The Fed’s Plan Revealed…

Will the Fed Raise Interest Rates?

Global stock markets continue to convulse as participants and pundits try to divine whether Janet Yellen will really pull the trigger and raise interest rates.

Our bet is no.  Or if so, maybe by only a quarter point (25 basis points in bank-speak) just to prove the Fed hasn’t forgotten how to do it.  After all, it’s been about 8 years.

But we think not.

The list of reasons is far too long for this missive, but here’s a few:

The Dollar is Too Strong

We’re not saying WE think this is bad.  But the people in charge think so.Some say the dollar is too strong and that's bad for the economy

They say a strong dollar makes it harder for U.S. companies to sell exports…because it takes more foreign currency to buy anything denominated in dollars.

And U.S. companies doing business abroad are losing out when converting their foreign sales back into U.S. dollars.  So they say a strong dollar is bad for earnings and stock prices.

Also, a strong dollar means the U.S. government is paying more real interest on all its debt to foreigners.

The goal for a borrower is to receive strong dollars today and pay back weaker dollars later.  It’s why policy makers (and real estate investors) like a falling dollar.

A strong dollar is deflationary, which is the polar opposite of what the Fed wants (more on that in a moment…)…though most consumer we know LIKE IT when prices fall.

But when prices on things like houses, cars, stocks, bonds, etc., drop in dollar terms…and those things are being used as collateral, it means the value of the collateral drops.

That forces painful margin calls and creates a temptation for borrowers to bail on the debt.  Just think back to the sub-prime crisis which triggered the Great Recession.  It all started when debt went bad.

And speaking of debt, there’s the other major reason NOT to raise interest rates…

Uncle Sam is Drowning in Debt

When interest rates rise, payments go up.  That puts downward pressure on spending, which the financial brainiacs believe is the key to economic expansion.

The US government is carrying a large debt burdenThe problem today is that interest rates are SO LOW that even a 25 basis point increase is a substantial percentage increase.

Do the math.

If you have debt at 2% and rates rise by .25% that effectively increases your interest expense (and payment) by 8%.

That doesn’t sound like much, but when you’re Uncle Sam and you’re already paying out $381 BILLION in interest each year…an 8% increase costs an additional $30 BILLION.

Now if interest rates were to rise 100 basis points, say from 2% to 3%, that’s a 33% increase…or a whopping $125 BILLION increase in interest payments.

And because Uncle Sam is already running in the red, it’s all debt compounded on debt.  Just like using your credit card to pay the credit cards you used to pay the credit cards you used to pay your house payment.

In financial terms, we call this a “train wreck”.

Since the last great re-set in the 80’s when then Fed chair Paul Volcker jacked rates up to over 20%, the government has gone aggressively into debt and lowered interest rates steadily for three decades.

But now we’re at the bottom of the interest rate barrel.

So if you can’t lower interest rates to leverage your payments into servicing higher loan balances (just like you do when you refinance your mortgage to a lower rate and keep the same balance …or grow it…while reducing your monthly payment)…

Then the only other options you have is to make more money.Uncle Sam needs to ask its taxpayers for MORE money...again

For Uncle Sam, this means raising taxes.  And there are two ways to do this.

The small government faction says lower rates to grow the private sector and take a smaller percentage of a bigger pie.

That is, lower tax rates, which they believe will leave more profits in the hands of entrepreneurs who will use it to expand their businesses (if they can find customers).

Then, when the pie is big enough, the smaller percentage of tax yields more absolute dollars to Uncle Sam.

Go red team!

The big government faction says raise taxes on the entrepreneurs and uber-rich and funnel that money through the government to the poor and middle class.

Then, when those everyday people spend all that money, it will provide customers and profits for the businesses, which will in turn result in even more tax revenue.

Go blue team!

Obviously, these two policies are polar opposites and each one enrages the proponents of the other.

So everyone beats up on each other and nothing gets done.

Go purple team!

BUT…there is another way…Ben Bernanke says the Fed can print as much money as it wants...at essentially no cost.

And on November 21, 2002 a guy named Ben Bernanke (who later took over for Alan Greenspan to become the chairman of the Federal Reserve) explained it in a speech before the National Economists Club in Washington DC.

Big Ben said….

“…the U.S. government has a technology called a printing press (or, today, its electronic equivalent) that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

“By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.”

The Fed can print as much money as it wants...for free.“We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

“…sufficient injections of money will ultimately always reverse a deflation.”

Our emphasis.  Always.

And just so you know we don’t make this stuff up, you can read the whole thing here.

So we think the Fed will find some excuse to turn the Quantitative Easing (QE) printing presses back on.

But, you say (correctly) didn’t they already do QE?  Like, 4 times?  Then why didn’t prices rise?

Great observation.

Here’s the short of it…and why it matters to real estate investors RIGHT NOW

The Fed expanded its balance sheet (printed) by about 4 TRILLION DOLLARS since 2008.

Most of the money ended up in bonds (causing bond prices to rise and interest rates to fall)…or stocks (causing stock prices to rise to record levels)…and on banks’ balance sheets (as reserves parked at the Fed).

Of course, when you read Big Ben’s 2002 comments, he expected the banks to lend.  That’s the way all the new money was supposed to get to the market.

But frightened borrowers weren’t anxious to take on more debt.  They were inclined to save or pay off debt, rather than spend.

So there’s not been a long line of borrowers to lend to.

On the lender side, with the politicians busy POUNDING on the banks (and rightfully so)…banks decided it was safer NOT to loan…except to only the very BEST borrowers.

But now that all the very best borrowers have taken on their fill of debt, Uncle Sam is back to making nice with the banks…hoping to get all the money pushed out into the market.

And guess which sector they’re focused on?

Yep.  Real estate.  And it’s happening as we head into an election year.  But that’s probably just a coincidence.

Check out this headline:

FHA Offers Olive Branch to Hesitant LendersWall Street Journal 9/1/15

The government is trying to coax banks back to making mortgage loans to risky borrowers…”

This makes sense because we already have construction lending surging.  But builders can only borrow if they have buyers to sell to.  And most buyers can only buy if they can get financing.

So Uncle Sam can see that the bottleneck in the pipeline is at the street level…where real estate investors like you invest.

All this to say (and thanks for reading to the end) that the stock market gyrations could actually be GOOD for real estate in the mid-term.

When nervous stock investors seek safety, they’ll go to bonds and push interest rates down.  Great!  Borrow all you can and lock in LOW FIXED rates.

Make SURE your properties cash flow conservatively and focus on big, affordable markets with low taxes, a friendly business environment, and a diverse local economy.

Some frightened stock investors will pile into real estate…just like they did in 2001 after the tech bubble deflated.  The Chinese already are.

So, we wouldn’t be surprised to see a run UP in prices in the near term…which could be a chance to grab some equity and move it to safety…once again taking advantage of increasingly liberal lending.Is another housing bubble forming?

Eventually, the real estate bubble that’s beginning to inflate now will “pass a little gas”.  Or maybe a lot.

Sure, it will stink.  But it won’t kill you if you’re prepared to hold your breath and go in and do some bargain hunting.

Meanwhile, as all this unfolds, it’s a good idea to continue to watch and prepare.  You can’t control it.  But you can roll with it.

Good investing!

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

11/2/14: Clues in the News – Election, Market Direction and Alan Greenspan’s Warning

There’s lots of news affecting real estate investors…and most of it doesn’t have anything to do with real estate.

In this episode, we read between the headlines to what’s in the news that real estate investors should be paying attention to.

In the broadcast newsbooth for this informative edition of Clues in the News:

  • Your anchor and host, Robert Helms
  • His dead-weight co-host, Russell Gray

In case you were in a coma the first week in November, the Republicans took over the U.S. Congress by winning a majority in the Senate and strengthening their hold on the House of Representatives.

