Taxes, politics, and real estate investing …

Taxes, politics, and real estate investing might not be as salacious as sex, lies and videotape … but it’s arguably just as intriguing.

By now we’re sure you’ve heard all the “outrage” about allegations the United States’ Real Estate Investor-in-Chief paid nearly no federal income tax.

This shocks no one who understands real estate or the tax code, but it’s sure to rile up those who don’t. Call us cynical, but we suspect this might be the plan.

We’re not here to pour gas on the fire … or defend or attack any candidate, party, platform, or policy. If we influence you, we hope it’s simply towards Education for Effective Action™.

After all, the tax code is a tool available to ANYONE willing to invest the time and effort to learn how to use it.

Of course, you probably already know this.

But this entire debate over what’s really in Donald Trump’s tax returns promises to push the incredible tax benefits real estate investors have enjoyed for decades …

… right into the mainstream media’s crosshairs …

… AND into the focus of nearly every moderately politically cognizant person during one of the most watched election cycles in history.

So before you put on your red, blue or orange face paint and cheer for your team and curse “the enemy” …

… let’s consider the potential challenges and opportunities of these unfolding events for all real estate investors … blue, red, green or yellow.

A Main Street Wake Up Call

The tussle over Trump’s tax returns is going to wake up a lot of people who have no idea the tax code allows real estate investors to legally reduce their taxes to nearly nothing.

Some will be outraged … at least outwardly. Most rational people will realize Trump didn’t write the tax code … he simply used it effectively.

Some people will be angry. Others jealous. Some suspicious.

But we’re guessing a big chunk of people will be curious enough to fact check the law … because it’s 2020 and they can.

And it won’t take long to find the key to tax-free wealth involves real estate.

Further, as more people discover the tax savings is legit and how to do it, we bet a lot of the newly aware will be looking to get in on the action.

Of course, not everyone will want to go out and become a hands-on real estate investor. Many busy and retired people still want the “Wall Street” convenience of passively investing with professional asset managers.

But when they find they can have their cake and eat it too ...

… it could create a surge of interest in real estate private placements or “syndications” …

… and an even better opportunity for real estate syndicators to attract capital.

In fact, one of the most successful alumni of our syndication training has been using the tax benefits of his deals to raise over $200 million in private funds.

Meanwhile, back to the political drama …

Calling Capitol Hill’s Bluff

As media fans the flame of tax-avoidance outrage … and opportunistic politicians myopically jump on the trash Trump bandwagon …

… the very politicians who created the tax laws Donald Trump and nearly every other well-advised real estate investor uses to legally reduce tax liability …

… could potentially face a lot of pressure to either defend them (at great political cost) or eliminate them.

In fact, in the first 2020 Presidential debate, Joe Biden claimed he would.

Of course, politicians of all colors are famous for making lots of promises and espousing policies they never actually follow through on.

We’ll let you decide which outcome you prefer, and which team is likely to push for it. Vote your conscience.

We’re just raising awareness so you can best prepare your portfolio … come what may.

What do we think will happen?

Well, since you asked …

When we look past the two teams on the field and the fiery rhetoric …

… we see a financial system which requires the unrelenting and perpetual expansion of debt.

We’ve explained this many times in the past, but in simple terms … any system which borrows its currency into existence at interest can ONLY repay by borrowing more.

If that’s confusing, just sit and think about it.

If you borrow $100 into existence at 10% annual interest to run your “economy” … no matter where the money ends up at the end of the year … the economy owes $110 (principal + interest).

The obvious problem is there’s only $100 in existence. The ONLY way to pay the interest and keep the economy going is to borrow MORE.

Spoiler alert: THAT is (apparently) THE plan. And (perhaps) all the rest is theater.

If this makes no sense to you, that’s because it makes no sense.

As we explained in our Future of Money and Wealth conference, it’s a faulty, unsustainable system.

Nonetheless, this is the system which was born in 1913 as a result of a secret meeting at Jekyll Island, Georgia. If you don’t know the story, it’s a great Halloween read.

But because the system is based on debt, the tax law encourages borrowing.

And because the best collateral for loans is real estate, it’s no surprise the best tax breaks are with real estate.

As CPA Tom Wheelwright has been telling us for yearsthe tax code is written to coerce people and businesses to do what the government wants.

And just in case you’ve heard the argument taxes are necessary to pay for government … there’s a different perspective from someone well-qualified to have an opinion …

Click here to read the transcript of a public speech given by a high-ranking Federal Reserve official who admits …

income taxes are NOT necessary to pay for government… AND the tax code is overtly used to manipulate private sector behavior for political purposes.

So will the tax breaks for real estate go away?

Probably not completely. But some of the best bonus depreciation breaks are already slated to expire soon … unless they’re extended to create more stimulus.

We’re not waiting around. There’s a window of opportunity for real estate investors … so we think the smart move is to grab them while you can.

Until next time … good investing!

Markets matter more than ever …

In an age of macro-economic turmoil and stress, the risk of the tide going OUT is far greater than the odds of a rising tide lifting all boats.

So as Warren Buffett famously quipped …

“Only when the tide goes out do you discover who’s been swimming naked.”

And of course, if that happens to be you … it’s often expensive and embarrassing to have your shortcomings exposed.

Anyone paying attention right now expects the tide to go out any time now. In fact, many pundits are shocked the Fed has been able to prop things up this long.

So for strategic real estate investors, market selection matters more now than ever. You can’t count on a rising tide in all markets.

People and prosperity will start to flow away from some markets and flood into others. We’re already starting to see this polarization.

Get it wrong, and there you are in your financial birthday suit with water around your ankles.

Get it right, and your portfolio of “average” properties has you floating in equity and cash flow amidst a flood of demand with capacity to pay.

Long time followers know when we say “markets” we’re referring not just to geographies, but also product niches and demographics.

So it’s places, products and people.

And when times get tough … which is what’s clearly on the weather report …

… the question is: where will people and businesses go, and what kind of real estate will they need?

If you only invest in your own area, this might seem simple.

After all, you know the lay of the land well. You talk to people. You have your thumb on the pulse of the local market.

But if you don’t happen to live in a great investing market … and the local economy or cash flows don’t make sense … then you need to look for clues about markets that might make sense.

For example, Visual Capitalist just put out a nifty 3D map they call …

The U.S. Cities With the Highest Economic Output

   

Of course, these aren’t really cities … they’re metros.

But it’s a great top-down start for homing in on a local geography in which to search for teams and opportunities.

However, this is only a start. There are several other factors to consider when delving into markets … but strong economic activity is a biggie.

So before you jump on a plane and tour the nation, dig a little deeper.

If you’re a residential rental property investor … single or multi-unit … there are several markets you’d probably eliminate from consideration, simply based on their hostility towards landlords.

Losers in this category would be California, Illinois and New York. In fact, of these ten, probably all but Texas and Georgia would get crossed off our short list.

Of course, while the macro-financial strength of a metro is a solid sea and can float a lot of boats …

… trends in the economy and employment also matter quite a bit too.

Remember … the Titanic was a big, powerful ship. Even after it started leaking it still seemed very robust. Many thought it could leak without sinking.

Of course, those passengers who didn’t understand what was happening or didn’t take it seriously were slow to make it to the lifeboats.

By the time the slow-movers were looking for safety, the best spots were all taken. It didn’t end well for them.

Keep this in mind when deciding how to navigate this current crisis.

Another important thing to remember when shopping for real estate markets, jobs and population matter … a lot.

LinkUp.com puts out a lot of great (and expensive) data … but sometimes you get free samples that are useful.

In this case, they did a study of Changes in New Job Openings for a one-month period and created this very cool state-by-state graphic …

 

 

This adds a little color to the analysis … literally. 😉

Our audience knows some of our favorite markets for the last several years are in Florida, Georgia, Tennessee and Texas.

