re prepared … it could be GREAT.

Real assets, such as well-structured and located income property …

… or commodities like oil, gold, and agricultural products (and the real estate which produces them) …

… are all likely to fare better in an economic shock than paper derivatives whose primary function is as trading chip in the Wall Street casinos.

So consider what money is and isn’t … the role of energy in economic activity … and how you can build a resilient portfolio based on a foundation of real assets.

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

Until next time … good investing!


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At this rate, something’s gotta give …

Real estate investors tend to like low interest rates.  

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

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

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

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

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

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

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

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

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

Maybe the answer is here …

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

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

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

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

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

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

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

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

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

At least for now.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Notice the attention to supply and demand. 

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

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

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

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

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

Think about it …

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

Cheap money makes building easy.  Developers love it.

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

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

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

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

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

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

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

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

“There is a tremendous amount of capital chasing yield.

That’s what happens when interest rates are low.

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

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

Until next time … good investing!


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Rent control … a sign of the times?

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

Oregon Okays First Statewide Mandatory Rent Control Law

 Associated Press, 2/28/19 

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

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

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

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

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

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

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

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

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

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

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

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

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

Make sense so far?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But it gets “better” … or actually worse …

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

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

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

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

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

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

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

It worked … at least for some people.

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

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

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

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

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

Certain markets got a disproportionate share of the goodies. 

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

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

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

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

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

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

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

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

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

If you bought into Oregon ahead of the migration …

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

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

Until next time … good investing.


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.


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Main Street needs Main Street investors …

When the 2008 financial crisis hit, the mortgage industry was at the epicenter … and the disruption of funding feeding real estate crushed housing values.

But it’s important to remember, the problem was NOT real estate.

After all, people still needed and wanted places to live.  So the demand for housing remained stable.

It was credit markets that failed.  And in a credit-based economy, everything stops when credit markets seize up … including home loans.

Without a steady influx of fresh debt to fund demand, prices collapsed … taking trillions in equity with it.  And it wasn’t just real estate.  Stocks tanked too.

Mortgage and real estate is just where it started.

The double-whammy of teaser rate resets … and the resulting big monthly payment hikes which sunk a lot of homeowners …

… and then the negative equity led to a rash of defaults by even prime borrowers …

… all of which caused a credit market contagion that scorched financial markets world-wide.

Of course, this all created huge problems for Wall Street, the banks … and for Main Street.

So Uncle Sam and the Federal Reserve got heavily involved to “help” … and to no surprise … Wall Street and the banks came out on top.

The banks needed relief from realizing their losses on their financial statements, while finding a fast path to re-inflating values.

After all, property values are the collateral for all those mortgages.  And when values drop, borrowers walk … along with the prospects of loss-recovery.

So Wall Street rallied and raised many billions of dollars to buy up Main Street houses …

… even as millions of homeowners were being demoted to the rank of tenant.

So now instead of collecting mortgage payments, they collected rent.

As a real estate investor, you probably think that’s better.  Who wants to be a lender, when you can be an owner … enjoying tax breaks and building equity.

But Wall Street doesn’t think like you … and that’s our point.

Today, those Wall Street buyers are landlords.  And by some accounts, they’re not doing a very good job for the Main Street tenants.

Shocker.

Don’t get us wrong.  We’re all for investors stepping in to clean up a mess.

Investors are like the white corpuscles of the economy … bringing capital to damaged areas and healing blight and distress.

It’s one of the reasons we’re excited about Opportunity Zones.

We just hope Main Street investors and syndicators don’t get pushed aside again by the wolves of Wall Street.

The issue is there’s a BIG difference between the way Wall Street money and Main Street money behaves.  And it’s not about savvy … it’s about heart.

Big money guys (and gals, we suppose) have a way of looking at things.

Remember this classic 2012 quote from mega-multi-billionaire and legendary investor Warren Buffett …

“I’d buy up ‘a couple hundred thousand’ single-family homes if I could.” 

Of course, we all know money’s not the gating issue for Buffet.  He can buy anything he wants.  So what could his hesitancy be?

Maybe he agrees with Sam Zell, who’s been quoted as saying this in 2013 …

“An individual investor can buy 25 houses and monitor them. I don’t know how anybody can monitor thousands of houses.”