Maybe that makes you happy.  Maybe it doesn’t.  But it doesn’t really matter how you, or we, feel about the results.  It happened.

So the next questions are…what does it mean, what happens next, and how is it likely to affect real estate investors?

The Election Results are a Barometer of the Mood of the Market

We think it’s pretty obvious the electorate isn’t happy with the state of the Union.  After all, happy prosperous people don’t vote to rock the boat if everything is smooth sailing.

So all’s not well on Main Street in spite of a booming stock market, allegedly low unemployment and continued low interest rates.

Since your tenants are part of the electorate, we’re guessing their pocket books aren’t overflowing with joy…or money…right now.  So we continue to favor affordable markets and product types, and nothing in the election or other news changes our mind.

The Maestro Sings a New Song

As we discussed in a recent blogpost on Alan Greenspan’s Shocking Confession, Alan Greenspan seems to agree that Fed policy hasn’t done much to help the real economy.  No wonder the voters threw a fit.

Also, Greenspan said that the timing of rising interest rates might be outside the Fed’s control.  If so, this affirms that it’s a good idea to grab as much cheap money as you can reasonably control with conservative cash flows and lock in fixed rates for the long term.

Last, but FAR from least, according to the Wall Street Journal, Greenspan said, “gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.”

Considering gold was tanking as he was talking, it seems like Alan Greenspan is concerned about “the policies conducted by governments”.

So in spite of the dollar’s recent surge and gold’s recent decline, for long term investors, it seems that even Alan Greenspan is a fan of real asset investing.

Maybe one of the governments he was talking about is Japan…

Bank of Japan Stuns Financial Markets with Massive Stimulus

So the whole world watches the Fed announce tapering and then, to many pundits’ surprise, actually do it…all the while touting the “robust” U.S. economy (funny…seems no one told the voters, who apparently missed the memo).

Then, as soon as the Fed’s expected tapering is done, the Wall Street Journal reports Japan’s “stunning” announcement of a MASSIVE stimulus package.

According to the Wall Street Journal article, “Japanese policy makers jolted global markets” by taking “Japanese economic policy into the uncharted territory of extreme stimulus“.

How extreme?

Well, according to Bloomberg, who also published an article on the move, the Bank of Japan “plans to buy 8 trillion to 12 trillion yen ($108 billion) of Japanese government bonds per month.”

For perspective, the QE that the Fed just finished started at $85 billion per month and tapered down.  That means the Japanese QE is 27% bigger than the U.S. program at it’s PEAK.  That’s massive, especially considering that the Japanese economy is only 1/3 the size of the U.S.

The Bloomberg article quoted the chief economist at Japan Macro Advisors as saying, “The BOJ is basically declaring that Japan will need to fix its long-term problems by 2018 or risk becoming a failed nation.”

So we have a few observations…especially if you’re sitting there thinking, “What the heck does Japan have to do with my rental house on Main Street, USA?

First, we’re in a GLOBAL economy.  Just think about how much foreign money is buying U.S. stocks, real estate and bonds.  Not to mention, how many Japanese companies employ U.S. workers?  And how many U.S. companies earn profits selling to Japanese businesses and consumers?

In a global economy, when a major component (Japan is #3 behind the U.S. and China) fails, EVERYONE is affected.

Right now, no one is saying Japan will fail.  And if it did, no one knows for sure what that looks like for everyone else.  But it bears watching, which is why we are.

Also, Japan has been a major purchaser of U.S. Treasuries.  In fact, according to the Unites States Treasury website, Japan is the second largest owner of U.S. debt behind China.  If we had to guess, we wouldn’t be surprised to see some of all that stimulus end up in U.S. Treasuries.  After all, if the Fed and China are curtailing purchases, either bond prices will drop (interest rates will rise)…or someone (Japan?) will need to fill the void.

The point is that when ANY central bank prints gobs of money and buys bonds, it affects interest rates for everyone…including Main Street real estate investors.

But it isn’t just bond prices and interest rates which are affected…

Back to the Wall Street Journal article, which says that the Bank of Japan will expand its asset buying program to include “not just more government bonds, but also stocks and real-estate funds.”

In our travels, we talk to lots of Main Street real estate investors and agents.  We hear reports all the time that foreign buyers concerned about the safety of their money are parking it in U.S. real estate.

Obviously, when any central bank is printing money like crazy, smart investors in ANY nation move quickly to get into real assets. But here’s where it gets a little complicated.

Right now, the dollar is “strong” because major currencies like the Yen and the Euro are being destroyed faster than the dollar.  So any commodity denominated in dollars gets cheaper (gold, silver, oil, etc).

Worse, there’s strong sentiment, if not substantial proof, that nearly every asset market is largely manipulated by central banks, which makes investing in many asset classes a risky business.

So, in addition to the cultural appeal of real estate for Asian investors, even die-hard paper asset investors are looking at real estate as a solid place to store and build wealth.

In addition to foreign capital moving into U.S. real estate, lending is starting to loosen up both in government and private loan programs.  This means more purchasing power moving into real estate.

We think this is bullish for real estate prices in the near term, though it will be mitigated by the weakness of U.S. home buyers.

But before you get too excited about all the equity happening to you, remember to pay attention to rents.  Because right now, asset values are growing faster than incomes.  This means housing is becoming less affordable for both renters and home buyers.

The last time this happened, lots of us made tons of money on appreciation (get ready, because equity is happening again), but real estate quickly went from being a sound investment to simply being another hot money wave to ride.

We’re not saying don’t ride it.  Quite the contrary.

Just remember to structure your deals so that when the wave goes out again (and it will)…that you can hold on for the long term.  When the tide goes out, everyone can see who’s been swimming naked.

Meanwhile, we’ll be here watching the headlines for Clues in the News.

Listen Now:

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Alan Greenspan’s Shocking Confession

The Real Estate Guys™ just returned from the New Orleans Investment Conference where we (and some of our listeners) had a chance to hear from the Maestro himself, Dr. Alan Greenspan.

The Real Estate Guys Radio Show host and several listeners with former Fed chairman Alan GreenspanIf you’re a long time follower of The Real Estate Guys™ radio show and blog, you know we pay close attention to the Federal Reserve because of it’s strong influence on interest rates, the value of the dollar, and asset prices (like real estate).

In fact, many economists and market pundits believe Alan Greenspan’s policies when he headed up the Fed (1987 to 2006) led to the real estate boom and ultimate bust in 2008.

Coming into the conference, we’d heard rumors that Greenspan was singing a strikingly different tune…about a great many things…than when he was at the helm of the most powerful financial institution on the planet.

Now it should be plainly obvious that Fed policy is hugely important to everyone who owns an asset, runs a business, earns a paycheck, has a savings account or pays on a loan.

So now that he’s on the outside, knowing exactly how it works on the inside, what is Alan Greenspan saying today about the Fed, the dollar, the future of interest rates, and what investors can and should do?

First, he says the bond-buying program known as QE didn’t help the “real economy” (i.e., jobs for the middle-class, real wage growth, or increasing purchasing power and consumer demand).

However, he admits QE did boost asset prices.  So stocks, bonds and real estate are all artificially higher because of easy money.

In other words, the Fed helped the rich get richer, while doing nothing for the middle-class and poor.

But as if THAT admission wasn’t enough, the Wall Street Journal’s article covering Mr. Greenspan’s speech to the Council on Foreign Relations on October 29th said this:

“He also said, ‘I don’t think it’s possible’ for the Fed to end its easy-money policies in a trouble free manner.”

Shortly after Greenspan’s comments, the Fed announced the end of its bond-buying program known as Quantitative Easing (QE).

Does this mean trouble is coming?

(Before you hit the panic button, remember that the flip side of every problem is an opportunity, so “trouble” is usually only bad for the unprepared…)

As real estate investors, not only do we care about jobs, wage growth and purchasing power (after all, it’s hard for unemployed poor people to pay rent), but we also care about interest rates.