These numbers don’t surprise us because these are business-friendly, landlord-friendly, relatively affordable markets.

Of course, this is just a snapshot … but it’s another clue about where to search for resilient opportunity.

Another fun resource is Zumper.

They have a semi-interactive tool which visually shows internet search volume for where renters are interested in moving to.

Seems like that would be good to know.

Here’s an interesting chart they recently put out …

 

As you can see, there are some new markets to consider adding to the research bin to see how they stack up in terms of strength in economy, jobs, and landlord friendliness.

While we love top-down data … we like to compare and contrast it to “thumb on the pulse” feedback from people who know the market intimately.

For example, we can see from this data that Indianapolis is attracting a lot of interest. We just don’t know WHY.

But we learned from talking with our Boots On The Ground correspondents, Indianapolis has been the beneficiary of people fleeing Illinois.

Our point is that as we continue to navigate this COVID-19 induced cascading crisis … people ALWAYS need certain types of real estate … and residential is always at the top of the list … no matter what’s happening.

People and businesses will move to pursue or preserve quality of life and opportunity … which is about income, expenses, amenities, and climate (weather and business).

In good times and bad, there will always be winners and losers.

Investors who win are more strategic, informed, well-advised and supported, and therefore more aware, prepared, brave and bold … and move smartly and decisively as trends emerge.

To paraphrase Charles Dickens … these are the best of times and the worst of times … and history proves both are ever-present.

So it’s not the circumstances which make times good or bad. Success depends on how well each individual responds to whatever is happening.

The good news and the bad news is … each of our individual destinies remains largely our own responsibility.

If that thrills you, then you’ve probably got skills and a great team … and are looking forward to the impending economic white waters.

If it freaks you out, then it’s probably time to work on your training, tribe and team as a top priority.

The great news is it’s never been easier to find great ideas, information, people and resources. Those all lead to great opportunities.

Thanks for being a part of our tribe … and for reading our stuff. We like it when you reply, give us feedback, comment on our videos. Especially while we’re still in semi-lockdown.

We look forward to getting back into visiting with our audience at live events … but until then, we’ll see you on the radio, podcast, social media and YouTube.

We’re stepping up our content creation now because talking heads on mainstream financial media don’t understand real estate investing.

They don’t talk about real estate investing because it doesn’t promote or protect Wall Street … and real estate is not an asset class or commodity.

But because properties CANNOT be used as chips in the casinos, they’re much more stable in stormy seas. We think that’s going to become VERY attractive.

The right real estate in the right markets controlled with the right financing and managed by the right team is about as good as it gets for building resilient wealth in tumultuous times.

Keep this in mind while watching the storms … and as you focus on the fundamentals, your odds for success go way up.

Until next time … good investing! 

This is a SHOCK! … said no one

We’re proudly filing this under the category of “We told you so.” ….

Stripe workers who relocate get $20,000 bonus and a pay cut
– Bloomberg, 9/15/20

“Stripe Inc. plans to make a one-time payment of $20,000 to employees who opt to move out of San Francisco, New York or Seattle, but also cut their base salary by as much as 10% …”

“… companies … have expanded opportunities for employees to work remotely while also signaling … pay cuts if workers move to less-expensive cities.”

“VMware Inc. … Facebook Inc., Twitter Inc. and ServiceNow Inc. have all considered similar measures.”

Of course, we could just as easily file this under “Duh.”

After all, when companies discovered they could move jobs to China and Mexico to save money and increase profits, they did.

Modern tech empowers remote working.

And while many info workers might not be keen on moving overseas … moving to low cost, low tax, good quality of life states is not just palatable … it’s appealing.

The COVID-19 lock-downs have forced businesses into improving their remote workforce management … opening everyone up to a win-win move.

Companies LOWER their labor expenses, while employees improve their NET lifestyle in more affordable markets.

Also obviously, this has implications for the demand for real estate … housing, office, retail … in both the markets losing and those gaining people and their paychecks.

This is just one of many trends the COVID-19 crisis has accelerated, though likely still in its infancy … and worth watching.

That’s why we created the COVID-19 Crisis Investing video series … and why we’re getting regular updates from our Boots-on-the-Ground correspondents.

Shift is happening … and faster than usual.

Investing in this environment is like driving a car … the faster you go, the farther up the road you need to look so you have time to react well.

Here’s another noteworthy article with insights which are a little more challenging to decipher, but worth the effort …

The Death of the 60/40 Portfolio
– Yahoo Finance, 9/6/20

“That’s stock talk. It doesn’t apply to me. I’m a real estate investor!”

Really?

Well, before you click away to check the latest mortgage rates or political pandering, consider …

While 60/40 refers to a typical Wall Street portfolio allocation model for a mix of stocks and bonds.

The reason it’s been a staple … and the reason it’s changing … is highly relevant to real estate investors.

“The biggest takeaway is that Woodard’s team is more confident than ever that … interest rates … will likely … move considerably higher … arguing that investors should start to move away from bonds in their current allocations.”

The “Woodard” they’re referring to is Jared Woodard, Head of the Research Investment Committee for Bank of America Research.

So he’s well-qualified to have an opinion worth contemplating.

But it’s not just rising interest rates that are interesting to real estate investors …

(though that’s a compelling reason to secure as much low-cost long-term debt as you can while you can)

… but his recommendation to “move away from bonds” is important.

So in another “surprise said no one” moment, are reports the two biggest U.S. bondholders in the world (China and Japan) have already started “moving away”.

That’s because when rates rise, bond values fall.

And like any bubble … when bondholders head for the exits en masse, it sets off a very disrupting chain of events in the macro-strata of the financial system.

Of course, as you might suspect … it all rolls downhill onto the often unsuspecting denizens of Main Street.

The reason it’s SO extreme is because of the way bonds are used in the financial system.

In real estate terms, they’re used like properties with equity. The owners borrow against them to raise more cash to lever into more “assets”.

Except these loans against bonds come with margin provisions … which means if the value of the bond falls, you’re either forced to sell at a loss or borrow more.

The point is when balance sheets at every tier of the financial system are stuffed with leveraged bonds …

… a collapse of bond prices is a BIG problem for everyone … including real estate investors. Remember 2008.

(Yes, we know we’ve covered this before. But although the asteroid is moving slowly towards Earth, it still seems important to talk about it and prepare.)

Of course, in 2008 bonds collapsed because of a higher than expected default rate in sub-prime loans.

Yes, it’s true, that was then and this is now. But with an economy still largely locked-down, headlines like this should surprise … no one …

Lower-Credit Homeowners Weigh Heavily on U.S. Mortgage Market
– Bloomberg, 9/15/20

But whether it’s sub-prime borrowers defaulting, large foreign holders dumping, interest rates rising, or leveraged bond-loans going bad …

It doesn’t matter WHY bond values fall … if they do, it’s a threat to the financial system.

The fix, of course, is lots of dollar printing by the Fed, which (as we’ve been saying and saying and saying) puts a lot of pressure on the dollar 

Dethroned Dollar Is Making Waves Across Markets, in Five Charts
– Bloomberg, 9/15/20

Of course, as this article points out, there are different tactics for investors to mitigate risk and capture opportunity …

“Savvas Savouri at Toscafund Asset Management recommends switching out of conventional Treasuries and into inflation-protected securities.”

“’The simple reality is that the only feasible way to get the U.S. to the preferred inflation target is through a dollar devaluation,’”

The article also mentions gold as an alternative tool for the job …

“The dollar’s decline has also helped thrust gold onto center stage … some investors are betting that [gold] bullion will prove a better haven than Treasuries as inflation bites …”

So while there’s a fair amount of consensus about the challenges … there are variations on how to best address it.

