A potentially big real estate story for 2019 …
While most Americans are fixated on the brouhaha surrounding the government shutdown, we’re thinking about something even MORE slimy …
Oil.
Long time followers know we’ve been watching oil for quite a while … and for a variety of reasons over and above the amazing tax breaks.
Oil and energy have a substantial impact on the economy, inflation, geo-politics … even the health of the financial system.
We’ve observed that as oil prices rise and fall, the specific area of their impact shifts. There are important clues and opportunities to be gleaned from watching these dynamics.
When oil prices rise, it’s a drag on economic growth and can also be a sign of inflation. It’s no secret President Trump wants to lower cost inputs to help fuel economic growth.
The Trump formula is lower taxes, lower oil, lower interest rates, a weaker dollar, and less regulation. Labor is the only input he wants to see rise.
You may agree or disagree, but that’s what Trump wants. Of course, there are some conflicting goals in the Trump recipe …
Specifically, low interest rates and a weaker dollar generally mean rising prices (inflation) … and oil is one of the first places it shows up.
Also, more economic activity leads to more energy consumption, which means higher demand … and rising prices.
So … the only way to keep oil prices low in an environment like this is to increase oil production to where supply overwhelms both higher demand and a weaker dollar … and pushes oil prices down anyway.
Perhaps obviously, a domestic agenda which needs lower energy costs will affect U.S. relations with oil rich nations.
We think Trump’s stance towards Saudi Arabia … in spite of denials … makes it clear low oil prices are a high priority for the White House.
It’s consistent with what Trump told us when we asked him about his vision for housing and real estate. He said, “Jobs”.
Remember, oil and energy were the largest drivers of job growth in the United States coming out of the 2008 financial crisis.
Many real estate investors who recognized this trend and got involved in Texas real estate in 2009 …and have done very well over the last 10 years.
We think that party’s probably not even close to over.
One less obvious, but very important connection between oil and real estate is in the financial system … specifically, the debt markets.
As we’ve discussed several times over the years, LOTS of loans were made to oil companies when oil prices were over $100 per barrel.
But when interest rates rise and oil prices fall … it’s the worst of both worlds for heavily indebted domestic oil producers.
MANY billions of oil-related debt has the potential to go bad … and crater the financial system just like bad mortgage debt did in 2008.
And when credit markets seize for whatever reason, liberal users of debt, such as real estate investors … are directly affected.
We don’t think it will happen.
First, there’s too much upward pressure on oil prices.
Second, as we’re about to discuss, there’s BIG motivation to stimulate domestic production … which provides a lot of cash flow to service debt.
Of course, we could be wrong … as Ben Bernanke was about the dangers of sub-prime … so real estate investors should pay attention to oil.
Using the gas pump as an indicator, you probably already know oil prices have been a little soft.
Of course, businesses and consumers (including your tenants) LOVE this because it makes everything more affordable.
U.S. car manufacturers love it because it means they can sell more gas guzzling SUVs and trucks.
But bigger picture … oil and energy are major cost inputs on virtually all products.
After all, it takes energy to manufacture and transport everything.
And many products are made from petroleum derivatives, such as plastic, roof shingles, and asphalt.
So even though energy is left out of the “core inflation” index, the effects of changes to oil pricing are still reflected in it.
And so partly due to subdued oil prices, concerns about excessive inflation have been muted … even in the midst of a red-hot economy.
Obviously, sellers of oil would prefer higher prices.
But you can only charge what the market will bear … which is a factor of supply, demand, and capacity to pay.
It’s also important to note that energy, like real estate and food, isn’t a discretionary purchase.
People MUST have energy to survive and thrive. Therefore, demand for energy is ever-present.
So when it comes to oil … the thing to watch is supply and capacity to pay.
Breaking out capacity to pay from the traditional supply and demand model is something we started doing a long time ago … because there’s no effective demand without it.
Just because you want something, doesn’t mean you can afford it. Think of it like debt-to-income ratios and interest rates in real estate.
Just because someone makes an offer on a house (demand), if they can’t quality for the loan (capacity to pay), there’s no sale.
And when mortgage rates rise, but wages don’t, the dynamic negatively impacts qualifying ratios … thereby decreasing capacity to pay and ultimately, effective demand.
That’s why observers often expect rising interest rates to lead to decreased housing demand.
It’s similar with oil.
When oil prices rise and wages don’t, then lack of “real” wage growth (incomes outpacing inflation) makes it hard for the market to bear price increases.
That’s why the recent blowout jobs report was notable.
Not only were lots of jobs created, but wages grew at the best rate since 2008.
That means capacity to pay improved.
As you may recall, Saudi Arabia (the leader of the middle-eastern oil cartel OPEC and one of the largest oil producers in the world) INCREASED production …
… which meant MORE supply and LOWER prices (and thanks from President Trump).