So what does Alan Greenspan have to say about the future of interest rates?

Alan Greenspan says it's a good time to by goldBack to the Wall Street Journal article…

“He said the Fed may not even have that much power over the timing of interest-rate increases.”

“‘I think that real pressure is going to occur not by the initiation of the Federal Reserve, but by the markets themselves,‘ Mr. Greenspan said.”

What does THAT mean???

We’ve covered this in detail in previous blogs (just search our site for “Fed”), but the short of it is that without the Fed using QE to create demand by bidding (and buying) U.S. bonds, someone (the market) is going to have to step up and buy them…because if they don’t, the lack of bidding will cause bond prices to drop.

And when bond prices drop, interest rates rise.  So if the markets don’t bid strongly enough on bonds, then no matter what the Fed says, the markets will decide when and how much interest rates rise.

In other words, how the market feels about the quality of the debt (the likelihood of being repaid) AND the quality of the currency the debt is denominated in (purchasing power) makes a BIG difference in what yield investors will demand from the borrower.

Right now, investors still consider U.S. Treasuries as “safe”.  That is, there’s very little probability of default…in spite of past political posturing over debt ceilings. That’s because the Fed can print as many dollars as it takes to pay off the debt.

But when that happens, it reduces confidence in the dollar itself (the quality of the currency).  Because just like when a company issues more shares of stock against the same earnings and assets, the value of each share (in this case, dollar) is diluted.

Real Asset Investing - How to Grow and Protect Your Wealth Against a Falling DollarAs we chronicle in our special report, Real Asset Investing – How to Grow and Protect Your Wealth in the Face of a Falling Dollar, there’s already been substantial moves away from the dollar and dollar denominated assets and trade.

China has signed bi-lateral currency swap agreements with virtually every major country, which essentially facilitates their international trade without having to use dollars.  And China is the world’s second largest economy to the U.S….and closing fast.

Meanwhile, China and Russia have been stocking up on gold as fast as they can.  It seems they’d rather hold their savings in a tangible asset versus a paper asset…like the U.S. dollar or dollar denominated Treasuries.

And what does Alan Greenspan have to say about gold?

Back to the Wall Street Journal article….

“Mr. Greenspan said gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.”

It seems Alan Greenspan is a fan of real assets.  He sounds more like Jim Rickards (author of The Death of Money) than a former chairman of the Federal Reserve.

Yet gold tanked after the Fed quit QE!  And other real assets like real estate and oil have also been sliding.

So is Greenspan wrong…or does he know something is coming that will change the value of the dollar?

It seems that Greenspan is warning us that interest rates are likely to rise before the Fed is ready.  And if that happens, the Fed is likely to get back in the bond buying business to stop it.  Peter Schiff says there will be more QE programs than Rocky movies.

And every time the Fed exits QE, only to come back and do it again…and again (remember, this was QE3 with an Operation Twist thrown in between 2 & 3 for good measure), at some point the world loses faith in the dollar.

When THAT happens, interest rates go up, the dollar falls, and real assets like gold, housing, farmland and energy will be in demand…not just for their utility, but for their ability to retain value as currencies like dollars, euros and yen fail.

Fortunately, real assets are on sale right now.

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6/22/14: Stop, Go or Proceed with Caution – A Conversation with Peter Schiff

Love him or hate him, Peter Schiff always speaks his mind.

Peter Schiff was rightWe happen to love him.  Not only do we admire his courage in trusting his own judgment… even when all the “experts” say he’s wrong, but we appreciate his willingness to explain his reasoning to anyone interested enough to listen.

For those that don’t know, Peter is the founder, CEO and Chief Global Strategist of Euro-Pacific Capital.  He ran for U.S. Senate in 2010, has a daily radio show, and is a best-selling author.  Slacker.

In 2005, he was sounding the alarm about the housing market, but few would listen.  We didn’t know him back then, but we wish we would have!

After everything blew up, we looked him up and have since become good friends.  Peter has been a faculty member on our last two Summits and we just found out he’s coming back for 2015!

We ran into Peter at The Money Show in Las Vegas, so we sat down to chat.  We thought you might like to listen in…

Behind the microphones in our mobile studio for this edition of The Real Estate Guys™ Radio Show:

  • Your Go-Go-Go host, Robert Helms
  • His stopped-up co-host, Russell Gray
  • Our never yellow guest, the indomitable Peter Schiff

One of the big lessons from the Great Recession is that financial markets both affect and reflect each other.  So even though we’re primarily real estate guys, we’ve learned to pay attention to stocks, bonds, currency, commodities and precious metals.

Peter Schiff isn’t really a real estate guy.  He’s big picture economy guy…that’s probably why he’s called a Global Strategist.  He has his eyes on the horizon…watching for waves of opportunity and signs of stormy skies.

When you hear Peter talk, he explains the cause and effect behind the movement of money, and filters everything through an Austrian economics school of thought.George Bush told America after 9/11...support your country.  Go out and spend!

If you’re not familiar with the two major economic schools of thought, think of it this way:  The dominant philosophy in modern economic is the Keynesian view which says that borrowing and spending fuels prosperity and economic growth.

When you understand this, it’s easier to make sense of what the government and the Fed are doing.  Everything is designed to entice people to borrow and spend.

The Austrian school believes that savings and production create prosperity and economic growth.  That is, when a society makes a lot of stuff (production) and doesn’t consume it all (savings), there’s abundance…more to go around.  Prices drop, stuff is more affordable to poorer people, and everyone is better off.

Peter Schiff says the Real Crash is yet to comeIf you keep this in mind when you listen to Peter, it helps you understand why he describes rising prices, low interest rates, increased debt and borrowing, and excess consumption all as warning signs.

It’s like using your credit card to buy a new car, new  furniture, a new wardrobe and then going out to eat every night at nice restaurants…even though you don’t earn enough money to pay for all those things without a big credit line.  Borrowing is the only thing fueling your “prosperity”.

But if you believe that borrowing is good, deficits don’t matter, then you’ll think that all the items purchased on credit are valid signs of prosperity.  After all, you got all kinds of stuff!  And more stuff is a sign of prosperity, right?Keynesian economist believe that borrowing and spending is the key to economic growth

Of course, anyone who’s ever run a household or a business knows that eventually the credit card has to be paid.  And the longer you wait, the bigger the balance will get, and the more painful the day of reckoning will be.

Peter thinks that higher interest rates would discourage borrowing and encourage savings.  He likens the cheap money to a spiked bowl of punch at a raging party.  It’s all good as long as the punch bowl is full.  But when the credit line gets cut, the punch bowl goes away, then the party is over…and all that is left is the hangover.

Evenutally the bill for all that spending comes dueSound gloomy?

Maybe a little.  But people go to parties all the time and enjoy themselves in moderation. Of course, if the guy next to you has had a little too much, it might be a good idea to keep a safe distance.  You don’t want his over-indulgence to get on you.  That’s the problem with investing alongside “hot money”.

In other words, asset prices are moving up because of cheap money.  Peter calls these “bubbles” because there isn’t legitimate productivity (fundamentals) underneath the increases.

Getting back to real estate (we haven’t forgotten that we’re The Real Estate Guys™)…

In housing, values are driven by the demand of home buyers (which is the desire to buy a home combined with the capacity to pay for one…which means an income that can be pledged to a mortgage), versus the supply of homes available to buy.

For investment housing, it’s similar…except the income comes from the tenants.  So even people with weaker credit and no savings help drive housing.

But in a weak economy (remember, “weak” means low productivity, low wages and low job growth…not a raging stock market), the incomes needed to drive housing aren’t strong.

Is that a red light?