And in yet another “surprise … said no one ever” moment …

… real estate is completely missing from mainstream financial media’s discussion of potential solutions.

That’s like heading out to a job site and leaving your best power tools at the workshop. Then again, if you don’t know how to use them, what good are they?

Of course, any talk about the what, why, and how of real estate investing is completely omitted because (in our not-so-humble opinion) mainstream financial media exists to protect and promote Wall Street.

That’s probably why YOU are here. It’s certainly why we are.

The GOOD NEWS is, whether you’re investing in your own account or organizing syndications with private investors …

… there’s a LOT of opportunity RIGHT NOW to use the right real estate as the foundation of a resilient real asset portfolio.

The GREAT news is that even though things are moving faster than normal …

… there’s still time to build your knowledge and relationships and to organize your life and portfolio to get in on the action.

The asteroid hasn’t struck yet … and while it may not … better to be prepared and not have a crisis than to have a crisis catch you unaware and unprepared.

We’re working hard to step-up the volume of ideas, resources, people and opportunities we share with you right now … because we think the times demand it.

There’s a “new normal” on the horizon …

… and while real estate is real, essential and a time-tested vehicle for wealth building and preservation …

… there are new rules and strategies emerging … because market conditions are dramatically shifting.

So be SURE to subscribe to our re-launched YouTube channel, follow us on Facebook, and of course, subscribe to the podcast.

When you support ALL our distribution outlets with your listens, views, likes, shares, comments, questions, and reviews …

… you make it easier for us to attract the guests and resources necessary to produce more and better content for you.

We appreciate you … and look forward to thriving through this crisis with you.

Until next time … good investing!

Good news for real estate in time of crisis …

A 5-minute muse …

After several weeks of confronting the brutal facts with our COVID-19 Crisis Investing Series …

… and chasing shiny objects in our Making Sense of Silver Series …

… it’s time to consider the BRIGHT SIDE of the crisis for REAL ESTATE investors.

So grab a lollipop, slather on some sunscreen, saddle up the unicorn, and let’s trot to the pot of gold at the end of the real estate rainbow …

 

U.S. Junk Bond Market Sets Record-Low Coupon in Relentless Rally
– Bloomberg, 8/10/20

“ … junk bonds at record-low yields amid a rally triggered by the Federal Reserve’s historic support for the market and heavy inflows into funds that buy the risky debt.”

 

Don’t see the sunshine yet? Hang tight …

 

“Can-maker Ball Corp. pays 2.875% yield on 10-year debt. Rate is the lowest ever for new issue due in at least five years.”

 

“Record low” … “historic” … those are words used to describe EXTREME events.

And sure enough …

 

Desperate hunt for yield forces investors to take ‘extreme risk’
– Financial Times, 7/26/20

The hunt for yield is getting harder than ever for fixed-income investors.”

“Roughly 86 percent of the $60 trillion global bond market … yields no higher than 2 percent — a record proportion – with more than 60 percent … yielding less than 1 percent …”

 

In case it’s not yet obvious, the Financial Times continues …

 

“This has pushed investors into riskier segments in search of income, compelling them to lend to lower-quality companies and countries.”

 

In the classic movie, Papillon, the hero gets tossed into solitary confinement and is fed only small amounts of bread and water.

To survive, he eats the insects crawling around inside his cell.

GROSS, right?

But starving people do extreme things. Remember the Donner party. (Not sure we’d call that a party.)

Spoiler alert: Yield starved paper asset investors might even stoop to investing in real estate.

So … are interest rates headed up any time soon?

According to Peter Schiffthe Fed is trapped in a monetary policy “roach motel” of their own making.

Ten years of zero interest rates to “fix” the 2008 crisis created an even MORE HUGE bond bubble (high bond prices create low interest rates).

Those bloated bonds are margined and splattered all over the balance sheets of “too big to fail” (TBTF) institutions throughout the global financial system.

If rates tick up … even a little … bond prices fall and those bond-bloated balance sheets implode … taking the financial system with it.

It’s like you owning hundreds of houses with 90% financing controlled by special mortgages which require 10% equity at ALL times.

If the property price falls, you MUST sell (at a loss) or pay down the loan to 90% of the CURRENT (now lower) value. That’s called a margin call.

Of course, if there’s not enough cash, you need to dump your houses on the market, which crashes the price, creating more losses and margin calls.

Avalanche!

This predicament is foreign to real estate investors because mortgages don’t work that way. But it’s commonplace on Wall Street.

So if the Fed lets rates rise, it implodes the bond bubble and crashes the financial system. That’s why they’re trapped and the dollar is on the altar.

So it seems Zero Interest Rate Policy (ZIRP) is likely the norm … as long as the Fed can print dollars to buy bonds.

But again … while ZIRP might save the financial system … it’s starving income investors. That’s the problem … and the opportunity.

So, in desperation, these yield-starved investors are dumpster diving looking for scraps of yield anywhere they can find it.

Enter the Real Estate Fairy Godmother …

 

“My child, why eat garbage in Oz when real yield awaits you in Kansas?”

 

Real estate investors know it’s not rocket science to find yields over 2 percent. And real estate investors are HAPPY to pay 3 or 4 percent to borrow.

Real estate arguably provides far more attractive risk-adjusted returns than junk bonds.

So Main Street real estate can feed the yields these income-starved investors need … if only they knew how to use their ruby slippers to get back to reality.

Instead, they’re crawling around junk bond markets devouring what amounts to return-free risk. After all, after inflation and tax, how much real yield is there on 2.875% annualized? Not much, if any.

Meanwhile, there’s a growing rag-tag army of real estate entrepreneurs serving up hot deals on Main Street. It’s like a soup kitchen for yield-starved investors.

But Mom and Pop paper asset investors don’t know about it. So they’re buying the junk food they’re sold.

Robert Kiyosaki has complained for years about the lack of real financial education in the school system and mainstream media.

In fact, you’re probably reading this … or listening to our podcast … or watching our renewed and improved YouTube channel because …

… mainstream financial media’s mission is to promote and protect Wall Street and the paper asset casinos. They ignore real estate. They don’t understand you and they don’t talk to you.

Sure, Wall Street might discuss home builder stocks, REITs, and hedge funds as vehicles to funnel money through Wall Street into real estate and mortgages.

But there are layers of limousines, penthouses, private jets, and big bonuses between individual investors on Main Street and the Main Street real estate producing the profits.

Seems like a whole lot of skimming going on.

We think a flatter model … where Main Street invests directly in Main Street can help #cancelwallstreet … (could this be a movement?)

It keeps more meat on the bone for the people doing the real work … Main Street savers (the money) and Main Street syndicators (the deals).

The pot of gold at the end of the real estate rainbow …

Some of the Fed’s TRILLIONS and TRILLIONS of new dollars will eventually find their way into real estate.

Consider how real estate is WAY better than bonds for yield-starved income investors …

First, real estate’s yields are higher. Plus, they’re backed by real collateral.

Compare that to a junk bond. What if Ball Can can’t pay? What do the bond holders get? Cans?

When you buy a mortgage (i.e., lend against real estate), and the borrower goes bust … you get the property AND the rent.

As a landlord, if the tenant fails, you can put in a new one. The income is more diversified.

But if Ball Can defaults on their bond, the lenders can’t just insert another borrower to take over the payments. It’s single point failure.

Sure, there’s hassle in the real estate. But when things go bad, there’s also places to land before total loss.

When Wall Street “works” on paper, it feels good and seems easy. But when it doesn’t work, it can fall apart fast and there’s no plan B … except the Fed.

The Power That Be (the PTB) have your back too.

Wall Street Wizards feed their families (and their egos) betting on the Fed “put”.

They know the Fed will print UNLIMITED dollars to bail out bad bets.