But just recently, Saudi Arabia reversed course, calling for a target price of $80 per barrel … and a REDUCTION in production to make it happen.
Now before your A.D.D. kicks in … remember, this ALL has ramifications for real estate investors …
The point is there’s some real pressure on oil prices to rise … and a lot of motivation by President Trump to take steps to push prices down.
We think BOTH will happen and lead to interesting opportunities for real estate investors … in spite of the pressure higher oil prices puts on your paycheck-to-paycheck tenants.
If you invest in oil for the tax breaks and oil prices go up … there’s big potential for a double dip … tax breaks and profits.
Nice. You can use both for your next down payment.
Higher oil prices reduce the risk of oil debt imploding credit markets. Healthy credit markets are essential to vibrant real estate markets.
If oil prices rise on the international stage, we’d bet President Trump will do whatever he can to further stimulate domestic production to counteract it.
And that means more U.S. jobs and robust regional economies … with increased demand for real estate to in those areas.
All this to say, we think it’s smart to pay attention to oil … as an investment, as an economic gauge, and as a treasure map to potentially hot markets.
Oil will be a big topic of discussion on our upcoming Investor Summit at Sea™.
Until next time … good investing!
More From The Real Estate Guys™…
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Ask the Guys – Long-Distance Landlording, Property Management and More
Welcome back to an all-new edition of Ask The Guys!
Today, we’ll be answering listener questions. So listen in for our best real estate tips and tricks!
A disclaimer … we are not tax advisors or legal professionals. In our Ask The Guys series, we give ideas and information … NOT advice.
In this episode of The Real Estate Guys™ show you’ll hear from:
- Your tipster host, Robert Helms
- His tricky co-host, Russell Gray
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How do I find a property management company?
This question comes from Lee, in Bay City, Michigan. He wants to know whether we have any advice for finding—and vetting—management companies.
He says he’s investing in his area, but the only management companies he can find are run by real estate agents on the side. He has a day job, and doesn’t have time to manage on his own … so he wants to find a reputable company that’s up for the task.
He also asks whether he should move out of his local area, since there aren’t many management companies.
We always say you should invest where the numbers make sense … but you also need to invest in places where you can find a great team.
In the long term, your property manager is the most important person on your team. So if there aren’t any great property management solutions where you live … perhaps it’s time to expand your geographic investing boundaries.
Start by refining your personal investment philosophy, then look for a market that both matches your goals and has the management companies to fill your needs.
You don’t want single-point failure. Make sure the company you choose aligns with your philosophy. Ask them, “Who supports you, and how?”
You want to make sure their compensation model is aligned with your best interests. In other words, when you earn money, they do too.
And choose your property management company BEFORE you buy your properties. They can be an excellent resource for finding properties and asset class types that will work well for both of you.
Remember, you can’t scale up without putting the right team in place. Getting a great property manager on your team helps you find the professional distance you need to run your business properly.
How do Section 8 rentals work?
Laura, from Naples, Florida, wants to know how Section 8 rentals work and how she can acquire affordable housing in her investment market.
First, a few things about Section 8. Section 8 is housing subsidized by the Department of Housing and Urban Development (HUD). But it’s administered by local public housing agencies, so it’s not always available and differs across the country.
Section 8 can be great because a portion of the rent is paid by the government. You basically have a guarantee you’ll get most of your rent on time, regularly.
But tenants in this housing can be a tough crowd … sometimes they don’t blend well with other, non-Section 8 tenants. For that reason, we like a property to be all Section 8 or none.
A great resource for learning about Section 8 is Mike McLean, who has published a book called the Section 8 Bible and has some great online resources, too.
Affordable housing can be a good place to be because of stagnant purchasing power … but make sure you’re playing close attention to the program from which funding comes.
And keep in mind … the devil is in the details. If you’re not managing the property yourself, make sure your property manager is well acquainted with Section 8.
Should I invest now, or later?
Casey, in Lehi, Utah, has been listening to the podcast, and now he has a pressing question.
Casey has saved up $100,000 to invest, but he wants to know whether he should invest now or wait until the market takes a dive. He mentions worries such as rising interest rates, an unstable dollar, and inflation.
Let’s start with a premise … markets will either do well or poorly in the future. We know that. We also know that when the market hits the bottom, you can only go up.
Real estate is a long-term, buy-and-hold business. But it is interest-rate sensitive, so you want to make sure you lock in long-term financing if you invest now.
It’s also good to keep some liquidity for if and when the market does go downhill.
Something we like to say is, “Opportunities are like busses. Another one will always come along … but you have to get on the bus at some point.”