Not necessarily.  After all, housing isn’t optional.  It’s essential.  So there will ALWAYS be a demand, even though it might be focused on the less expensive markets and product types.  And people will cut back on almost everything in order to keep a roof over their head, so even when incomes are soft, rental income is less affected than more discretionary spending.

Does that mean real estate is a step-on-the-gas green light?   If you view “green light” as throw-a-dart-at-a-map-and-buy-wherever-it-hits (like you could do in 2004), then no.  Some markets and property types are probably a long way from recovery.

Keep investing towards your financial goals...but proceed with cautionWe think it’s a “proceed with caution” yellow light.  Even though Peter disagrees with low interest rates, we have them.  And Peter says that current monetary policy favors the borrower.

Based on that, it seems like a good idea to borrow some cheap money, lock it in long term, and buy real incomes producing assets like rental real estate.  Especially because right now, in some markets, you can still buy properties at or below replacement costs.  For example, we just came back from Atlanta, and there are still very attractive deals there.

The key is picking the right market, price point and property type.  When markets get heated up, it’s SO tempting to speculate on rising prices.  If you get it right, it’s some of the easiest money you’ll ever make.  Who doesn’t want to buy a house for $500,000 and sell it a year later for $650,000?

But if you can’t sell it, are you structured in a way that you can afford to hold on for the long term?  If you could rent that home for enough to cover the rent and all the expenses for the next 3 to 5 years…or longer…then great!  If not, then you might lose everything you put into it…and your credit score.

And if you’ve been riding the tide of the rising stock market for the last year, you might think about moving some chips off the table and placing them into real assets No one likes it when the party’s over, but better to get out before the crowd…otherwise you risk getting stampeded or locked in.

Listen Now:

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1/12/14: Booms, Busts and Bubbles – Watching Market Cycles

As market mariners, we’re always watching the financial waves to know which way the wind is blowing and whether a swell is headed our way.

After discovering the painful price of myopia in 2008, we’re not only diligently watching the horizon, but we spend a lot more time talking to smart people from a variety of financial disciplines.  In fact, we talk to a really smart guy in this episode!

If you recall, there was a big wave of money that rolled into the stock market in the 90’s.  A big chunk was the savings of the baby boomers who were in the height of their asset building years.

Another big chunk came from the Fed as it provided the marketplace lots of liquidity (sound familiar?) to head off the Y2K “crisis” (remember that?).

Of course, before long the stock market…and especially the tech sector…was booming!

Eventually, the tech stock boom busted, and right on its heels came 9/11, and so the Fed pumped even MORE liquidity into the system.  But this time, investors who’d been burned by stocks, took all that cheap money and jumped into real estate indirectly (through mortgage backed securities) or directly (through individual properties).

Then…ka-BOOM…the MBS market imploded, real estate tanked, banks failed, and we had a crash of EPIC proportions.  In response, the Fed…you’ll never guess…pumped even MORE liquidity into the system.  And guess what?  Today, the stock market is at all time highs.

We’re detesting…er, detecting a pattern here.

So we want to know if the stock market is vulnerable to a crash.   And what can the stock market tell us about the future of real estate?

Since we’re not stock market experts (we can barely read the charts at the optometrist), we thought we’d call in someone who spends most of their time studying such things.

In the studio on location in sunny San Diego, which (contrary to Ron Burgundy’s dictionary) does not refer to a female whale’s anatomy:

  • The Captain of your broadcast boat, host Robert Helms
  • His First Mate (in a purely platonic way), co-host Russell Gray
  • Our stow-away guest from Dow Theory Letters, Matt Kerkhoff

In stock trading, and really any kind of trading, there are two kinds of analysis: fundamental and technical.  Another way to think of them are: logical and emotional.  One is about the business.  The other about the market.

With fundamental analysis, an investor looks at the company’s financial performance, competitive risks, sector dynamics, vulnerabilities, opportunities, the management team, etc.  In other words, it’s a LOGICAL assessment of the BUSINESS.

This is the way most real estate investors analyze properties.  Why?  Because most real estate investors are making LONG TERM investments.  Ditto for stock investors.

Traders, as opposed to investors, are usually looking to move in and out of positions quickly hoping to scrape a few basis points of profit out of each trade.  To do this, they try to exploit the irrational nature of market participants.

In other words, people aren’t always logical when making investments (ya think?).  Sometimes they get greedy and overpay.  Sometimes they get scared and sell too cheap.  And in today’s technologically driven world, some trading is done automatically by computers.

Big players have figured out they can trick the computers into buying or selling if prices can be pushed up or down temporarily.

Trading is not for the faint of heart.  Ironically, successful traders control their emotions and use logical analysis of the market’s emotional indicators to place their bets.  This reading of the moods of the market is called technical analysis.

One of the main tools of the trader are technical charts.  These charts show the ups and downs, trading volumes and “patterns”.  The patterns measure the predictable responses of market participants to various trading feedback (support, resistance, averages, etc.).

On our upcoming Investor Summit at Sea™, Rich Dad Paper Asset Advisor Andy Tanner will be helping us understand all of this and how it relates to real estate investing.

The point is that technical analysis doesn’t really consider the fundamentals.  So while fundamental analysis is about understanding the business issuing the stock, technical analysis is about understanding the market…that is, the PEOPLE trading the stock.  And there are both long term and short term patterns of behavior.

As any mortgage pro can tell you, when the stock market is up, so are interest rates.  When the stock market is down, interest rates drop.  As real estate investors using mortgages to control property and arbitrage cash flows, we care about interest rates.

Now you may be thinking, “If it’s true that interest rates rise when stocks do, then why are interest rates so low, while the stock market is so high?”

What a GREAT question.  We have such smart listeners.

So put a new battery in your thinking cap, and let’s take a moment to get our mind around this important concept.  Because when a market isn’t behaving is it should, it tells you that something might be amiss.  And if miss it, it can sneak up and bite you.

Here’s deal in simple terms:  When people sell stocks (equities), it’s because they are afraid of risk.  So they want to move to the front of the line (debt eats before equity) and buy debt (bonds).  Creditors (bond holders) get paid before equity (stock holders).  Are you with us so far?

Now, when more people sell something the price goes down.  So as people leave the stock market (sell), stock prices drop.  Conversely, when people enter the bond market (buy), bond prices rise.  Make sense?

Here’s the hardest part to track with.  So take a deep breath and we’ll do this together…

When bond prices go UP, bond yields (interest rates) go down.  Here’s why:  If you have a bond, it’s like a certificate of deposit…you loan your money to the bank, and they give you a promise to pay you back with interest.  Simple, right?

But with a bank CD, everything stays static because no one is trading the CD (that you can see).  So if you buy a $100,000 CD and it pays you 5% interest (good luck finding that, but it keeps the math simple), you get $5,000 per year in interest for loaning the money to the bank. Got it?

But what if you wanted to sell your CD to a private investor?

If the investor wanted to buy your CD and get 5%, he’d pay you $100,000.  But what if the investor wanted 10% yield on his investment?  Then, he’d only be willing to pay you $50,000.  Why?  Because the bank is only committed to pay $5,000 per year on the CD.

And if the investor (your buyer) insists on a 10% return on his money (he doesn’t care about yours) and he’s buying $5,000 a year in interest, he can only pay $50,000 for it because $50,000 x 10% is $5,000.  See?

bonds and yields have an inverse relationshipThis is an overly simplistic explanation of the inverse relationship between bond prices and bond yields, but it gives you the basic concept.

When bonds get bid DOWN (pay less for the same yield), yields (cash on cash return) go UP (as explained in our CD example). And the reverse is true (as we’ll show you in a moment).

Once you get it, you’ll go “duh”.  Until then, it’s a head-scratcher.

But it’s a very important principle…and based on the way people are piling into bonds even when yields (interest rates) have no where to go but up, we can tell many investors don’t get it.