Really?  We know Main Street investors like Terry Kerr at MidSouth Homebuyers who successfully manage thousands of houses.

So it’s not impossible to manage a big portfolio well. You just need to be committed to doing it … one tenant at a time.

The folks we know who excel at single-family property management really care about their tenants as human beings … and deal with them as individuals.

They’re focused on creating cash-flow as the PRIMARY investment result … as opposed to simply a necessary evil to offset holding costs until a capital gain can be realized at sale.

Buffett and Zell are smart guys.  Buffett saw the opportunity in single-family homes … but had the good sense to know he wasn’t the right guy for the job.  Ditto for Zell.

Big money moves in broad strokes, which is fine when you’re dealing with commoditized assets and you can buy and sell in bulk.

But real estate … especially single-family homes … is not an asset class and can’t be effectively commoditized.  And neither can property management.

We think Main Street tenants are much better served by Main Street landlords … like YOU … so long as you remember the main thing is happy tenants.

Happy tenants means longer tenancy, less turnover and vacancy, and better real-world cash flows.

Of course, you don’t need to be a small-time investor to build a portfolio of single-family homes.

When you learn to syndicate, you can combine bulk money with individual property investing … and build a portfolio of hundreds or even thousands of homes.

Being big isn’t bad.  Wall Street’s problem isn’t its size.  It’s its mindset.

As the legendary Tom Hopkins says …

“Don’t use people and serve money.  Use money and serve people.” 

Because when you do, you’ll end up with both.

Until next time … good investing!


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The big story for 2019 will be …

As we’re winding down 2018, it’s time to rub our crystal balls and peer into the new year … and we see …. 

Taxes.

For most high-earners, taxes are their biggest expense.  And almost everyone who has to pay taxes would prefer not to … or at least pay less.

So while there are MANY trends and developments real estate investors should pay attention to in the new year …

… the biggest story may well end up being how market participants respond to their growing understanding of the revised tax code.

Thanks to tax strategy advocates like Tom Wheelwright, many people ALREADY investing in real estate are cashing in on the amazing tax benefits the new law gives to real estate investors.

But as investors of all stripes close the books on 2018 and start looking for tax breaks in the new year, we’re guessing many will discover real estate for the very first time.

Meanwhile, it’s quite possible stock investors will trade in their “buy the dip” strategy for “drop the falling knife” … and look for other, less volatile places to invest the proceeds.

While YOU may not be interested in the stock market, its recent tribulations are noteworthy because it may portend a shift of capital from Wall Street stocks to Main Street real estate.

And if you’re a syndicator talking with prospective investors, you should really have more than just a cursory understanding of what puts downward pressure on stocks.

After all, some of the jittery money still stuck in stocks just might be inclined to move your way … if you’re able to explain the case for real estate.

Besides tariffs and rising interest rates, there are two factors putting pressure on stocks but aren’t discussed much on mainstream financial news.

First, as interest rates rise, it’s less profitable for corporations to borrow heavily to buy back their own stocks.

Besides, many have already gorged themselves on cheap money while taking corporate debt to record levels.  This alone is causing some concern.

And if rates resume their climb, debt service will begin to take a toll on corporate earnings as interest expenses rise. 

There’s a second factor sucking the wind out of the corporate buyback sail …

The big tax break offered to corporations enticing them to bring their offshore money back to America has already worked most of its magic.

And a lot of the money ended up in stock buybacks.

But with the dual air pumps of cheap debt and repatriated offshore funds both losing pressure, stock buybacks are slowing … letting air out of the stock bubble.

Remember, asset values (prices) are largely based on “air pressure”.  There always needs to be more money coming in to keep prices elevated.

On the other hand, income producing assets … like rental properties … derive their value from income.  And because those incomes are relatively steady, so are the prices.

That’s why jilted stock investors often migrate into real estate. 

Sure, they like flirting with the hot stocks when the punch bowl is full.  But when the bowl runs dry, many investors choose to go home to old faithful … real estate. 

And when you add in the new tax breaks, old faithful got a face lift … and is even MORE attractive.