So it’s all upside for the gamblers, while the downside is subsidized by all dollar-holders everywhere. But the world is waking up to this game.

Meanwhile, like it or not, agree or disagree that it’s fair or not, the fact is that real estate investors enjoy support from the Fed and Washington too.

Yes, it’s true politicians sometimes vilify landlords (as they do Wall Street … wink, wink) and occasionally throw down some public-appeasing rhetoric or legislation.

But it’s mostly theater. The Fed and the politicians NEED real estate investors.

Watch what they DO … not what they say.

Consider the notion that COVID-19 crisis stimulus … PPP loans, enhanced unemployment, and direct-deposits into Main Street bank accounts … are indirectly aimed at real estate.

That’s because stimulus funds help make sure people have money to pay their rents and mortgages.

It’s intended to flow through the recipients and their landlords to the lenders. In fact, the entire financial system is designed to do this.

Real estate investors position themselves in the flow of funds in order to create cash flow and equity.

As long as the debt-fueled system exists, real estate is arguably the BEST tool to benefit from it.

Remember, real estate serves an essential human need … and is particularly important in the financial system the PTB protect.

So unless private property rights are abolished, or Uncle Sam gives everyone a free house, or Elon Musk invents a new tech to shelter people without land …

 real estate will be with us for the long term and remains high on the priority list for everyone from Main Street to Wall Street to Washington DC.

It’s disconcerting when the earth is shaking beneath your feet. The current crisis is nerve-racking. Loose hands and weak wills are going to get bucked.

But if there’s a pot of gold at the end of the rainbow when the stormy clouds clear … and we’re guessing it will be sitting on a piece of real estate.

Keep calm and keep cash flowing.

Recent Updates Unlock Retirement Account Profit Potential

Tax rules are always changing … but they’re a great signal to show where policymakers want individuals like YOU to invest your money. 

With the economy struggling under the weight of COVID-19, it’s no surprise that tax rules are being tweaked. 

Today we’re looking at how retirement accounts are being unleashed … and how you can get in on the action as a real estate investor. 

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

  • Your tireless host, Robert Helms
  • His exhausting co-host, Russell Gray
  • Regular contributor and retirement account investing expert, Damion Lupo

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Using your retirement account now

There are lots of different ways to invest in real estate. One of the most underutilized … and often misunderstood … resources are retirement accounts. 

So, how can you take that money and invest in real estate and other hard assets?

When many people get hired, they set up a retirement plan, and they forget about it. But you can … and need … to take control off your account. 

If you’re still working for your company, you likely can’t do much about your account besides monitor it and pay into it. 

But, when you have an opportunity to turn that account into a self-directed account, you can make magic happen. 

What’s great about retirement funds is that they can be invested in all kinds of things … you’ll want to talk to your tax professional about the rules and the options available to you. 

Different money is treated differently … it’s taxed different ways, and we behave differently around money that we have saved and put away like retirement accounts. 

We think it is good for individual investors AND for society, in general, to get the money in retirement accounts freed up so you can invest directly in main street instead of relying on Wall Street. 

Whether you are a hands-on investor or a hands-off investor, we’ve got a lot to share with you. 

Understanding how the retirement game is played

Damion Lupo has been involved in many of our events … but he is here today to take us all back to square one. 

Before you can put your retirement account to work, you need to understand what it is and how the game is played. 

“The mission that I have now is breaking financial shackles, and most of it’s done with retirement accounts and breaking people out of the Wall Street jail,” Damion says. 

The Wall Street machine means people hope they are going to wake up in 40 years and maybe they’ll be rich. But there are other alternatives. 

When people leave a job … whether it’s the government with the TSP or a 401K at an employer … they typically roll that account into an IRA and invest in stock or mutual funds. The alternative is a self-directed account.

A self-directed account allows you to be able to direct your money and be in the driver’s seat instead of being in the trunk hoping it works out. 

There are different options in the self-directed realm. The most extreme form of control is an EQRP, and another really good option is a self-directed IRA. 

The biggest difference between the two is that for an IRA you must appoint a custodian … someone else that you have to go through to direct your money. 

An EQRP allows you to be a trustee on your own account, which is the equivalent of the custodian in the self-directed IRA. 

When we talk about controlling and being the trustee of your account … many people hear something that sounds like work. 

Maybe it’s a little work to get it set up … but then, the investments that you make can be as hands off as you want. Retirement accounts are generally set up for passive investing. 

Another important thing to understand is “Roth.” When we say Roth, we mean the after tax money. 

If you have a Roth account … whether it is a Roth IRA, Roth 401K, or Roth EQRP … you pay tax before the money goes into your retirement. When you pull the money out, it’s zero tax. 

And we always say that one of the most important parts of your investment philosophy is your team. That definitely applies in this situation. 

A custodian or an EQRP company can help you make sure you stay in compliance with IRS laws as you put your retirement to work now. 

What type of account is right for you?

What type of account is right for you? Damion says that deciding starts by figuring out your big picture. What do you want to do?

If you want to invest in mutual funds, a self-directed IRA is a great place to start. If you are interested in doing things like real estate, there are considerations to be made. 

A big issue right now is something called unrelated business income tax … UBIT tax. 

When somebody makes a net profit in a real estate deal and there’s debt, there is up to a 37% tax because of the UBIT.  

The reasoning behind it is that your retirement funds aren’t intended for you right now. 

So, if you use your retirement funds to partner with a loan and go buy a property, sell it, and make a lot of money … part of that return was from the dollars in your retirement account.

Those dollars aren’t taxed, but a big part of the return was from leveraged dollars that aren’t part of the retirement account. That means a big tax is due. 

It’s fairly logical, but people hate it. 

The alternative is being in a different part of the tax code. If you have an EQRP, there’s an exemption for UBIT. 

If you’re already invested in an IRA, it’s fairly easy to switch to an EQRP. 

For more information on unlocking the profit potential in your retirement account … listen to the full episode!


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Crossbreeding billionaire brilliance …

Personal development guru Tony Robbins reminds people …

“Success leaves clues.”

The idea is that success isn’t purely a product of blind luck or extreme innate ability. For guys like us, that’s REALLY good news.

Success is much more a matter of developing the knowledge and discipline to take aggressive action based on proven patterns and principles.

So if you carefully observe both what a successful person does and how they think, you can often replicate their thinking, behavior, and results.

Similarly, if you’ve had success in one area of life, you can probably apply those principles to other endeavors and achieve success there too.

That’s why we pay attention to successful people … even those who aren’t real estate investors.

So we perked up when we saw this headline …

Warren Buffett offers his 2 best pieces of advice for aspiring young investors

– Yahoo Finance 4/28/20

Of course, notwithstanding his investment in Berkshire Hathaway Home Services, Warren Buffet isn’t really a real estate guy.

But Warren Buffet is arguably one of the most successful, famous, most admired investors in modern history. There’s probably a lot to learn from him.

And since we need a timeout from our intense monitoring of the macroeconomic tsunami forming on the horizon …

(we’ll do a deep dive on our upcoming Crisis Investing webinar)

… today we’re looking at what real estate investors can learn from Warren Buffet.

After all, at nearly 90 years old, Buffet has seen his fair share of crises. Few people on earth are as experienced at navigating stormy economic times and building wealth in spite of frail financial infrastructure.

So according to the Yahoo Finance article and accompanying interview video, Buffet’s first tip is to learn accounting.

Tip number two is do NOT invest based on charts (an approach referred to by stock traders as “technical analysis”), but rather to focus on “buying good businesses instead.”

As with most brilliant people, there’s a lot of wisdom packed into just couple of sentences. So let’s take a moment to unpack it and look for principles we can apply to real estate investing …

TRADERS attempt to buy low and sell high … going from cash to asset to cash. The mindset is to accumulate cash.