So back to the stock and bond market…

When people get afraid and sell their stocks to buy bonds, the price of stocks falls (more sellers than buyers), while the price of bonds rises (more buyers than sellers), so interest rates go down as bond prices go up.  Huh?

It’s like this:  In the prior scenario, no one wanted your CD for $100,000.  You had to sell it at $50,000 to get the buyer because the market demanded a 10% yield.  But what if people were really scared, so they wanted the safety of the CD even if they have to pay MORE?  Remember, when you pay more ($) you get less (%).

Now, if someone were to offer you $200,000 for your $100,000 CD (you’d be happy!), and the CD paid $5,000 per year, what yield is your buyer willing to settle for?  Half what you’re getting.  So if you’re getting 5%, your buyer is only getting 2.5%.  Let’s check the math…

$200,000 invested / $5,000 annual yield = 2.5% rate of return.  Hey!  It worked!

Now with this basic understanding, why would interest rates be so low while stocks are so high? 

It seems that people are putting money into the stock market (bidding it up), but somebody is also buying bonds to keep them up too (bonds up means interest rates down).  Weird.

There are a couple of things going in, all of which are abnormal, and would be described as “distortions” by David Stockman, in his NY Times best-seller, The Great Deformation. (This and other great books on economics and investing can be found in The Real Estate GuysRecommended Reading Store.)

First, the Fed has been buying bonds like crazy through their Quantitative Easing program.  This artificially bids up bonds and pushes interest rates down,which is why they do it.  But all this extra bond buying is abnormal and distorts the market.  History says, QE leads to booms, bubbles and ultimately, a bust.

Also, you may have heard that many businesses have been borrowing at these low interest rates in order buy back their own stock.  This is also abnormal and drives up stock prices with money that would otherwise go into expanding the business.  No surprise then that stocks are going up, while employment and productivity aren’t.  Again….weird.  Usually, rising stock prices reflect a healthy and growing business climate.

Third, yield starved conservative investors and savers have been forced to buy stocks and accept substantial market risk…risks they normally wouldn’t take.  When people start putting money in places they wouldn’t, they’re prone to move it quickly if things look dicey.

All of these obvious distortions, and a whole host of lesser and sometimes unseen and unanticipated abnormalities, cause market emotions to run high.

There’s one group of people who are giddy with greed and pouring into stocks believing the party will last forever.  There’s another group of people who are reluctant participants and have their running shoes on and one eye on the exit.

Most people in the paper asset space don’t really know how to do real estate, nor do they want to.  It’s messy.  There isn’t all kinds of infrastructure to support stay at home real estate investing, they way there is with paper assets.  The closest thing are REITS (Real Estate Investment Trusts that are publicly traded).

But in deformed markets, people do things they wouldn’t normally do, in order to earn profits and/or avoid risks.

So, since you’ve read all the way down this lengthy post, here’s the pay off:  There’s a HUGE OPPORTUNITY for real estate investors to attract capital from frustrated investors trying to find a good yield with reasonable risk.  If you develop the knowledge, experience and relationships to buy and manage income producing real estate in a market like this, there’s BILLIONS of dollars looking for a home (pun intended). 🙂

But to talk with affluent investors about investing with you, you’ll need to know how to both explain the benefits of real estate as well as the risks of paper assets.  So even though you may not be a stock investor, it’s a good idea to understand how the stock, bond, commodities and real estate markets all interact.  This episode can help!

And if you like Matt Kerkhoff, come spend a week with Matt, along with Andy Tanner, Peter Schiff, Anthem Blanchard, Ken McElroy and the rest of our outstanding faculty on the 12th annual Investor Summit at Sea!  Meanwhile, enjoy listening to us talk with Matt about Booms, Busts and Bubbles!

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10/20/13: Real Asset Investing – Using Hard Assets to Hedge Against a Falling Dollar

The dollar has been on a steady decline since Nixon took it off the gold standard in 1971.  Since then, the dollar has lost a staggering 80% of its purchasing power.  Ouch.

The flip side of a falling dollar is that it takes more of them to buy anything that’s real.  That’s why that gallon of gas you could buy for 35 cents in 1970 now costs ten times as much.  And amazingly, gas is a product which has actually become cheaper to produce!  It’s also why gold, which was $35 an ounce in 1971 is now $1300 an ounce.  Or why that 3 bedroom house you could buy for $30,000 is now worth $300,000.

In other words, equity happens to those who own real assets when a currency declines, which is the topic of this episode.

In the studio for another powerful parade of playful pontification:

  • A man whose hard asset is his real talent for talking, your host Robert Helms
  • His inflated co-host whose value continues to fall, Russell Gray

Last episode, we talked about the government shutdown and the “threat” of a U.S. government debt default.  You know, like in “Put down that healthcare or we’re going to blow up the economy.” 

We’re not making light of it (well, maybe a little), but did anyone seriously think they were going to default?  No.  All the financial markets just yawned and munched popcorn while they watched the same movie play that we all watched in 2011.  Only this time, we didn’t even get sequestration.  All the theater’s fun, but we have work to do.

Now that it’s clear to all (as if it wasn’t before) that Uncle Sam has neither will nor the skill to curtail spending and Uncle Ben is handing the printing press keys to Janet Yellen-for-more QE, our focus is (as it was before) on how to position ourselves for the perpetual flood of currency.  Because we know that just standing here watching the waves come in is a good way to get washed away with the rest of the debris.

And all of this is happening against the backdrop of a disastrous roll out of the latest mega-entitlement program (Obamacare), as if the other two (Social Security and Medicare) weren’t already putting enough pressure on Uncle Sam’s budget.  Oh wait.  What were we thinking?  Uncle Sam doesn’t HAVE a budget!  No worries, because now he doesn’t have a credit limit either.  Problem solved!

Not really.  More like “Problem exacerbated”.  But that’s just what Uncle Sam is doing to HIMSELF.  Remember, now China’s making noise about Uncle Sam’s shenanigans.

China holds a LOT of U.S. debt.  And they’re smart enough to know that getting paid back in cheaper dollars is a rip off.  They aren’t happy.  The Chinese Premier was publicly taking the U.S. to task back in 2010 for out of control spending and printing.  Did we listen?  Noooooo…..

So the Chinese went and cut a deal with Russia to settle their trade without going through the dollar.  “Don’t worry.  This isn’t a repudiation of the dollar standard,” they said.  No. More like a warning shot across the bow, but Uncle Sam closed his eyes.

Now China is making a lot more noise about removing the dollar as the world’s reserve currency.  And not only are they making noise, but they’re busy cutting  many more deals to settle their international trade without using the dollar.  So what?

All that trade requires countries to buy dollars.  That’s DEMAND.  When they don’t use the dollar, demand goes down.  Combine that with QE (printing), which INCREASES the supply of dollars.  What happens when you decrease demand and increase supply?  Prices drop.  So hence, ergo, therefore my Dear Watson, etc., etc., the dollar’s future is murky.

Yes, we know it’s nearly Halloween and this all seems like a nightmare.  BUT….there’s actually a LOT of OPPORTUNITY in all of this.  So don’t go hide under your bed sheets just yet.

To thrive in all of this, you simply have to keep it real.  As in, REAL ASSETS.

Long time listeners know that after the Great Recession of 2008, we’ve spent a lot of time looking at the macro factors affecting real estate… because it makes no sense to build your real estate empire on the beach when there’s a tsunami coming.  The last tsunami caught us myopically counting doors, which we were buying everywhere and anywhere.  Today, we’re working hard to be a lot smarter.

In other words, market selection, price point, product type and financing structure have become VERY important for the long term buy and hold income property investor.

We learned the hard way that even through a rising tide (of easy credit) lifted all boats (asset values), when the tide recedes, only those investments with solid fundamentals weathered the storm.