The way we see it, Casey has a few options …
- Invest in things that are likely to do well, even when the market is bad, particularly mid-level rentals and below. There will always be demand for housing, especially mid-range housing.
- Invest in a forced equity situation … a neighborhood or property that has room for improvement, which you can force upward in value. This will help you mitigate downward pressure to the dollar.
- Invest in a bigger market … this provides stability, as these markets have more ballast during tough times.
- Step in on the debt side of the market by lending money to other investors.
- Work with an experienced syndicator who is more likely to get investments right, even when times are more precarious.
Remember, when you’re in property for the long haul, most of the time you’ll be fine. The key is to structure deals so you can weather the ups and downs.
Another thing to consider … the price only matters when you buy and when you sell. In between, it’s all about cashflow.
Real estate is one of the best inflation hedges if you structure the financing properly relative to cashflow … but you can’t fledge against inflation if you don’t do anything at all!
How do I create residual income with little savings?
Jeff, in Fountain Hills, Arizona, says he is in an interesting situation.
He doesn’t have any income, but he has enough cash to live on for 24 months. In the meantime, he wants to figure out how to create residual income that will pay for his living expenses going forward.
Jeff is looking at building a balance sheet of passive income sources.
But right now, he has time, labor, and energy he can put to work. And since he’s not holding on to a chunk of cash, the active investor route is a good one.
Some options …
- Force equity by fixing and flipping.
- Earn cashflow by fixing, holding, and renting.
- Become a syndicator and use other people’s money to make great investments. It’s our favorite way to go full-time, fast.
- Try wholesaling.
Basically, what Jeff needs to do right now is to build up his investment capital so he can start getting some cashflow.
But before he does that, we suggest he invest in education and build relationships. Get the right tools in your toolbox and the right advisors at your back before you go big.
Can you recommend turnkey management companies?
Keith hails from East Sandwich, Massachusetts. He recently bought a home through Mid South Homebuyers and is ready to buy another.
The problem? He’s on the waitlist at Mid South. In the meantime, he’s looking for another turnkey company that manages the houses it sells.
One disclaimer … we don’t know anybody quite like Terry Kerr at Mid South.
But we do know lots of other great folks.
The idea of a turnkey provider is that they do the whole thing … find the properties, get them in great shape, put tenants in, and manage the rentals.
But before you look for a provider, think about the type of property, market, and team you want.
Then go ahead and search our provider network for someone who can help fill your needs. We don’t guarantee anyone on the list, but we do promise we’ve spent a lot of time with them on the ground and have seen enough to trust them.
Should I attend Secrets of Successful Syndication now, or later?
Gene, in Boston, Massachusetts, is an investor who owns two duplexes. He wonders whether he should attend our signature Secrets of Successful Syndication conference now, or later in the year when he has more experience.
We’ve gotta say, we really think the key is for investors to come early and often.
This conference is designed for investors who already have a portfolio and are ready to take the next step.
But even if you’re just starting out, it’s a great way to get around what we call “evidence of success” and learn the power of networking.
Experience is something you can accumulate through other people. And syndication is all about having the experience to make good investment decisions.
So, for those who want to move forward, we recommend you start as soon as you can.
More From The Real Estate Guys™…
- Sign up for The Real Estate Guys™ Free Newsletter
- Check out all the great free info in our Special Reports library.
- Don’t miss an episode of The Real Estate Guys™ radio show. Subscribe on iTunes or Android or YouTube!
- Stay connected with The Real Estate Guys™ on Facebook, Google+ and our Feedback page.
The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
Love the show? Tell the world! When you promote the show, you help us attract more great guests for your listening pleasure!
5 Things I Wish I Knew Before I Started Wholesaling Real Estate
5 Things I Wish I Knew Before I Started Wholesaling Real Estate
Find a good deal … find an investor … and get paid!
Wholesaling real estate is one of the fastest and easiest ways for new investors to get into the game.
You don’t need a license. You don’t need a lot of money. You don’t need good credit … and you can get started with just a few hours a week.
Wholesaling is simple … but it takes unique know-how to make it into an explosive source of passive income.
In this special report, Tom Krol, founder of Wholesaling Inc., shares the biggest lessons he has learned in this investment niche.
Dive in and discover:
- What the wholesaling process looks like in the real world
- How to generate a LOT of passive income
- True success stories of investors like YOU
Do more deals, own more properties, and make more money. Simply fill out the form below to get your free copy of “5 Things I Wish I Knew Before I Started Wholesaling Real Estate.”
Social Security, Inflation and Real Estate …
If you’re relatively young, Social Security is probably just an abstract concept and another bite out of your paycheck.
But before you tune out, consider that the U.S. Social Security program creates both problems and opportunities for real estate investors of ALL ages … including YOU.