But it gets better …

The world is really starting to buzz about Opportunity Zones

O-zones promise huge tax breaks … and much of it is likely to provide long-term benefit to real estate in those designated areas.

Of course, like anything new, it takes time for folks to figure it out, to get in position, and make their moves.

That’s the advantage of being small.  You can study fast and out-hustle the big money to get into position. 

Then when big money finally shows up, you get to ride a wave.

So when we look at the upcoming year, we think the impact of the tax laws will continue to magnify a movement of money into real estate.

And even if the overall economy slows, it’s our guess real estate will continue to attract its unfair share of investor interest.

Now we’re starting to understand why Tom Wheelwright and Robert Kiyosaki get so excited about taxes, real estate, and infinite returns.

Until next time … good investing!


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Seven lessons for better investing …

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

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

Lesson# 1:  Invest in yourself first and frequently

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

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

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

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

Lesson #2:  Focus on relationships, not transactions

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

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

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

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

This is where YOUR education and network come into play …

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

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

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

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

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

Lesson #3:  Emphasize mission and values

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

It’s true.  But it goes further …

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

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

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

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

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

But the timeless lessons are as applicable today as ever.

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

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

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

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

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

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

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

Lesson #5:  Develop and maintain a clear vision

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

The challenge for many is the picture is fuzzy.

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

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

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

What’s the difference?

Clarity.

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

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

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

Lesson #6:  Always see the downside

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bonus Lesson:  Use firewalls to avoid portfolio contagion

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

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

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

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

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

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

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

Until next time … good investing!


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The mid-term morning after …

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The point is that money and markets like gridlock.

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

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

So bringing it all back to Main Street …

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

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

So gridlock inside the beltway means stability on Main Street.

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

Until next time … good investing!

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Is THIS what China and Russia are REALLY doing …

It’s no secret the United States has been at odds with both China and Russia lately.

So what?  What does it mean to Main Street entrepreneurs and investors?

Maybe nothing. Or maybe a lot more than you think.

Just a few months ago, Russia dumped a majority of the Treasury holdings.

Three out of the last four months, China has reduced its Treasury holdings.

And now Market Watch reports … 10-year Treasury yield hits 4-month high as bond market sells off …

“ … investors fear China … could sell its Treasury holdings to push the U.S.’s borrowings costs higher.”

Not TWO days later, Market Watch reports … Mortgage rates jump to four-month high as housing hits a bump. 

That’s because, as any credible mortgage professional will tell you, mortgage rates track VERY tightly with 10-year Treasury yields.

So you don’t need to be Sherlock Holmes to see …

… there’s a direct connection between what Russia and China are doing and YOUR Main Street real estate investing.

But it’s bigger than interest rates.  Interest rates are more a reflection of currency and bond markets.

The United States has enjoyed … and some might say abused … a privileged status because of the U.S. dollar’s status as the world’s reserve currency.

China and Russia have both publicly proclaimed their upset over how the U.S. the dollar system … and they’re working to dethrone it.

Some people who are well-qualified to have opinions think …

… there’s a HUGE danger to dollar-denominated investors if the dollar LOSES reserve status.

According to Bloomberg, famed billionaire hedge fund manager Ray Dalio spells out America’s worst nightmare … warning the U.S. “not to take its reserve currency for granted.”

“The idea that the U.S. dollar would lose its status as the world’s reserve currency is an existential threat unlike just about any other to the U.S. government and financial markets as a whole.”

“ … for just about everyone’s sake, we should hope that he’s wrong.”

Last time we looked, hope is not a strategy.

We don’t make this stuff up.  We pull it right from the headlines.  In fact, we’ve been covering it closely for more than five years.

The good news is these things move S-L-O-W-L-Y.  The bad news is these things move S-L-O-W-L-Y.  It’s easy to fall asleep at the wheel.

It’s also easy to ignore or dismiss the people who keep sounding the alarm.

But if you earn dollars, borrow dollars, measure asset values in dollars, or use credit markets in any way … the future of the dollar impacts YOU.

Most Main Street investors aren’t paying any attention at all … 

They don’t study history.  They don’t recognize the warning signs … even though there are clues in the news every day.