Now, here we are in a jobless recovery and it isn’t credit (yet) that’s pumping up asset values.  In fact, interest rates are rising.  The FHA (the post 2008 supplier of “sub-prime” funding) needs a bailout.  And fewer people have good paying jobs.  And everyone is being squeezed by rising real world costs of living (forget the bogus CPI number).  So if higher incomes and looser lending isn’t pushing up values (yet), who is?

Investors.  Some call them speculators, but we’re not so sure.  We think it makes sense to buy real estate when you can get it below replacement costs, use relatively cheap long term financing when you can get it, and pick up tax breaks;  knowing that over the long haul, that debt will be easier to pay off with cheaper dollars.

In other words, Uncle Sam is a big borrower and he’s rigging the system to favor the borrower.  So we want to be borrower’s too.  And income producing real estate provides arguably the best vehicle for shorting the dollar through long term debt.

So if you’re not betting on short term price increases (it’s happening now, but could end tomorrow), then what you’re really doing is betting on LONG term inflation and controlling the asset with the cash flow and tax breaks generated by the property.  In that regard, the game isn’t much different than it’s always been.  In fact, it’s gotten better because the debt is cheaper and the prospects for long term inflation are high.

BUT, the weak economy created by QE creates some real budget challenges for the working middle-class, which means they have a hard time handling rent increases.  In fact, they may need to move to a cheaper property – maybe even a cheaper market.  That’s why picking the right market and price point is important.  We think there will be more demand for cheaper places in big markets with nice amenities.  So proper price point and market selection can be a hedge against a falling dollar.

Obviously, if the deal made cash flow sense when you bought it and you locked in long term financing, you have a much better chance of riding an asset valuation bubble up and down.  And as much as we like to reposition equity (the free duplex story in Equity Happens), there’s no guarantee the financing to do it will be there when the equity is.  If you can do it, great.  But if not, don’t get too attached to that equity and be prepared to ride the wave for the long haul.

So right now, we think the risk of rising interest rates justifies a slight premium to lock in long term financing.  After all, a falling dollar means any lender who loans for profit (as opposed to the Federal Reserve, who loans for political reasons), will want higher interest to compensate for the weak dollar.  So, borrowing long at fixed rates is another hedge against a falling dollar.

But any time you borrow, you put the collateral (the property) at risk if you suffer disruptions in cash flow.  And as asset prices rise faster than rental incomes, cap rates are pushed down, which makes it harder to have a comfortable cushion to weather weakness in rental incomes. (Cap rate is like the interest rate on the investment).

Since wages are slow to respond to “stimulus”, especially since the U.S. has shipped many of its blue collar jobs overseas in the name of “free trade”, how can a U.S. landlord (an any landlord for that matter) hedge against fragile rents?

Good question!  And it’s one we talked about a few episodes back when we looked at cash flowing oil and gas investments as a tool to supplement cash flow.  We won’t bore you with the details now, but you can learn all about it in our special report, Using Oil to Lubricate Your Real Estate Portfolio.  The bottom line is oil, like other commodities, is useful for hedging against a falling dollar.

And speaking of commodities….

Our friend Robert Kiyosaki says, “Savers are losers”.  He doesn’t mean that people should consume more than they produce.  Far from it.  He’s saying that it makes little sense to hoard anything that is decaying.  You wouldn’t buy a 10 year supply of fresh fish, right?  After all, over time the value decays along with the fish.  It’s a losing deal.

It’s the same with the dollar.  If the dollar’s value continues to decay overtime, why would you stock up on them?  Sure, we know that ALL currencies are fiat (unbacked by anything other than the trust of the seller and the taxing power of the issuer), but that just makes the dollar (at best), the least rotten fish in the market.

We also acknowledge that the world still does business (for now) in the dollar, so you have to enough dollars on hand to handle your daily transactions.  But why hold more than necessary?  And what’s the alternative if you want to remain reasonably liquid?

Since real estate investors, like many businesses, tend to have quite a bit of float sitting in their bank accounts, some are taking a chunk of those dollars and converting them to gold and silver bullion.

We know.  It’s a “barbarous relic”.  And it’s dropped in dollar value 30% in the last year (after 12 years of spectacular gains).  But we’re not talking about short term speculation in metals or using metals as a vehicle to accumulate more dollars.  Nor are we suggesting abandoning the fiat dollar and adopting a gold standard (though that’s not a half-bad idea!).

We’re simply saying, in the context of hedging against a falling dollar (or falling currencies of all types), that time-tested hedges are gold and silver.  So if you’re concerned about the long term value of the dollar, it might make sense to take 30-50% of your “always there” bank balance and put it in bullion.  You can easily convert it back to dollars if needed, but the plan is to just let it sit there (and grow), as a component of your liquid reserves  that is something other than dollars.  It’s not only a hedge against a falling dollar, but against counter-party risk (like a Cypress-style bail in).

Does your brain hurt yet?  Our hands our tired of typing.  Plus, it gets crowded when two guys are working on the same keyboard.

So we’ll close by letting you know we’re also looking into farmland investments as a hedge against a falling dollar.  It’s the same concept as combining traditional rental property with an incoming producing commodity investment like oil, except the tenants are trees and the commodity is food, not energy.  All under the banner of Real Asset Investing.  Because we think there’s a lot of air in the paper asset market right now, and it the stock market farts, not only will it stink, but people’s portfolios will get messy.  Not pretty.

So sit back, put your feet up (you’ve earned it, if you’ve read this far!) and enjoy the discussion of Real Asset Investing!

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9/15/13: Clues in the News: Fools Rush In – Beware the Jobless Recovery

We like real estate.  We think real estate is a GREAT investment…maybe the BEST investment.

BUT (and yes, it’s a big bubble of a but), not all real estate is the same.  And not all real estate markets are the same.  And not all real estate market booms are the same.

So, because we’ve been around the block a couple of times (in The Godfather’s case, a couple of thousand times), we know there’s more to a great real estate market than just rising prices.

Fortunately, there are many clues in the daily headlines that help us figure out if the enthusiasm for appreciation is a new gold rush for real estate investors or simply a fool’s gold head fake.

In the studio to sift through the daily dirt of mainstream headlines in search of nuggets of investing gold:

  • Your powerful prospector of broadcast gold, host Robert Helms
  • His dead-pan co-host, Russell Gray
  • Regular contributor, that silver-haired real estate claim-staker and The Godfather of Real Estate, Bob Helms

A lot of things have been going up lately:  Housing prices, housing sales, home-builder confidence, multi-family rents, interest rates, jobless claims….hey wait! Who snuck those last two things in there???

Yes, it’s true.  There’s some seriously concerning news hidden inside all of the happy housing news.

Now this doesn’t mean you can’t make money in this market.  Au contraire, mon ami!  It means there’s a LOT of money going to be made.  But (there it is again), one should proceed carefully because once a market starts to move, whether it’s gold, stocks or real estate, it’s important not to chase it.

Here’s where real estate shows it’s amazing awesomeness.

As we’ve said a zillion times, real estate isn’t an asset class and there’s no such things as one big real estate market.  An ounce of gold or a share of Apple stock is EXACTLY the same, AND it trades for virtually the SAME price anywhere in the world.  So whether you buy  it in the U.S., France, Argentina or Nigeria (wait, we’ve heard you can special prices on gold in Nigeria…at least that’s what the email said….), it’s the SAME.

Contrast this with real estate, where a property’s value can vary not just from state to state or county to county, but right down to the neighborhood, property type, condition and terms of the deal.

The very inefficiencies that make real estate anathema to paper asset traders, make it a value hunter’s paradise!  And what can YOU personally do to fix up an ounce of gold or a share of Apple stock?  We’re guessing it won’t do much good to throw carpet on your Kruggerand or put sod on your Apple stock, but those things might make your real estate worth more.

