Pension problems percolating …

In a complex financial eco-system, there are MANY components, dependencies, and inter-dependencies …

… any of which can be the catalyst for a seismic economic earthquake.

The flip side and basis of real estate’s stability is real estate’s relative lack of liquidity as compared to publicly traded securities.

After all, you can’t hit a buy or sell button and execute a real estate transaction in seconds like you can with stocks, bonds, currencies and options.

Real estate moves slowly.

That’s why real estate prices and rents don’t bounce around on a daily basis after a Presidential tweet, an executive faux pas, a jobs report, or even a Federal Reserve interest rate pronouncement.

It’s also why so many Mom and Pop investors come home to real estate when the Wall Street roller coaster ride becomes a little too nauseating.

But because most minor economic waves tend to break harmlessly against the breakwater of real estate’s stability…

… real estate investors can get bored of watching the horizon for the occasional financial tsunami.

And boredom’s not the only problem.

There’s also the issue of overwhelm. In today’s complex world, there’s not only a lot more to watch, there’s a lot more chatter.

While lots of information is generally good, some stories get lost in the noise. And entering an election year, there’s a LOT of noise out there.

But it’s a mistake to tune out and assume all is well. Or to put blind faith in the “smart” people whose hands are on the controls.

Sometimes, those in control are the very people creating and downplaying the problems.

Remember, it was then Fed chair Ben Bernanke who assured the world in 2007 that the sub-prime crisis was contained and didn’t pose a threat to the economy.

We all know how that ended.

Current Fed Chair Jerome Powell recently assured the world that the U.S. economic expansion is sustainable.

Perhaps.

But there’s a long list of alarm bells going off … in bond markets, in oil, in trade, the dollargeo-politics, and the resumption of easy money (just don’t call it QE).

Okay. Take a breath. Yes, Halloween is coming up, but we’re not trying to scare you … much.

It’s unwise to unplug a blaring smoke alarm because it’s interrupting your sleep.

If you’re trapped in the wrong slow-moving real estate and you wake up late to a developing problem …

… you may not be able to rearrange your portfolio fast enough to avoid losses and capture opportunities.

Remember … a bend in the road isn’t the end of the road unless you fail to make the turn … and problems and opportunities exist concurrently in any transition.

Events are often only as good or bad as your personal awareness and preparation make them.

So back to our threat assessment …

You’re going to be hearing more about problems with pensions.

But before you check out because you think pensions don’t have anything to do with you … think again.

You may not have a pension. But lots of people do.

More importantly, pensions control a HUGE chunk of assets in the economy, including stocks, bonds, and real estate.

While there may be many reasons for any particular pension fund’s failure, there are a couple of undeniable macro-factors common to all …

… artificially low-interest rates and an aging population.

This one-two punch has many pension plans on the ropes.

Recently, General Electric (GE), an iconic company once revered for its great management, announced it’s freezing workers’ pensions.

GE is FAR from alone.

Both public and private pension programs, not to mention Social Security, have been on a slow motion collision course with insolvency for many years.

There are many potential ramifications for real estate investors. Some good. Some not so much.

Starting with the not so good …

Loss of purchasing power creates a ripple effect in any economy … affecting which states, cities, neighborhood, product types, and price points people can afford for housing.

Jobs and wages are important. But neither have a direct impact on retired people living on fixed income.

When costs tenants can’t control rise for essential items such as energy, healthcare, food … they’re forced to cut back on big things they can control, like rent.

Think about that when you jump on the senior housing bandwagon. Not all senior housing communities or investments are created equal.

Also, for investors with properties in retirement markets … even if YOUR tenants aren’t depending on pensions and social security directly …

… those retirement checks still provide the economic fuel for the local economy.

After all, your tenants might work at the restaurant, gas station, grocery store, dry-cleaner, auto shop, or landscaping service providing services to retirees.

When retirees cut back, it affects those tertiary businesses and their employees (your tenants). Pay attention to these dependencies.

Bigger picture, failing pension plans mean potential bailouts.

While the Federal government can (for now) still print unlimited amounts of dollars, local municipalities cannot.

So failing local government pensions create a huge temptation for local officials to increase property taxes and the costs of municipal services.

Landlords are easy targets for pandering politicians in cash-strapped towns.

And while you might not pay directly for all municipal services, it doesn’t matter. If the tenant’s costs go up, it puts downward pressure on their ability to pay you rent.

It’s a complex eco-system and we’re all inter-connected.

Bailouts also could mean big federal tax increases, or perhaps even worse … loss of faith in the dollar, rising interest rates (pressure on both you and the tenants), and a general decline in the economy, jobs, and wages.

Robert Kiyosaki tells us failing pensions are one of his biggest concerns right now.

There’s more to watch out for, but before you go into a full-fetal coma, let’s end on a high note …

The flip-side of any crisis is opportunity.

When asset prices collapse, those who are liquid, educated, well-connected, and emotionally prepared can acquire quality assets at bargain prices.

So note to self: Now is the time to get liquid, educated, well-connected, and emotionally prepared.

Sadly, many retirees will sell homes to raise cash, then enter the ranks of renters. So just like 2008, demand for rentals in the right areas could actually increase.

Therefore, it’s important to really understand your markets, their drivers and demographics, and to be mindful of the product types and price points favored by an increasingly large retirement population.

For example, multi-story homes can be less desirable to seniors. Warm weather is a plus … who wants to shovel snow in their 70s?

Great local medical services are also really important to seniors.

And if retirees have moved away from friends and family in search of affordability, great transportation infrastructure is another valuable market “amenity”.