Big picture …
Social Security and Medicare make up about 42% of federal program expenditures. They’re a BIG chunk of Uncle Sam’s spending.
According to this Congressional Research Service report on Medicare and this Social Security Administration Trustees’ Report … both are headed towards insolvency in the not-too-distant future.
That’s bad.
Worse … both are “pay as you go” programs. That’s not our description. That’s exactly the way the U.S. government describes them.
The programs don’t really have any money.
The only “assets” these programs have are YOUR taxes … and IOUs from Uncle Sam. The CRS report explains it on page 5.
Of course, IOUs from Uncle Sam are also backed by taxes … and the Federal Reserve’s printing press (which means inflation).
According to recommendations by the SSA Trustees in their report, the answers are … wait for it …
… raise payroll taxes and reduce benefit payments.
Shocker.
You probably know payroll taxes are paid by working people (your tenants) and their employers.
Higher payroll tax obviously means less take-home pay to live on … including paying their rent to YOU. So you may want to pay attention to the direction of payroll taxes.
But what about benefit reduction? How does that matter to real estate investors?
There’s the obvious impact on tenants who rely heavily on Social Security, disability benefits or Medicare to help them with their routine living expenses.
Reduction in subsidies means those tenants have less money to pay rent … and less flexibility to absorb increases to rent or other costs of living.
But there’s a less obvious angle to consider … one we pay close attention to … and that’s the Fed’s printing press.
We trust at this stage of your financial awareness, you’ve heard of John Maynard Keynes, the father of the “Keynesian economics” you hear about.
Here’s a long, but powerful statement made by Keynes in his book The Economic Consequences of the Peace …
“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
There’s SO much we could say about that quote … but read it and re-read it a few times. You’ll view the news in a whole different light.
For now, let’s get back to Social Security, inflation … and YOUR real estate investing …
As you can guess, cutting benefits overtly is not a politically popular solution.
Neither is raising taxes.
Yet according to the people in charge of these programs, that’s EXACTLY what needs to happen.
And it is happening … but “in a manner which not one man in a million is able to diagnose.”
That is … cutting benefits and raising taxes are both cleverly hidden inside how Uncle Sam and the Fed handle inflation.
When most people think of “inflation,” they think of Uncle Sam’s official gauge of inflation … the Consumer Price Index (CPI).
It’s well known that the Fed has a stated goal of 2% per year inflation … every year … year in and year out.
That doesn’t sound like much. And whether it’s good or bad depends on which side of the coin you’re on.
If you own real assets, you get richer in nominal terms.
If you use long-term debt, like mortgages, you get richer in real terms.
That’s too big a concept for today, but one EVERY real estate investor should know like their name. In fact, it’s a big part of what Robert Kiyosaki will be talking about at our next Investor Summit at Sea™.
But just because you own properties doesn’t mean you’re home free (punny, we we know) because …
… for folks who don’t have assets (like your tenants) … inflation means it costs more to live. To see it in dollar terms, use Uncle Sam’s inflation calculator.
Based on the CPI, a tenant in October 2018 would need $1,542 to purchase items that cost only $1,000 in October 1998.
That’s means they need more than a 50% increase in take-home pay over 20 years … just to keep the SAME standard of living.
Similarly, for programs like Social Security … with built in cost of living adjustments (COLAs) … a $1000 benefit in 1998 now costs Uncle Sam $1542.
No wonder the debt is swelling.
Of course, it didn’t take Uncle Sam long to figure out keeping the CPI lower than real-world rate of inflation, would effectively cut benefits without political fallout.
In other words, as Peter Schiff often points out, the CPI probably UNDER-reports the ACTUAL rate of inflation … which means the reality is even harder for the working class than the CPI indicates.
So it’s important for investors of all types to get the best measure of real-world inflation possible. And the CPI is arguably not it.
That’s why many investors turn to Shadow Stats or the Chapwood Index.
The Chapwood Index is handy for real estate investors because it breaks inflation down by city. That’s important because unlike stocks, bonds, and commodities … real estate is a LOCAL investment.
Here’s where it all comes together …
Even though Uncle Sam is motivated to keep inflation LOW for CPI purposes, they have no choice but to print gobs of dollars to fund the huge and growing debt and deficit.
Meanwhile …
Income producing, leveraged real estate is arguably (and by far) the safest, most powerful hedge against long-term inflation.
But again, rental property investors must stay alert to the pressure inflation puts on their tenants.
Remember … just because nominal GDP is growing, it doesn’t mean your tenants are getting more purchasing power.
So be careful to select markets, product types, and tenant demographics that fit well into what’s happening in the big picture.
Until next time … good investing!
More From The Real Estate Guys™…
- Sign up for The Real Estate Guys™ Free Newsletter
- Check out all the great free info in our Special Reports library.