INVESTORS seek first to acquire a stake in a profit-generating enterprise. They focus on accumulating cash FLOW … or what we call the ongoing efforts of others.

Of course, they’re happy to buy low and enjoy some capital gains too. But the purpose of buying is to acquire cash flow.

In real estate, flippers and wholesalers are TRADERS … they hustle to go from cash to asset to cash.

The difference between a stock and real estate trader is the real estate trader has the ability to improve the asset (add value).

So the real estate trader has some degree of control over creating the capital gain they wish to realize. The stock trader does not.

But whether in stock or real estate trading, the long-term financial performance (the accounting) is less important than the short term “mood of the market” (the technicals).

If the market is hot and new buyers are piling in … especially if those buyers are equipped with cheap credit … then it’s a lot easier to sell high to the next guy.

This investment philosophy is sometimes called “The Greater Fool” because your exit always requires someone coming along willing and able to pay more.

And when rising prices are dependent upon healthy credit markets and abundant jobs, and one or both crash, the line of greater fools gets short real fast.

So the challenge, as many traders just discovered, is hot markets can turn cold quickly … and you can end up a reluctant long-term holder.

Of course, with leverage (margin on stocks, or mortgages on real estate), you may not be able to hold on for the long-term. Then it’s a wipe out.

Mortgages are far more forgiving than margin debt on securities, but negative cash flow on a negative equity property is no fun either.

On the other hand, real estate INVESTORS are much more like Warren Buffet 

… except instead of buying businesses, real estate investors are looking to populate portfolios with profitable cash-flow producing properties.

This is a very timely discussion, because in challenging times like these, QUALITY matters.

And when it comes to sound investments, quality is cash flow.

To survive and thrive long-term, it’s important to look for sound properties … in relatively strong markets … managed by great teams … and serving a viable demographic.

Yes, many markets are weak now … and getting weaker. Ditto for demographics. But some aren’t. And some are well-positioned to bounce back better when things open up again.

So it’s not all doom and gloom. In fact, markets which are dipping now, but positioned to bounce back soon, could present great acquisition opportunities.

This isn’t the time to sit out or tip toe through the trauma.

However, you’ll need to know how to look at the operating financials of an income property … the accounting of real estate.

Warren Buffet says, “that’s got to be like a language to you.”

In other words, you’re not looking at the entrance price, exit price, and profit potential. You’re looking at how to hold for the long term in between.

The Yahoo article refers back to an annual letter Buffet sent his investors way back in 1988 …

“Our favorite hold time is forever.”

– Warren Buffet

In Seven Habits of Highly Effective People, Steven Covey explains it’s important to “begin with the end in mind.”

When you approach real estate as a commodity to trade with your end game being cash … then you’ll focus on short term circumstances and structures to produce short term results.

Then, at the end of the transaction all you end up with is cash.

Worse, cash in the bank pays next to no yield, and with the Fed printing trillions, there’s a possibility (probability) cash will lose value.

So to protect your “profit” you’ll need to quickly find another asset to buy.

But when you approach real estate as a “going concern” … a business … then you underwrite, structure, and manage it very differently … for the LONG term.

It’s not a date, it’s a marriage.

This matters more than ever right now …

It’s not a stretch to think prices for many properties will be falling as the damage done by the COVID-19 shutdown permeates through the economy.

We expect a big chunk of the damage to metastasize through credit markets, further weakening the economy and letting a lot of air out of property prices.

This is a very challenging environment for real estate traders. It’s hard to buy low and sell high when prices are falling faster and farther than any value you might add.

Meanwhile, many investors will sit on the sidelines and let viable deals go by because they don’t want to “pay too much”.

But if you have a 10 or 20 year hold horizon (remember … “our preferred hold time is forever”) …

… it’s less important what you pay today versus having a viable property and structure you can live with long term.

Sometimes prices can fall so you could theoretically buy lower. But if it’s because the availability of capital or credit if limited, it might hider your ability to buy with an optimal structure.

Also, real estate isn’t a static commodity. If the property is in good shape and you pass at the higher price, the lower later price could be because the condition of the property or tenant mix deteriorates.

So sure, you might wait and get the lower price, but is it a better buy? Maybe not. That’s why we say if the deal in front of your make sense, buy it.

Lessons from Warren Buffet’s career suggest that quality is present in all markets.

The time to buy is when an individual deal makes sense and can be structured for the long haul.

If the bust becomes a boom, all ships rise with the tide.

But if the boom becomes a bust, only the well-structured property ownerships will survive to the next boom.

Investing is different than trading. And success is simply a matter of focusing on the relentless execution of the boring basics.

Sure, it’s fun to flip the hot property and find yourself neck-deep in a pile of green paper.

And if you’re short on liquidity, you may need to do that from time to time (though we prefer syndication as a preferred path to having more cash to invest with).

But if you’re aspiring to build a portfolio of properties and a pile of passive income, then it’s wise to take a long-term approach and focus on fundamentals as a proven path to resilient prosperity.

Until next time … good investing!

Inflation or deflation? That is the question …

Just when you thought things couldn’t get any more insane, the price of oil dropped all the way to NEGATIVE $37.

Of course, it bounced back to a positive (but still very low) price of about $12.

We’re guessing there’s a big opportunity somewhere in all of that … just like if rents crashed temporarily. We’ll look into it.

Meanwhile, Uncle Sam is rolling out Free Stimulus Money Phase whatever … all freshly printed by the (privately owned) Federal Reserve.

We’re not sure how many dollars the Fed can print before dollar-holders start moving into something else. Russia dumped dollars for gold quite a while ago.

Looks like Bank of America thinks more investors will follow suit …

Bank of America recently RAISED its 18-month dollar price target for gold to $3,000 an ounce … 50% higher than gold’s all-time high …

… because “the Fed can’t print gold.” (the title of B of A’s report).

So it’s not just Peter Schiff, Robert Kiyosaki and Jim Rickards who think the dollar could be headed down … and gold is where many will flock for safety.

If you’re a nose-to-the-grindstone Main Street real estate investor and haven’t paid any attention to the dollar, gold, and oil …

… it’s time to wake up and smell the crisis.

Because as we discussed in our last muse … and the one before thatthe fundamental flaw in the financial system is too much debt.

We won’t beat that horse again except to say it seems the Fed is betting the dollar is strong enough to paper over all of the debt and neither will implode.

So the question every investor … including real estate investors … should be considering is …

will this economic shutdown and money printing result in inflation or deflation?

Inflation makes your rents (and expenses) go up. At least once it makes its way through the entire system.

Of course, wages haven’t seen much inflation in a long time. So demand-driven rising rents actually pushed some people down the ladder or out onto the streets.

Inflation causes equity to happen all by itself … no hammer, paint, or new carpet needed.

Inflation makes debt easier to pay off.

That’s why all borrowers, including indebted governments, LOVE inflation … and central banks work furiously to create it.

Of course, deflation is the opposite of all that.

Deflation causes equity to disappear and wages and rents to decline. It makes the mortgage payment harder to deal with.

Deflation causes debts to go bad, which is why banks (lenders) are scared to death of it.

Once a deflationary spiral begins, it’s really hard to stop it. Ask Japan.

Deflation (or preventing it) is what the Fed’s “price stability” mandate is REALLY all about.

So the Fed’s not interested in keeping prices low … it’s trying to keep them HIGH and rising at least 2% per year.

But as the Rolling Stones said and the Bank of Japan can attest … you can’t always get what you want. At least not exactly when, where and how you’d like.

So will it be INFLATION or DEFLATION?

Yes. At least in terms of prices. Both can be present at the same time, and we’re already seeing it. Gold is up while oil is down.

That’s because rising and falling prices are factors of currency supply, leverage, and supply vs. demand.