And of course, areas with an overall lower tax burden help those fixed incomes stretch further.

It’s not rocket science, but you do have to think.

That’s why we attend conferences and listen to smart people talk about all these things from different perspectives.

It’s also why we host the Investor Summit at Sea™ each year, where we get together with big-picture thinkers together and street-level niche experts to find ways to think big but invest small and smart.

Whether you join us at these events or find your own tribe, we encourage you to take your nose off the grindstone a few times a year and confer with the smartest investors you can find.

Because even though you can’t possibly watch it all and see every threat or opportunity forming, your tribe can. And you can all learn faster together.

Until next time … good investing!


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Pension Crisis Threatens Property Owners

Pension Problems Piling Up …

Anyone paying attention knows the world is facing a global pension crisis.  And if you don’t think it will affect you … think again. 

Consider this report recently issued by the Federal Reserve Bank of Chicago …

How Should the State of Illinois Pay for Its Unfunded Pension Liability?  The Case for Statewide Residential Property Tax 

“The State of Illinois has a very large unfunded pension liability and will likely have to pay much of it off by raising taxes.” 

And guess what?  Illinois isn’t the only place with pension problems.  California is a HUGE mess too … as is much of the country.

According to this report from The Pew Charitable Trusts, only four states had at least 90% of the assets needed to pay promised benefits.

It’s BAD.  And the Federal Reserve apparently wants to tax property owners to fix it. 

“In our view, Illinois’s best option is to impose a statewide residential property tax …”

“ … the tax rate required to pay off the pension debt over 30 years would be about one percent.”

 But it gets WORSE … are you sitting down?  This is SHOCKING …

“There are good reasons to pay off … pension debt through … residential property tax … home values go down …”

“ Current homeowners would not be happy, but … would not be able to avoid the new tax by selling their homes … because home prices should reflect the new tax burden quickly.”

In other words, prices will crash, and upside-down homeowners are trapped.

Nice.

In a presentation at Future of Money and Wealth, we warned that financially strapped governments would turn desperado.  This is a classic example. 

This isn’t hyperbole or conspiracy theory.  We don’t make this stuff up.  These are the Fed’s OWN WORDS.  You can (and should) read them yourself. 

Here’s a link to a PDF we highlighted to make it easy for you.   And here’s a link to the Chicago Fed’s website where you can see the source with your own eyes.

The writing is on the wall.  Property owners are easy prey because the asset is right out in the open.

BUT … the low hanging fruit are properties in jurisdictions where the desperado taxman has authority.

That’s why many savvy investors park wealth in non-domestic property … in countries where the tax burden is small.

If you’ve been following us for any length of time, you’ve been bombarded with invitations to come to Belize.  And this is another one. 

We don’t understand why EVERYONE reading this wouldn’t drop everything and immediately register for the next Belize discovery trip … and learn how to invest in offshore real estate.

You don’t need to be a multi-millionaire to diversify your wealth internationally.  But you do need to get educated and connected.   

The Belize discovery trip is a great way to start.

And the trip is not just relatively affordable … it’s FUN! You get a multi-day semi-private educational tour personally led by our very own Robert Helms.

And one last suggestion on the educational front …

We videotaped the entire 14 hours of the Future of Money and Wealth conference … and you can click here to order the entire collection of Future of Money and Wealth presentations and panel discussions.

In spite of all the rosy economic rhetoric … and yes, there are some good things happening … there are still some BIG landmines out there.

This latest trial balloon from the Fed should be a wake-up call for all real estate investors.  Isn’t it prudent to explore options while there’s still time?


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.

12/19/10: Winding Down the Year – Maximizing Your Properties, Deductions and Strategies

Let’s face it.  Running even a fledgling real estate empire is hard work.  The only paperwork that’s fun is cashing those rent checks!  Nonetheless, the end of the year is a great time to step back from all the wheeling and dealing and do some strategic planning for the New Year.

In The E-Myth Revisited (on our list of Recommended Reading), author Michael Gerber says you must invest time “working ON your business instead of IN it”.  In Before You Quit Your Job (hey! that’s also on the recommended list!), our good friend Rich Dad Poor Dad (yes, it’s on the list too) author Robert Kiyosaki explains the importance of SYSTEMS in his B-I (Business Owner / Investor) Triangle.  The point is that being organized and thinking strategically are critical components of success.

But where to start?  That’s the topic of this episode!

Behind the microphones, in the Equity Sleigh, winding down the year:

  • Your host, the Santa of Real Estate Wisdom, ho-ho-host Robert Helms
  • Santa’s Helper, co-ho-ho-host (or just “co-ho” for short), Russell Gray
  • Our own Santa look-alike, the Godfather of Real Estate, Bob Helms

Taking a page from Santa’s playbook, The Real Estate Guys are making a list and checking it twice.  But we’re not looking for who’s naughty or nice…well, actually naughty would be okay 😉  …our list has a bunch of things real estate investors should be thinking about this time of year.

When rushing to open your holiday gifts, wouldn’t it be nice to open up a great big tax deduction, reduced mortgage rate or increased cash flow?  Of course it would!  But sadly, no one is going to slide down your chimney and stuff your stocking with enhanced profits.  So, if you want to pad your bottom line, and keep your assets safe and warm, you’re going to have to wrap your own gifts.

So grab a pen and paper (or that brand new iPad you just opened) and get ready to take some notes.  When you’re done listening to this episode, you’ll have very own end of year checklist and a great start of a new holiday tradition!

Happy Holidays!

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