- Don’t miss an episode of The Real Estate Guys™ radio show. Subscribe on iTunes or Android or YouTube!
- Stay connected with The Real Estate Guys™ on Facebook, Google+ and our Feedback page.
The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
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Oil and Gas for Real Estate Investors
Energy is the key input for all economic activity. And as populations and economies grow worldwide, there’s an increasing demand for energy.
So listen in as we chat with an experienced oil man and discuss the nitty-gritty of investing in oil and gas for profits and tax breaks.
In this episode of The Real Estate Guys™ show, you’ll hear from:
- Your well-oiled host, Robert Helms
- His slightly creaky co-host, Russell Gray
- Oil and gas businessman, Bob Burr
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How we got into oil and gas
We’re often asked how we transitioned from real estate to other real assets.
We started studying economics after the ’08 financial crisis. We were looking to see what we could have done … to better survive the crash.
We realized we needed to be more careful about structuring our portfolios so they weren’t vulnerable to the ups and downs of Wall Street.
We also realized the dollar, gold, and oil were all interconnected.
And, we looked at the tax benefits, and realized the tax path leads to oil.
Our guest today is basically the Godfather of Gas and Oil. Bob Burr started out in the gas and oil industry working on rigs as a young man in Louisiana.
“It was my life’s mission to find out the other end of the business,” Bob says.
Well, he’s made it … Bob now has several cumulative decades on the money-making side of the oil and gas industry.
And he’s still at it … technological innovations and new oil discoveries have made the U.S. one of the top places in the world for oil extraction.
Bob’s decades of experience have led him through ups and downs, mistakes and discoveries, and he has come out wiser on the other end. He met us on the Summit at Sea™ … and now he’s here to share his knowledge with YOU.
The tax benefits of oil investing
So … why oil and gas?
“The tax shelter is just tremendous,” Bob says. Oil and gas investing is the only business today where you can put in a dollar and write off 70 to 80 percent of that, whether you win, lose, or come to a draw.
There are risks inherent to investing in the industry, but the federal government makes it much more approachable by subsidizing heavy tax breaks.
“Every time you drill a well, you’re gambling,” Bob says. But since oil drives the economy, Uncle Sam is willing to place some bets.
Bob does a lot of due diligence before he even starts digging to make sure a potential well has a high chance to be profitable for him and his partners.
First, he explores the land and picks out a bunch of prospective sites.
Then, he sends those prospects to a third-party geological team and says, “Kill it.” Really. If the geological team comes back and says no go, Bob moves on.
After the geological team gives the A-OK, Bob does yet another evaluation. His sons do a due diligence inspection to examine specific site issues.
“We’ll have some bad ones regardless, but I’m doing everything to avoid that,” Bob says.
Oil and gas exploration is a numbers game, but Bob is shaving the odds in his favor. He’s eliminating 90 percent of the bad options … before the drilling starts.
Oil and gas investing is an industry that requires high responsivity to partners.
Because it is a high-risk industry, Bob makes sure he is being attentive to his investment partners’ needs.
“We need to shut up and listen and let them present the facts,” Bob says. If there’s ever a point where he disagrees, he consults with specialists and experts first.
Bob has been in the business a long time. “I would be lying if I never did anything wrong,” he says. “I had to climb the mountain and fall back down, climb the mountain and fall back down.”
But now, “You can’t play any tricks on me,” he declares.
Who gets a cut?
How does oil and gas investing work for everyone involved?
First, there are the land owners. In usual oil and gas terms, the land owner owns the surface and minerals. The oil extractor … that’s Bob … gives the owner a bonus for each acre used, plus royalties … a percentage of the total proceeds.
“You have to look at the economics,” he says, in reference to the royalty rate.
If an oil person is pulling in millions of dollars, the reserve rate … what they take home to investors and their own business … will be less, perhaps closer to 50 percent. For a smaller pull, it’ll probably be closer to 80 percent.
“You have to play every hand differently,” Bob says. There are a lot of variables that affect each situation.
Now, what about the investors?
Becoming a partner to Bob or another oil person requires taking on a lot of risk. But regardless of the outcome, investors still get tax benefits.
Bob says he does turn-key deals on each well, and he takes on the responsibility of figuring out completion costs and risk.
If he runs into problems, he doesn’t go back to his investors to ask for more money, he says … but if there is a chance to drill deeper and get much higher profits, he will sometimes give investors an opportunity to put more money in and play the game.
As for the profits? “I’ve never had one problem having a market for oil at a premium price,” he says.
Bob recently got about $70/barrel for West Texas crude, but he says he can make money at as low as $25/barrel … so there’s a lot of flexibility. Twenty-five is still a good, solid return, he says.