They won’t see a dollar crisis coming and won’t know what to do if it happens.  It will strike them like a thief in the night.

But it doesn’t have to happen.  In fact, the more people who are aware and prepared, the less likely it will happen.  And the less severe it will be if it does.

Of course, warnings are only useful if understood and heeded.

Otherwise, you wake up one day and credit markets seize up … asset prices collapse … and all those TRILLIONS in paper wealth everyone is celebrating is WIPED OUT.

Think about how hard you work and study to create profits in your business and investing.

How much time do you invest in studying how to avoid LOSING it all?

If you’re like most investors, it’s not very much.

Riding an uptrend is an easy way to FEEL like a genius … but TRUE investing genius is revealed in the BAD times.

Warren Buffet’s famous quote sums it up …

“Rule #1:  Don’t lose money.  Rule #2:  Remember rule #1.” 

Okay, so you’ve read this far.  Now what?

Well, you probably know we can’t possibly give you a useful answer in just a few hundred words.

If you REALLY want to know, you’ll need to dig in … and invest some time and money in getting up to speed.

It starts with getting your mind around the situation.

If guys like Ray Dalio are paying attention to the future of the dollar … maybe YOU should too.

When it comes to China and Russias attack in the dollar, we created a VERY affordable 48-minute video and two downloadable PDFs which many people have found helpful …

Click here for info about The Dollar Under Attack video and two related special reports.

The video features the opening presentation from our 2018 Investor Summit at Sea™ … which kicked off with two full days focused on the Future of Money and Wealth.

Not only has nothing changed since the original presentation, but the news continues to indicate things are picking up speed.

So it’s not surprising savvy investors like Ray Dalio are concerned and making contingency plans.

Perhaps you should too.  After all, better to be prepared and not have a dollar crisis than to have a dollar crisis and not be prepared.

Until next time … good investing!


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


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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!


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.


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Don’t get lost in the lag …

Investors and economists often talk about cycles … business cycles, credit cycles, even news and legislative cycles.

Cycles are the ebb and flow of causes and effects sloshing around in the economic sea we all swim in.  They’re big picture stuff.

For nose-to-the-grindstone Main Street real estate investors, cycles are barely interesting, seemingly irrelevant, and mostly boring.

But a danger for Main Streeters is not seeing something dangerous developing on the horizon.  Another danger is getting lost in the lag.

The lag is the gap between when a “cause” happens and when the “effect” shows up.

For example, in a typical supply-and-demand cycle, a shortage of homes could cause prices to spike.    The effect of the supply-demand imbalance is higher prices, which in turn becomes a new cause.

Rising prices causes builders to increase production … and existing property owners to put their homes on the market … thereby increasing supply.

As supply grows, price escalation slows. If supply overshoots demand, prices might actually fall.  If you’re structured for only rising prices, you might have a problem.

Of course, there are other factors affecting pricing such as interest rates, wage growth, taxes, labor and material costs, availability of developable land, and on and on.

But our point is … an amateur investor often doesn’t see the cause for price escalation (or anything else) until the effect happens.

Once prices rise, they jump in to ride the wave … believing prices will go up tomorrow because they went up yesterday …  and their speculation only adds to the demand and fuels the fire.

At least for a while …

What’s often overlooked is the production pipeline … until the supply shows up and softens pricing.  Near-sighted investors often get lost in the lag.  They’re not sure where they are in the cycle.

It’s what happened to “GO Zone” investors after Katrina and Bakken investors during the shale boom.

Folks bought in during a boom, not considering the “production lag” … and didn’t structure for a slowdown.  When it happened, they didn’t have a Plan B.

It’s a simple example … and before 2008, that was about as deep as our analysis ran.

But the pain of 2008 opened our eyes … and 10 years later they’re still as wide open as we can keep them … because we know there are cycles as sure as the sun comes up.

That knowledge isn’t bad.  In fact, it’s good.  Because when you see the bigger picture, you also see more opportunity.

So we study history for lessons … current events for clues … and we talk with experts for different perspectives.

It sounds complicated … and maybe it is a little … but it’s like the old kids’ game, Mousetrap.