When the Fed prints money, it increases currency supply. If you focus solely on that, you see hyper-inflation. After all, they’re printing TRILLIONS.

But when credit markets collapse (the reason the Fed is printing), leverage decreases … letting air OUT of prices.

That’s why real estate values plummeted in 2008. Anything dependent on financing falls when financing fails.

And when supply is short in the face of demand … prices rise … if you can get product at all. Think of recent price gouging in medical masks or toilet paper.

Conversely, when demand disappears in the face of strong supply … prices collapse … as just happened in oil.

Currency supply, leverage, supply and demand are like three tension wires holding an old-fashioned TV antenna upright.

The trick for the wizards behind the curtain is to balance them so prices remain “stable” … which for the Fed means plus 2 percent per year.

The trick for a lowly Main Street investor is to watch all this …

… and then accurately anticipate what’s likely to happen and auickly position to avoid catastrophe and capitalize on opportunities.

It’s also important to consider whether the factor causing the shift is permanent or temporary.

Will oil demand be this low forever? For a while? For a season? What about unemployment? Dollar demand?

We know … it’s a little complicated. But it’s not rocket science. And it’s worth the effort to gain context for all the non-stop info in the daily financial news.

Armed with context and information, your mission is to thoughtfully consider what to do in different scenarios.

This is a VERY IMPORTANT exercise RIGHT NOW … because everything is changing so fast.

The time to design the fire escape isn’t when the house is on fire. And there’s already a fair amount of smoke. This is no time to hit the snooze button.

We’re going to leave you with some questions to ponder for now, while we get back to work on the upcoming Coronavirus Crisis Investing webinar …

If unemployment remains high and wages fall, then which geographic markets, demographic markets, and product niches are likely to win and lose?

If credit markets seize up as badly or worse than 2008, how will your current portfolio of deals, debt and equity be affected?

If real estate prices collapse, what can you do NOW to mitigate the risks and capitalize on opportunities?

And the super-bonus extra-credit question …

If the dollar loses reserve currency status, what happens to your portfolio, liquid net worth, and purchasing power? How can you hedge?

Hey, no one said real estate investing is paint by numbers.

Diligent investors need to think, imagine, and mastermind with each other to find creative ways to survive and thrive.

You can’t control external factors, but you can decide how to react. Do your best to accept the challenge and enjoy it.

After all … “We’re all in this together.”

Until next time … good investing!

An economy in triage …

(Here’s a 5-minute money read)

You probably know the global economy caught a virus and suffered a massive heart attack. Cash stopped flowing, creating a cascade of problems …

… including individual cell damage, organizations and systems in danger of failing, and almost certainly … brain damage.

So the monetary doctors at the Federal Reserve are infusing enormous volumes of liquidity … perhaps hoping sheer pressure will force cash to flow.

Concurrently, Uncle Sam is injecting free money right into Main Street bank accounts …

… while local governments are selectively allowing certain chosen industries to provide “essential” products and services.

We’re not criticizing or complimenting. It’s simply an observation of what’s happening.

In recent rants, we suggested that insane, absurd, unsustainable levels of systemic debt is the primary vulnerability …

… the kryptonite of the “super” economy the United States was purportedly enjoying … right up until it wasn’t.

It’s a long, convoluted rabbit trail to explain, but the short of it is simple … when cash stops flowing, debts go bad.

That’s bad enough. But of course, it gets worse …

All that debt is underpinning artificially inflated asset prices (yes, that’s where the inflation ended up … they just call it “the wealth effect”).

As debts go bad, asset prices PLUMMET …

… UNLESS, the Wizards behind the curtain conjure many trillions of new dollars out of thin air to prop up … EVERYTHING … and push asset values back up.

Of course, all those dollars aren’t really free.

But no one in the White House, Congress, the Federal Reserve, or the mainstream financial media will say it, because …

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
– Henry Ford

But YOU should know it.

It’s the reason real estate investing has been arguably the most powerful and reliable builder of real wealth for many decades.

Properly structured income-producing properties allow investors to hedge deflation, ride inflation, and enjoy high after-tax yields on equity along the way.

Of course, there’s risk. And real estate investing is more work and takes more education than “invest and forget” or “buy low/sell high” paper asset investing.

But with ALL forms of investing … when external factors change, your investing strategy and tactics need to change too.

Right now, external factors are changing FAST. But it’s too early to tell if we’re facing an unpleasant cold front … a deadly blizzard … or a new ice age.

However it’s safe to say storm clouds have formed … and inclement economic weather is threatening to engulf the entire world.

This is notable because it usually takes a strong lead dog to pull the pack and sled through the snow … though that sometimes comes at a price.

China took on nearly $33 trillion in new debt to help pull the world out of the Great Financial Crisis of 2008. It’s doubtful they’ll do it again.

So contrary to popular myth, this 2020 crisis-in-waiting is probably NOT 2008 all over again.

Of course, the how and why won’t be clear until we’re on the other side.

But YES, the sun will come back out … eventually. Right now, it’s cloudy and cooling with very limited visibility.

So rather than delve into tactical details for right now …

(we’re interviewing many of our boots on ground teams and we’ll be talking on the radio show about what they’re seeing and doing right now)

… we think it much more useful to share what we’re watching and why …

Jobs

The MOST important thing is jobs.

When we interviewed then-candidate Donald Trump and asked about his housing agenda, his one-word answer was, “Jobs”.

But jobs are only the start of the financial food chain.

Tenants’ jobs provide your rent, which provides your mortgage payments. Obviously, homeowners’ jobs are the source of their mortgage payments.

Mortgage payments often get made to servicers, who in turn forward the income to investors often via mortgage-backed securities (MBS).

But when enough payments get missed, those MBS lose value. And if they’re leveraged, that loss in value triggers margin calls.

Margin calls then force leveraged paper investors to post cash or face a forced sale of their pledged assets at a loss.

(This is where all the excessive systemic debt is the biggest problem … in that regard this IS 2008 all over again … only bigger)

If you’ve ever been on the wrong end of a leverage stock investment and received a margin call, you know exactly what that’s like.

Sometimes, highly-margined paper traders need to sell anything and everything at ANY price in order to raise cash … or end up bankrupt like Lehman Brothers in 2008.

These fire sales cause paper asset prices to collapse, triggering more margin calls, and a vicious downward cycle of asset price deflation.

That’s financial system contagion and when you see RED flashing across all the financial market indices.

The “patch” is for the “Plunge Protection Team” and/or the Federal Reserve and their proxies to step in and bid up prices … the Fed’s “asset purchase programs“.

Of course, when this happens, markets see a blip up, and cash-starved traders “sell the rally” … which of course, creates more red.

Right now, the Fed is SO active, paper traders default to buying anything the Fed’s buying just to catch a free ride.

We wish real estate underwriting were so simple.

The REAL solution is productivity (jobs), NOT printing currency.

But neither the government nor the Federal Reserve can “create” jobs. The best they can do is foster an environment where private enterprise creates jobs.

Right now, just the OPPOSITE is happening. They’re shutting everything down.

Until that’s fixed and businesses have time to rebuild … economic malaise and financial system (credit markets, banks, currency) instability are likely.

Sorry to burst your bubble … oh wait, something else already did that.

The Dollar

As we’ve been pointing out for some time, the Federal Reserve is using their printing press to “borrow” trillions of new dollars from the purchasing power of ALL dollar holders worldwide.

Read that again. And if you don’t CLEARLY understand it, then make a note to study this topic until you do.

It’s probably the most important financial concept most people don’t understand, but should …

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” 
– John Maynard Keynes (look him up)

A fantastic resource for understanding the foundation of all this is The Creature from Jekyll Island by G. Edward Griffin.

Creature is a much more useful horror experience while sheltering in place than binge watching The Walking Dead.