The oil industry is all about developing relationships … after all, we only got to know Bob through the great relationships we form each year at the Summit at Sea™.
“I’m a team with my partners, and I’m the captain of the team,” Bob says. “And I want to score.”
Think you want to learn more about oil and gas investing? You can start your research with Bob’s custom report. And of course, you can meet Bob and other experienced investors at our annual Summit at Sea™!
More From The Real Estate Guys™…
- Sign up for The Real Estate Guys™ Free Newsletter
- Check out all the great free info in our Special Reports library.
- Don’t miss an episode of The Real Estate Guys™ radio show. Subscribe on iTunes or Android or YouTube!
- Stay connected with The Real Estate Guys™ on Facebook, Google+ and our Feedback page.
The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
Love the show? Tell the world! When you promote the show, you help us attract more great guests for your listening pleasure!
Bitcoin, gold, oil, stocks, real estate, and popcorn …
It’s hard to watch the financial news these days and not get the feeling the fragility in the financial system we’ve been concerned about … is starting to show.
We grew up in California and learned as kids how to react to an earthquake …
Get away from glass and hide under the shelter of a desk or doorway … because stuff was probably going to start falling.
Fragile things shatter in an earthquake. They can’t handle the pressure. The key to safety is to get to the sturdiest parts of the structure until the shaking subsides.
Of course, when it’s clear and bright … the windows are the most fun. You can bask in the sunshine of hope and opportunity.
But when the foundation is shaking, it’s time to find shelter … FAST.
You’ve probably noticed stock prices slipping. Even the fabled FAANGs (Facebook, Amazon, Apple, Netflix, Google) are ALL now in bear markets.
So what? After all, we’re real estate investors. What do we care about stocks?
We don’t. At least not directly. But all these markets are like gauges on our financial dashboard … and when they start flashing red, it’s wise to investigate.
This is a newsletter, not a seminar, but let’s see what we can reason together in the next few minutes about what’s shaking in the financial world … and where it might be headed.
The first place to look is the most important financial market there is … bonds.
Of course, real estate investors should watch the bond market for clues about the direction of interest rates.
But while interest rates are interesting … credit markets are what REALLY matter.
That’s because credit markets both create and price the currency which fuels everything else.
Credit markets are like the big reactor core in the Star Wars Debt Death Star. They’re both the fuel source and the weak spot at the same time.
To take the metaphor a conspiratorial step further … credit markets are also the source of the Emperor’s power.
And as Peter Schiff persistently points out … when the original Debt Star blew up in 2008, the Emperor wasted no time in building a bigger, deadlier version.
The obvious implication is the next explosion could be a LOT bigger.
Now in a plain vanilla stock market dip, some (usually innocuous) event spooks highly-leveraged paper traders. They sprint to the exits … and stock prices fall.
But then they calm down and the next day they’re back out there snapping up bargains. This “buy-the-dip” strategy has been the name of the game for several years.
But the longer-term downtrend suggests something is different this time. Perhaps worries the Debt Star is running out of power?
The Bitcoin crowd has been chanting “buy the dip” also … but here too, it seems the Farce is strong … and the downtrend has more gravitational pull than past dips.
Clearly, nervous stock investors aren’t piling into Bitcoin for safety.
Of course, the usual safe space for snowflake stock investors to hide is bonds.
But if gobs of money were pouring into bonds … interest rates would be falling.
While rates have certainly moderated the last few weeks from their upward trend, it’s hardly a serious decline.
So … nothing happening now has us disagreeing with our recent conversation with David Stockman on the direction of rates.
And we certainly would NOT be using short-term debt on tight-cap properties hoping to re-fi to lower rates in a year or two! If that’s your plan … be careful.
Then there’s oil. You’ve probably heard the price has fallen. We’re guessing your tenants like it at the pump. Businesses too.
Obviously, energy costs … just like interest and taxes … RAISE the costs of operating a business, a household, and an economy.
President Trump’s a business guy. So to no surprise he prefers ALL three lower … so more profit gets to the bottom line.
But oil … like gold … is MUCH more than just a commodity.
Both have significant connections to the future of the U.S. dollar … and all three are powerful tools in geo-politics.
Just last year, we pointed out China’s noteworthy moves with both oil and gold.
And just because things are moving slowly, doesn’t mean they aren’t moving.
All that to say … we’ve been paying close attention to this for several years … and it seems to us things are picking up speed.
We keep them on our radar … and yours … for TWO reasons …
First … major financial events often seem to show up suddenly and shock the world … but they usually had a long and obvious (in hindsight) build up.
We’ve learned to look further out so we have more time to re-position. After all, the blessing and curse of real estate is it moves slowly.