There’s a lot of fancy machinery hanging over our heads …and it’s just a series of causes and effects.  “A” triggers “B” triggers “C” and so on … until it’s in our faces.

But even at the street level with our nose on the cheese, if we watch the machinery, we can see events unfold and still have time to react appropriately.

So let’s go past a simple supply-and-demand example.

Back in 1999, Uncle Sam decided to “help” wannabe homebuyers get Fannie Mae loans … so the government lowered lending standards and pushed more funds into housing.  It seemed like a nice thing to do.

But at the time, observers cautioned it could lead to financial problems at Fannie Mae … even to the point of failure.  It took nine years (lag) … but that’s exactly what happened.  Fannie Mae eventually failed and needed a bailout.

But before things crashed, it BOOMED … and people made fortunes. We remember those days well.  It was AWESOME … until it wasn’t.

Folks were profitably playing in the housing jumphouse from the time the easy money air pump switched on until the circuit blew.  Lags can be a lot of fun.

Because few understood why the party started and why it might end … most thought the good times would roll forever.  So they were only structured for sunshine.

Oops.

People who urged caution at the height of fun … like Peter Schiff and Robert Kiyosaki … were derided as party-poopers.

Of course, they both did well through the crisis because even in the boom they were aware of the lag and the possibility of a downturn … and were structured accordingly.  Smart.

Now, let’s go beyond supply, demand, and mortgages … and look even further up the machinery …

In late 2000, Congress passed the Commodity Futures Modernization Act of 2000.

Doesn’t sound like it has anything to do with real estate … BUT …

This was the birthplace of unregulated derivatives … like those infamous credit default swaps no one in real estate ever heard of …

… until they destroyed Bear Stearns and Lehman Brothers in 2008, while bringing AIG to the brink of bankruptcy, and nearly crashing the financial system.

This mess got ALL over real estate investors in a big and painful way … even though there was an 8 year lag before it showed up.

Remember, for those 8 years a lot of the money created through derivatives made its way into mortgages and real estate … adding LOTS of air to the jumphouse.

Back then, real estate investors were riding high … just like today’s stock market investors.

And those who only measured the air pressure in the jumphouse … ignoring other gauges … didn’t see the circuits over-heating … until the system failed.

Then the air abruptly stopped, the inflated markets quickly deflated, and the equity-building party turned into a balance-sheet-destroying disaster.

And it happened FAST.

Which bring us to today …

The Atlanta Fed recently raised their GDP forecast for the booming U.S. economy.

Stock indexes are at all-time highs.  Unemployment is low.  The new Fed chair says, “The economy is strong.”

Some say these are the effects of tax cuts and a big spending bill.

Makes sense … because when you measure productivity by spending, when you spend, the numbers move.  Spending, or “fiscal stimulus” is an easy way to goose the economy.

But some are concerned this is a temporary flash fed by debt and deficits.

Others say it’s fiscal stimulus done right … kindling a permanent fire of economic growth and activity.

Could be.  After all, Trump’s a real estate guy, so he understands using debt to build or acquire long-term productive assets.

Real estate investors know better than most that not all debt and spending are the same.

Of course, government, geo-politics, and a national economy are a much different game than New York City real estate development.

And there are certainly some cracks showing in all these strong economic numbers …

A strong U.S. dollar is giving emerging markets fits.  Home buyingbuildingappreciation, and mortgages are all slowing.

We’re not here to prognosticate about what might happen.  Lots of smart people are already doing that, with a wide variety of opinions.

We just keep listening.

Our point today is … there’s a lag between cause and effect smart investors are wise to consider.

When lots of things are changing very fast, as they are right now, some are tempted to sit out and see what happens.  Probably not smart.

After all, the air in the jumphouse could last a while.  No one likes to miss out on all the fun.

But others put on sunglasses, toss the umbrella, and go out and dance in the sunshine … without watching the horizon.  Also not smart.

Dark clouds could be forming in the distance which might quickly turn sunshine into storm.

The best investors we’ve met take a balanced approach … staying alert and nimble while enjoying the sunshine, but not getting lost in the lag.

Changes in economic seasons aren’t the problem.  It’s not seeing them coming and being properly prepared.

Until next time … good investing!


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

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