And while you’re digging deep into the design of the dollar system, be sure to study its ascendancy to world’s reserve currency status in 1944.

Then go even deeper and consider what YOUR world will look like if the dollar loses that reserve currency status. Most Americans are NOT ready.

However, as we chronicled way back in 2013Russia and China have been on a mission since 2010 to knock King Dollar off the throne.

As pointed out in the opening session of the Future of Money and Wealth program, Russia and China are in a MUCH better position to pull it off today.

Are they? Will they? Maybe. Maybe not.

But it’s no secret they want to … and have been working on it for a long time. They’ve reiterated it in word and deed on many occasions over the last 10 years.

Which brings us to …

Gold

Gold is the oldest and most universal form of money.

“Gold is money. Everything else is credit.”
J.P. Morgan

And apparently, the rest of the world is adding to their gold savings ….

 

 

Again, this has been going on since 2009, when China publicly warned the U.S. about protecting the value of dollar.

But Uncle Sam’s debt swelled nonetheless.

And the Fed’s balance sheet exploded from $800 billion to $4.5 trillion in 2012 … and is now $6.6 trillion and still GROWING. That’s all freshly printed dollars.

No wonder the world went to work on breaking their dependency on the dollar.

You may know gold is at all-time highs against every major paper currency in the world … except the dollar.

Stated inversely, paper currencies have collapsed to their all-time lowest values against gold … and the dollar is getting there … probably soon.

The ultimate currency insiders … central banks … accelerated their gold acquisition over the last two years. Hmmmm ….

What’s in YOUR safe?

Bringing it Home to Main Street

It’s no secret all us outsiders are on the front end of what looks to be a severe economic contraction.

Individuals, businesses, industries, asset classes, and even countries …are going to feel it. Real estate is not immune.

But even as you prepare for the worst, there are bright spots …

U.S. Manufacturing and Agriculture

In the short term, it’s ugly.

But long term, it seems policymakers and John Q. Public realize it’s important to have more manufacturing back in the United States.

Shortages of masks and medicine sent a message. We’re guessing many industries will consider or be coerced into moving.

So we’ll watch for opportunities in currently overlooked geographies where a migration of manufacturing might create a resurgence in real estate.

Energy

Again, energy is depressed right now because of a temporary collapse in demand.

But that also means choice assets are on sale. Meanwhile, less efficient production is going off-line … perhaps permanently.

So unless you think economic activity has ceased forever, then at some point the demand for energy should rebound … even more so if more manufacturing makes its way back to the USA.

Cheap Debt

Stimulus almost always means free money.

While borrowing to spend is stupid, borrowing low and long to invest high and short can be very smart … and profitable.

And right now, credit markets haven’t collapsed … yet.

So, it’s probably still a great time to quickly load up on cheap dollars, some precious metals, and high-yield debt secured by real estate you wouldn’t mind owning.

Distressed Assets

Of course, tough times means wrong-footed investors will need to let go of nice properties in good markets because they’re only structured for sunshine.

They’re selling because they have a problem, and when you buy … even at a discount … you help solve their problem.

And while it’s nice to buy at the very bottom, what really matters is where everything is at 10-20 years from now.

So, don’t be shy to buy if a deal makes sense … even if there’s a chance more air will come out. After all, you don’t know what will happen tomorrow.

Until next time … good investing!

 

The pension problem is about to get REAL …

Our good friend, multi-time Investor Summit at Sea™ faculty member (who’s back again for 2020!) … and greatest-selling financial author in history …

Robert Kiyosaki thinks pensions are the greatest threat facing the financial world today.

Of course, it’s not like pension problems are breaking news. The whole crisis has been unfolding for a decade as more of a slow-motion train wreck.

But over the last few years, the looming disaster is getting hard to ignore …

America’s utterly predictable tsunami of pension problems
– The Washington Post, 2/22/17

Pension Fund Problems Worsen in 43 States
– Bloomberg, 6/30/17

States have a $1.4 trillion pension problem
– CNN Money, 4/12/2018

The Pension Hole for U.S. Cities and States is the Size of Germany’s Economy
– The Wall Street Journal, July 30, 2018

“Many retirement funds could face insolvency unless governments increase taxes, divert funds, or persuade workers to relinquish money they are owed.”

And it’s not just government pensions. Some of the biggest corporations are also struggling under the weight of their pension burdens …

GE’s $31 billion pension nightmare
– CNN Business, January 19, 2018

Here Are 14 Companies Getting Crushed By Pension Costs
– Business Insider, 8/15/2012

You get the idea. Huge storm clouds have been forming for quite a while … in both the public and private sectors.

In an election year, you’d expect to hear some chatter about it. But we’re guessing you won’t because there’s no politically palatable solution.

Of course, ignoring the problem won’t make it go away.

That’s why Kiyosaki is shining light on it. You can’t prepare for or profit from a problem you don’t or won’t see.

So this is a situation we’ve been watching more closely of late. And clues in the news tell us pension problems pose a threat to real estate investors.

Desperate politicians have already proposed funding their shortfalls with property taxes and cuts to benefits for pensioners … some of whom could be YOUR tenants.

Meanwhile, major corporations like General Electric and United Airlines have already cut their pension benefits.

Of course, the flip side of bad news is GOOD NEWS …

Pension problems also create opportunities for real estate investors.

We think pension managers will eventually concede that for a chance to save their funds from the Federal Reserve’s war on yields …

… they’re going to need to get REAL … real fast.

Pension fund managers will need to funnel more money away from Wall Street and into Main Street.

Think of all the reasons Main Street investors LOVE real estate …

… reasonably consistently achievable double-digit total returns 

… inflation-hedged yields much higher than bonds and without the counter-party-risk …

… assets which aren’t practical as gambling tokens in the Wall Street casinos, and therefore much less volatile in terms of yields and principal value.

We know. You’re already convinced real estate is awesome. And you may be wondering why everyone doesn’t invest in real estate.

But don’t under-estimate the seductive allure of Wall Street marketing and the pervasive political pressure to promote paper assets.

Remember, an argument can be made that government and Wall Street sometimes work together to the detriment of Main Street.

But when Main Street gets mad … it’s every politician and pension manager for himself.

So when poking around the crevices of the internet looking for credible clues …

… and being mindful that things NOT being talked about in well-publicized political discourse is probably more worth paying attention to …

… and we came across a couple of interesting articles …

CalPERS gets candid about ‘critical’ decade ahead
– Capitol Weekly, 8/27/19

Yes, we realize this article isn’t “fresh” … but it’s still relevant today. After all, they’re talking about the “decade ahead” … and again, this is a slow-motion train wreck.

Here’s a notable excerpt …

Quoting a letter written to CalPERS by a third-party consulting company brought in to help figure out what to do …

“ ‘The financial world is changing, and we must change with it,’ said the letter. ‘What we’ve done over the last 20 years won’t take us where we need to go in the future. New thinking and innovation are in order.’ ”

Of course, who knows what they mean by that. “Change”, “new thinking”, and “innovation” are all buzz words that lack meaning apart from a suggestion or context.

But one thing is perhaps becoming clear to the pension managers … Wall Street’s not the answer …

“ Meanwhile, a line [the] letter is a reminder that CalPERS remains at the mercy of the market, as when the stock market crash and recession struck a decade ago: ‘The value of the CalPERS fund fell 24 percent in a single fiscal year, to about $180 billion.’ ”

So it’s against this backdrop that we found the second, more recent, article noteworthy …

Sacramento County launches tender for alternative assets consultant
– Institutional Real Estate, 2/11/20

“The $10 billion Sacramento County (Calif.) Employees’ Retirement System (SCERS) is seeking a consultant for its alternative assets portfolio …”

“The alternative assets consultant works with the pension fund’s investment staff to help develop and maintain strategic plans for the system’s absolute return, private equity, private credit, real assets, and real estate investments.”