So real estate investors are wise to pay attention to early warning indicators … and then rearrange portfolios to both mitigate risk and capture opportunities.
Second … when economic and financial earthquakes first tremble … it’s smart to seek shelter under sturdy structures.
For that reason, we think it’s likely to see MORE money moving into real estate in search of stability (and tax breaks).
But just because real estate is stable doesn’t mean YOUR portfolio is.
As we learned in 2008, bad portfolio structure crumbles when hit with tremors from a Debt Star explosion.
However, when those market forces clean out weak portfolios, there are bargains galore … for those who are ready, willing, and able to take advantage.
Ironically, consumers are tapping home equity like it’s 2007. We’re guessing holiday shopping will be solid. But it won’t make those borrowers wealthier.
Savvy investors are grabbing equity too … and using it both to purchase strong cash flows … and to hold in reserve.
It’s always good to have some cash if market tides turn.
YOUR mission is to be among the aware and prepared … and NOT among the unaware and unprepared. It could be a good time to increase liquidity.
Are we saying another crash is coming? No. But we can’t say it’s not.
Right now, there are tremors.
So while you’re thinking about your goals for next year … including how to invest your educational time and money …
… we encourage you to make getting better educated, better connected, and better structured a top priority … so IF things turn quickly …
… YOU can sit safely inside your reinforced portfolio chomping on popcorn and watching the fireworks.
And if the fireworks turn out to be a dud … you’re really no worse off for being prepared.
Until next time … good investing!
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Preparing for the Future of Interest Rates and the Dollar
We’re concerned about interest rates … and you should be too.
Consistently rising interest rates affect your ability to borrow money for investments.
In this episode of The Real Estate Guys™ show, we dig into how the Federal Reserve and central banks affect interest rates. We talk about the future of the dollar. And we discuss how rising interest rates affect YOU.
We met with two knowledgeable experts in the economics field. You’ll hear from:
- Your interested host, Robert Helms
- His uninteresting co-host, Russell Gray
- James Grant, economic expert and author of eight books on the U.S. financial system
- Nomi Prins, former Wall Street analyst, journalist, and six-time author
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James Grant on interest rates and securities
James Grant was named by Ron Paul as his likely candidate for Chairman of the Federal Reserve. Over the years, he has been a voice of reason … he calls himself “a ‘yes, but’ guy in a ‘gee whiz’ world.”
We got right into the subject of interest … interest rates.
Are rates going up? “Rates tend to trend over the long term,” James says.
They’ve been on the down-swing since the 1980s, but they may be on the up-swing again … and although rates are currently rising, James emphasizes we’ll have to wait and see whether the trend continues.
James says investors should look to the bond market for clues.
A 10-year treasury bond delivered a yield of 1.37 percent in 2016 … the lowest yield since the year 1311, according to a study by the Bank of England.
In the early 80s, a 30-year security would’ve netted you a 14 percent yield. That’s a big difference.
Today, almost every security is priced next to nothing when investors account for taxes and inflation, James says.
Who manipulates interest rates? The Federal Reserve.
“It’s an act of malpractice that the Fed and central banks worldwide are manipulating these rates,” he says.
And real estate cap rates are driven by interest rates.
To James, this means we now live in a world of great danger. “We live in a kind of hall of mirrors,” he says.
On forecasting the future and investing in gold
James notes forecasts are for people who think they know what’s going to happen … when the reality is, no one actually knows.
“We can’t know the future, but we can know how it’s being handicapped in the present,” James says.
He finds it helpful to remind himself of how our descendants will think of us.
And he says, “Successful investing is about having everyone agree with you … later.” Investors must imagine plausible outcomes before the market catches up.
We asked him his thoughts on gold investing. “Gold is interesting because it’s where people flee,” James says. “But it’s really an investment, not a flight asset.”
Gold is a way to step outside of orthodox institution investments. “Gold is simply money to me. It’s a cash balance. It’s something the central bankers can’t debase.”
To hear more from James Grant … and keep your eye on interest rates … check out Grant’s Interest Rate Observer, an independent journal covering financial markets.
Nomi Prins on the Federal Reserve and the world market
Journalist Nomi Prins was a member of Senator Bernie Sanders’ panel of advisors on Federal Reserve reform. She’s coming at this from a different angle than James Grant … but both guests are incredibly informed, with lots of great things to say.
In 2007, Nomi wrote that there could be a problem if financial institutions and the government continued the credit derivative system and high leverage.
No one wanted to hear it. But then ’08 happened.
Nomi says that over the last 10 years, “The Fed has subsidized a lot of credit problems that existed before the ’08 crisis by creating electronic money.”
That has raised the level of artificial leverage.
And THAT means the next market collapse will come from an even higher height than in ’08, she says.