Plus, real estate allows you to use debt.  And last time we looked, which was just a moment ago, the Fed continues to print money (pending this week’s big announcement about “tapering”…or is it a tape worm?), so tomorrow’s dollars are likely worth less than today’s.  When this happens, it’s AWESOME to borrow, because you can buy stuff today (like houses) and pay back tomorrow (actually, over THIRTY YEARS) with cheaper dollars.  Loans on income producing real estate can be one of the safest ways to short a falling dollar.

But (that thing will not get out of our face)…before you get all hot and bothered and run out to start buying up any property you can find, be CAREFUL!  You should never get IN to a deal that you don’t have at least a couple of ways to get OUT of.

We’re not sure why, but rapid appreciation causes otherwise sensible investors to rush in and expect that prices will continue to rise, and trust that  liquidity will be there (in the form of “a greater fool”) when you want to realize all that wonderful equity.

Well, when an economy is hitting on all 8 cylinders and jobs are being created, real incomes are rising, and lenders are busily making loans to well-qualified borrowers, you might be able to drive your investment vehicle a little closer to the red-line of leverage.  However, as we learned in 2008, hidden forces can be forming that can pull the rug right out from under you pretty fast.

Today, those forces aren’t even all that hidden, which brings us back around to the headlines (and you thought we forgot).  Most of what we should be concerned about is right out in plain sight.  But for some reason, some investors aren’t seeing it.  That’s why we’re here.  To help you take a deep breath and stay sober when everyone else is drunk on QE fueled asset growth.  And you thought it was only stock investors who got drunk on QE.

So in this episode, we discuss the world’s fixation on the U.S. housing market and the general consensus that housing has put in a bottom.  But what bottom are we talking about?

Prices.  But when the headlines say that U.S. labor participation is down, jobless claims are up, interest rates are rising; and a quick trip to the grocery store and gas pump tells you that houses aren’t getting more affordable, it makes you wonder:  So where’s all that price appreciation coming from?

A little more digging and we find that a lot of investment capital has been pouring into real estate, especially single-family homes.  Except this time, instead of all the equity rich Mom & Pop investors buying 2 or 3 houses at a time, there are huge hedge funds buying 20, 30 or 100 at a time.  And many are paying CASH.

Meanwhile multi-family rents are rising and may have peaked temporarily.  Why?

Could it be that real people can’t afford to buy so they’ve been piling into apartments, which are more affordable than houses?  But the article we read suggests that while occupancies are up, which is usually a sign that it’s time to raise rents, most tenants can’t afford a rent increase.  And if a multi-family landlord tries to raise rents, he may find that his tenants will up and move to some place cheaper.

Oh!  Hold that thought.

This is our point.  Hot markets, speculative markets, higher priced markets – they appear tempting when prices are rising.  But if the fundamentals underneath the price increases aren’t sound, then when the tide of QE money recedes, as Warren Buffet says, we’ll see whose been swimming naked.

For residential real estate investing, we favor affordable markets that provide important quality of life infrastructure like transportation, medical, education and entertainment.  Because when people are squeezed, they will move to save money. But they don’t want to live poor.  And when they find they can have a nice suburban life in places like Atlanta, Memphis, Houston, Dallas or other similar big metros, for the same price they might pay to live in the rougher areas of San Francisco, Boston or New York, they’ll move.

That’s the beauty of real estate.  There’s no one “real estate market”. There are thousands of little ones.  And the advantage a Mom & Pop investor has is they can find those high quality, affordable areas and buy up assets that are still selling below replacement cost.  The key is understanding the fundamentals of the LOCAL market and having a great local team who can help you find the right deals.

We could go on (can you tell?), but you get the idea.  Don’t just rush in and buy any property anywhere just because you think it will go up.  It might.  But understand WHY and HOW it might.  Because it might not, and if you use a bunch of leverage with out a long term plan to service it (i.e., tenants employed in a strong job producing local economy), you might end up watching a painful replay of 2008.  Our friend (and 2014 Summit at Sea™ faculty member), Peter Schiff says the REAL crash is yet to come.

We hope he’s wrong.  But Peter Schiff was right about 2008. And after hanging out with on this year’s Summit, we think he’s a pretty smart guy.  But if you have the right properties, in the right markets, with the right financing structure and management team, you are very likely to whether any storm far better that those who are investing purely in inflated stocks for capital gains which are SOLELY dependent upon a greater fool coming in to buy you out at a higher price.

So learn to watch and love the headlines.  And if it gets too tedious for you, just tune in to The Real Estate Guys™ radio show.  We’ll watch the news and interview smart people to help us all understand it better.

One final word of caution:  Don’t let concern about the next crash keep you from investing.  In the face of falling dollar, sitting on savings could be the WORST thing to do.  Real estate investors are having a great time grabbing properties below replacement cost, locking on long term cheap debt, utilizing tax breaks to recoup upfront costs faster and positioning themselves to control one of the most fundamental and desirable assets in any market: the properties that people and businesses need to occupy in order to survive.

For now, listen to this episode and think about this real estate recovery and how you plan to take advantage of what’s happening right now.  Enjoy!

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Who is Peter Schiff and why is he on the Summit at Sea?

If you really care about your money, chances are you’ve watched more than your fair share of financial shows.  If so, you’ve probably seen or heard Peter Schiff.  He’s a hard guy to ignore…not that you’d want to.  We know we’d be better off had we been listening to him back in 2006 when he accurately predicted the financial collapse.  Watch the video here.

So it’s probably obvious why WE would want Peter Schiff on board our 2013 Investor Summit at Sea™.  We want to spend quality time with him, hear what he thinks about the fiscal cliff, the debt ceiling, quantitative easing ( we call it “queasing”, because it makes us queasy), the Fed, and Keynesian versus Austrian economics, and more.  We’re also anxious to learn more about what Peter calls The Real Crash (the title of his recent best-selling book), which is the collapse of the dollar and government debt.

Scary?  Maybe.  But closing our eyes, or switching the channel on the remote won’t make these issues go away.  So like it or not, we are ready to learn from a guy we think has unquestionably earned the right to have an opinion worthy of our consideration. And maybe, we’ll learn some important strategies to protect ourselves and actually make great profits while everyone else is hitting the panic button (or the snooze button).

But why would Peter Schiff invest a week of his life to come hang out with us (and you, if you decide to join us)?  After all, we’re not paying him.

Peter told us he looks at the Summit as a rare opportunity to give more than a keynote speech to a large crowd or a short soundbite on a TV show.  And even though he has a radio program, we know from experience that radio is a one way conversation.  The Summit is about connecting with people face to face without cameras and microphones.

For Peter, just as Robert Kiyosaki told us about the 2012 Summit that he attended, the Investor Summit at Sea is a chance to spend quality time with a relatively small group of serious investors and a diverse faculty in a fun, semi-private and focused environment.  Plus, our event brings together a slightly different mix of speakers than Peter usually shares the stage with, which means new conversational dynamics and strategic relationships, both for him and everyone else.

If you’ve ever heard Donald Trump talk about how he avoided financial ruin and re-built his empire, you know how important building face to face relationships can be.   As Trump explains it, he was $900 million in debt and on the verge of ruin, when almost on a whim, he decided to attend a dinner party that he didn’t really feel like going to.

It turns out that he ended up sitting next to one of the bankers scheduled to foreclose (first thing on Monday!) on an important property , but after a personal conversation, Trump made a deal that played a pivotal role in saving the property and Trump’s future.  What’s scary, Trump says, is how close he came to not going.

The important lesson?  No one is going to come to your home and hand you or a solution on an opportunity.  The good news is that everything and everyone you need is out there somewhere.  You’re mission, should you choose to accept it, is to go out and find the resources and relationships you need to achieve your dreams.  If you’re reading this, you’ve already shown yourself to be someone who is out looking.  Good job!