Pension problems are rampant in governments … from nations to states to counties and municipalities, as well as corporations all around the world.

As pension managers realize there’s opportunity to grow absolute returns through private placement and real estate 

… it opens up a potential floodgate of money into Main Street opportunities.

Of course, if you’re just a Mom & Pop Main Street investor … or even a fairly successful real estate syndicator doing multi-million-dollar deals …

… you may wonder how YOU can get in on the action.

Like Opportunity Zones, pensions pointing their portfolios at specific markets and niches have the potential to provide a tailwind to EVERYONE already there … or going along for the ride.

So pay attention to pensions … not just for their potential to torpedo the financial system …

… but for the opportunities created as they act out on “new thinking and innovation”.

Lastly, keep in mind that like Fannie Mae and Freddie Mac back in 2008, and the FDIC today …

… the Pension Guaranty Benefit Corporation is a horribly underfunded quasi-government enterprise backing TRILLIONS in potentially failing pensions.

If a substantial number of pensions fail (a VERY real possibility) …

… it’s all but certain the Federal Reserve will need to step in to paper over the mess with trillions in freshly printed dollars.

This weakens the dollar and among the biggest winners are borrowers and owners of real assets.

This makes real estate investors who use mortgages double winners.

So while you may not be able to calm the stormy seas …

… you can choose a boat that’s seaworthy and equipped to sail faster when the winds of change (and a falling dollar) blowhard.

Until next time … good investing!

Housing market conditions create challenges … and opportunities …

Housing is the sector of real estate most watched … and worried about … by economists, politicians, journalists, bankers, and investors … from Wall Street to Main Street.

That’s because housing, quite literally, hits us all right where we live.

We can all relate to it and housing is both an objective and subjective measure of individual and national prosperity.

Housing has certainly been in the financial news of late …

Housing Starts Surged in December. Don’t Expect It to Last
MarketWatch, 1/17/20

Housing market falling short by nearly 4 million homes as demand grows
CNBC, 1/21/20

New Risk to World Economy: Synchronized Housing Slowdown
Wall Street Journal, 1/28/20

As you can see, there’s both “good” news and “bad” news. Of course, buried inside of all that is opportunity.

So we think it worthwhile to look at housing through the lens of a tried and true investing strategy which could prove timely in today’s market conditions.

But first, let’s set the context …

Despite low interest rates (and largely because of them), housing is expensive relative to incomes.

That’s a problem for both renters and prospective home buyers … and why affordable housing is a hot topic today.

It’s also why we’re strong advocates of leaning towards affordable markets, neighborhoods, and price points. Demand tends to be stronger there.

We think it wise to be positioned below the top of the range. If interest rates rise or there’s a recession, people above will flow downhill to you.

Meanwhile, be prepared to survive a notch or two below your current price point. Otherwise, you may lose more demand leaking out the bottom of the range than you gain flowing in from the top.

In other words, ALWAYS compete for the loyalty and rent checks of your tenants … even in a high demand market.

Those who push rents to the margin of the range are the first to feel the pullback. Like equity, all rent retraction is at the margin. High rents hurt first.

That’s because when tenants start to feel a financial squeeze, giving a 30-day notice and moving to someplace more affordable is a relatively easy thing to do.

And don’t get suckered into thinking there’s no inflation or high employment based on the highly publicized and potentially “adjusted” official data.

Pay attention to the real world … because that’s where your tenants live.

From a home buying perspective, demand comes from first-time home buyers entering the market and pushing things up.

That’s why pundits are concerned that the average first-time home buyer age has risen to 47 years old.

Perhaps young people would rather rent than own? Maybe. But even if true, we wouldn’t bet on that lasting.

Sure, Millennials saw their parent’s real estate experience turn sour in 2008 … but that’s now 11 years ago … and a LOT of equity has happened since.

Most Millennials we know would like to own. They see prices rising and affordability getting away. Meanwhile, rents are climbing.

So we think Millennial demand will be a substantial factor in housing going forward. Demand is already growing … and it’s a wave you can likely ride over the next 10 years or more.

Also, Millennials are among a large group of Americans standing to inherit about $764 billion THIS YEAR alone.

We’re guessing next to paying off student debt, buying a home is near the top of the wish list for some of those heirs … adding some additional capacity-to-pay to fuel demand.

And speaking of capacity-to-pay …

Interest rates remain crazy low … and aside from a collapse of the dollar or a seizure in the bond markets (which could easily happen somewhere down the road) …

… there’s not much in the near-term to suggest interest rates will rise substantially.

In fact, with the amount of debt in the system, it could be argued there’s FAR more downward pressure than upward.

Still, because you don’t know, it’s not a bad time to stock up on inexpensive good debt. Just be VERY attentive to marrying it to durable income streams to service it.

Of course, another much discussed hindrance to Millennial home ownership is the now infamous and mountainous levels of unforgivable and inescapable student debt.

But in terms of student debt defaults and the resulting dings to credit, it’s only less than 15% of borrowers.

That means 85% of Millennials are chugging along making those payments … and presumably preserving their very valuable credit scores.

Of course, making those student loman payments hinders a young person’s ability to save for a down payment on a home. They start later and it takes longer.

And if a young person doesn’t have parents with equity they’re willing to re-position into a home for junior, or they aren’t on the receiving end of a chunk of that $764 billion inheritance …

… the lack of a down payment is perhaps an even bigger hindrance to Millennial home ownership than student debt.

And even though there are low down payment programs out there, they come with higher interest rates, private mortgage insurance, and larger loan balances …

… all of which converge to make the resulting mortgage payment much bigger than low interest rates can offset.

So that elusive 20% down payment dramatically increases the affordability of home ownership for many Millennials.

ALL this adds up to a great opportunity for real estate investors …

There’s a simple, time-tested strategy to leverage your cash into long-term equity … while preserving your credit and avoiding virtually all land-lording hassles.

It’s “equity sharing”.

In short, a cash rich investor supplies the down payment to a credit worthy owner-occupied home buyer.

The credit partner gets the loan, makes the mortgage payment, and lives in the house for the long term.

After a predetermined period of time … usually 3 to 10 years … an appraisal is done.

Any equity growth net of capital investments (reimbursed to the partner who made them) is split at a previously agreed upon rate such as 50/50.

Of course, there are some legal agreements which need to be put in place … and the borrower needs to work closely with a mortgage pro to make sure nothing is misrepresented in the loan application.

But equity sharing is a profitable way for Main Street investors to help the next generation of homeowners get into the market … so both can ride the long-term equity wave.

The borrower gets a home of their “own” … to live in, care for, and fix up for their personal enjoyment and prosperity.

They don’t feel or act like tenants … and they’re in for the long haul.

And with their name and credit on the line, they’re HIGHLY motivated to make the payment … even if it’s higher than they could rent a similar home for.

They don’t move to save a few bucks the way a tenant would because they have housing stability, tax breaks, long-term equity growth, and pride of ownership.

Meanwhile, the investor gets half the amortization and appreciation over the hold period … and next to no management headaches.

Plus, the investor has no property management expense, no loan on their credit report, no turnover or vacancy expense.

Equity sharing is a great way for an investor to leverage cash without as much risk as traditional land-lording.

Equity sharing is really just a form of syndication and a simple strategy for taking advantage of current market conditions.

For the cash partner, you get to invest in housing for the long-term, while mitigating much of the downside risk in the short term.

For the credit partner, you convert your housing expense into housing security and long-term equity. Half of something is better than all of nothing.

And when it’s hard to find rental housing that cash flows after expenses, equity sharing is a way to ride the housing bull with far less risk than traditional land-lording … while helping a young person get on board the real estate equity train.

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