We’ve been hosting these Summits for 10 years now.  We never know who’s going to be there, what will be going on in the world at the time we sail, or what the faculty will have to say about anything.  But we do know that good things ALWAYS happen when we get people together for a week in the right environment.

Will getting to know Peter Schiff change your life?  We don’t know.  But we invite you to come and find out…maybe some good Schiff will happen to you!  Click here now to learn more.

7/15/12: Banking, Monetary Policy and Real Estate

Whatever you may think about the Federal Reserve or its motives and contributions, one thing is certain:  The Federal Reserve has a profound impact on the supply and cost of capital.  This alone makes paying attention to the Fed an important part of any investor’s routine market vigilance – and real estate investors are no exception.

While attending Freedom Fest in Las Vegas, we caught up with a 2012 Summit at Sea™ faculty member who was one of several keynote speakers – along with Steve Forbes, Peter Schiff , Robert Kiyosaki, Andrew “Judge” Napolitano and Mark Victor Hansen.

Coming to you from Las Vegas, Nevada:

  • Your straight dealing host, Robert Helms
  • Your royally flushed co-host, Russell Gray
  • Special guest and best selling author of The Creature from Jekyll Island, G. Edward Griffin

This is G. Edward Griffin’s second appearance on The Real Estate Guys™ radio show.  Last October, as part of our Halloween theme, we traveled to Southern California to interview Mr. Griffin – and didn’t quite know what to expect.  After all, his signature book, The Creature from Jekyll Island – A Second Look at the Federal Reserve, is somewhat controversial to say the least.

But after spending a week on our 2012 Summit at Sea™ with both G. Edward Griffin and Robert Kiyosaki discussing the Fed, banking, investing and real estate, we were excited to reunite with both of them at Freedom Fest.

We took advantage of the opportunity to sit down with Mr. Griffin one more time, in the wake of several Freedom Fest speakers (including Robert Kiyosaki, Peter Schiff and yours truly) talking about the Fed and its impact on real estate.

Whether or not you subscribe to the notion that the Fed is a nefarious cartel of international banks bent on world domination, or a misguided but very powerful 4th branch of the U.S. government; or a necessary, effective and benevolent steward of the U.S. dollar – no one seems to disagree that when then Fed expands the money supply (quantitative easing), that new currency flows through the economy and ultimately has an affect on all types of asset classes, including real estate.

Therefore, we ask Mr. Griffin to give us a short review of the history and mechanics of the Fed.  Since he literally wrote the book on the subject, he’s one of the best qualified people we’ve met to help us with this essential understanding.

While Ed’s position is that the Fed is a problem (hard for us to disagree), we also know that for every yin (negative) there’s a yang (positive), so (parents, cover your children’s eyes) we enjoy pulling out our yang (the force is strong with us) and discussing the opportunities that the Fed’s shenanigans create for real estate investors.

It’s a topic we’ve covered before, but as we listen to Peter Schiff and other financial pundits turn up the warnings of a falling dollar, we can’t help but smile.  After all, there is no better financial vehicle with which to short the dollar than a low interest 30 year fixed rate mortgage on an income producing property in the right market.  In fact, that was the topic of our presentation at Freedom Fest.

It’s one thing to walk around talking about market cycles and how what goes up must come down and vice-versa.  It’s another thing to understand the mechanics of money from the Fed to Wall Street to Main Street so you can see the wave coming and ride it.  And it starts with understanding the Federal Reserve Banking System.

So listen and learn as we discuss banking, monetary policy and real estate with G. Edward Griffin.

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10/23/11: The Creature from Jekyll Island – A Conversation with G. Edward Griffin

As Halloween approaches, we wanted to pick a spooky topic to kick off the week.  We’ll follow it up next with our annual edition of Halloween Horror Stories, so stay tuned!

For this episode, our topic is The Creature from Jekyll Island.  For the uninitiated, this is the title of the epic and iconic expose on the Federal Reserve by award winning documentary filmmaker G. Edward Griffin.  And while it isn’t quite as entertaining as Rocky Horror Picture Show, it certainly has its own cult of rabid fans.  However, like Rocky, Creature probably has more than it’s fair share of closet followers.

So when our good friend Robert Kiyosaki (who is no stranger himself to controversy) not only promoted, but endorsed The Creature from Jekyll Island, we thought we’d use the power of our press passes to get a face to face interview with the author.

Lurking around the microphones for a frightening discussion about the Federal Reserve:

  • The mad scientist of radio magic, host Robert Helms
  • His humpbacked henchman, co-host Russell Gray
  • Documentary filmmaker, prolific author and outspoken critic of The Fed, G. Edward Griffin

Anthony J. D’Angelo says, “Your mind is like a parachute.  It only works when it’s open.”  How true!  But this doesn’t mean that you should blindly accept everything you hear.  However, it certainly encourages exposure to various points of view for further contemplation.  In fact, that’s just how Griffin expanded some simple research for a speech on inflation into a seven year research project and one of the best known critiques of the Federal Reserve ever penned.

The Federal Reserve Bank is arguably the most powerful, non-governmental institution on the planet.

What’s that?  You thought that “Federal” meant it was part of the government like the Treasury department?  Not so.  And that fact in and of itself isn’t even considered to be all that controversial!  It’s widely acknowledged, even by Fed supporters like David Wessel, author of the New York Times bestseller In Fed We Trust, that the Fed is NOT an official part of the U.S. government.

So what’s the big deal about the Fed and why should a real estate investor pay attention?

First. the Fed controls the money supply of the (for now) world’s largest economy.  It has a profound impact on interest rates and inflation – two topics which all real estate investors hold near and dear.  Plus, the Fed has tremendous authority over ALL banks in the USA, even the little commercial ones in the flat middle states.  And if all that power wasn’t enough, because the U.S. dollar serves as the reserve currency of the world, the Fed and its policies also profoundly affect global trade and currency exchange rates.

Yeah, the Fed’s a pretty big deal.

It’s no wonder then, that as the 2012 elections approach and so much emphasis is on the economy, that the topic of the Federal Reserve has made its way into the mainstream of presidential debates.

Ron Paul wants to End the Fed (the title of his book).  Rick Perry has publicly denounced the Fed’s activities as “treasonous” and the last time we looked, “treason” was a pretty egregious crime.  Although politicians are often guilty of putting their feet in their mouths, we’re guessing that wasn’t a comment Perry made lightly.

Meanwhile, Herman Cain actually has a stint as a Chairman of the Kansas City Fed on his resume!  What’s an investor to think?

To top all of this off, love him or hate him, all the major polls show that President Obama’s odds for re-election are not good.  So it’s quite possible one of the aforementioned GOP candidates will end up in the White House.

Now we aren’t here to say who should or shouldn’t be in the White House, or even if the Fed is good or bad.  As you might guess, we have our own opinions.  But since you’re investing YOUR money and not ours, then the opinion you should be most interested in is your OWN.  Hopefully, you are forming it carefully!

To help you formulate an informed opinion on the Fed (and anything else we can think of that may affect job creation, the value of real estate, interest rates on mortgages, taxes paid on profits, etc), we will continue to scour the universe for news, information, perspectives and ideas to share with you.

After reading The Creature from Jekyll Island, we found it to be both well-researched and documented, as well as thorough and extremely thought provoking.  And after sitting down with the author for several hours both on and off mic, we found him to be a whole lot less scary than some of his critics portray him.  In fact, in many ways, it was refreshing to talk to someone who was willing to go where the evidence led him – even if it was to a highly controversial conclusion.

So listen in to our discussion with Mr. G. Edward Griffin, then form your own opinion.  And we encourage you to continue your education on the Fed by devouring some of the other books in our Recommended Reading list on the topics of Banking & Politics.  Happy Trick or Treating!

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