Even worse, many central banks around the world created electric money and dropped rates when the Fed did. Nomi examined this situation in her book Collusion.
“We’re in a very precarious situation going forward,” she says.
Quantitative easing … the introduction of new money onto the market … causes inflation and collapses markets, starting with emerging markets.
In order to retain capital, central banks in these countries have to raise rates and increase the value of their currency. That’s what’s happening now.
This, in turn, lowers the value of foreign currencies relative to the value of the dollar. So, any debt these countries have has to be paid back or renewed at a higher rate.
Apparently, however, the U.S. is back to quantitative tightening now, says Nomi.
The Fed’s statements and its actions and reports tell different stories.
Fed Chair Jerome Powell SAYS current quantitative tightening is official. That means the government will continue to sell … but not re-invest … assets.
But in reality, the Fed is selling much more slowly than they’ve said they will.
The reason? “They know that if they sell too much too fast, rates will increase too fast, and the value of assets will go down too fast,” Nomi says. “They want to be in a holding pattern.”
More on quantitative easing, coming crisis
Nomi wants people to know there is NO correlation between GDP growth and quantitative easing. However, there is a very high correlation between quantitative easing and the stock market.
She thinks the next financial crisis will look like a bunch of smaller crises that add up to big gaps in liquidity and credit availability.
Nomi says she sees a few things happening around the world … bond defaults are creeping up in emerging markets, and certain countries are starting to have major credit problems.
“I think all of that will come to bear on the Fed.” And because of that, Nomi says, “I think their language will start to move toward growth slowing.”
Think two rate raises over the next year, instead of the forecasted four.
She predicts extreme appreciation is not going to happen. Rates will stay low, although they might continue to rise a bit relative to the Fed.
What about real estate? “Commercial real estate may have more leverage, so rate hikes will have more impact.”
Instead, Nomi recommends “any area where rent can overcompensate for an increase in cost.”
She says there are currently opportunities in emerging markets where there’s still room for upward growth in prices.
Mexico City, for example, is a place where prices are low, the government has a strong growth strategy, and there is opportunity in the near team.
Lessons learned
Debt doesn’t operate in a vacuum. Interest rates have a HUGE impact on whether your investments will be successful.
You don’t need to understand ALL the mechanics … but you should have a basic understanding of WHAT will affect interest rates and WHERE they’re headed.
More From The Real Estate Guys™…
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Think like a big dog …
Whether you’re an active real estate investor out there finding and managing deals in your own account …
… or you’re a passive investor looking to invest in someone else’s deals …
… or you’re a syndicator putting together deals on behalf of your passive investors …
… it can be smart to think like a big dog.
After all, major players have big research and due diligence budgets. They hire big brains to study the market and make smart strategic decisions.
YOU can learn a LOT … just by watching what they’re doing.
Sometimes you can get in front of a big wave they’re about to create and ride it.
And sometimes you can front run them … buying what they want BEFORE they get there … selling to them at a premium when they arrive.
(We think there could be a particularly good opportunity to get in position to do this in the residential assisted living space right now.)
So even though you can’t play at their level, you can still get in the game by paying attention and being more nimble.
For example, this headline caught our attention …
Apollo is Targeting $1 Billion for U.S. Real Estate Fund –Bloomberg 11/20/18
“Apollo Global Management LLC has started talking to investors about its third U.S. real estate fund …”
Hmmmm … $ 1 billion is a chunk of change. And apparently it’s not their first rodeo.
In fact, Apollo has been around since 1990 and has over $270 billion under management.
Not that we’re promoting or vouching for them. We’re just saying it seems like they’re qualified to have an opinion about investing.
So back to the article …
“Investment will be in senior housing, hotels, retail”
A little deeper down we discover … in addition to these three … Apollo is also into industrial real estate and manufactured housing.
Of course, this doesn’t come as a big surprise to us or our long-time followers.
We’ve been paying attention to sub-niches in senior housing, hotels, retail,industrial and manufactured housing for quite some time.
But even though it’s affirming to have a big dog like Apollo see what we see … it’s not like we’re geniuses.
The clues in the news, trends, data, and our discussions with our boots-on-the-ground contributors make it easy to see the opportunities.
Of course, seeing the opportunity and knowing someone in the space … is just the beginning.
It’s also important to think about your personal investment philosophy … build great relationships with a solid team … and structure things to endure in both good times and bad.
Recently, the wild ride in the stock market is reminding 401k owners how fickle paper equity can be.
It’s no surprise smart fund managers are looking to real estate as a way to find high risk-adjusted returns … and stability in a volatile world.
Right now, we’re watching Wall Street investors race each other to the exits … leaving a flood of red in their wake.
And while history doesn’t necessarily repeat itself, it often rhymes.
Remember, after the dotcom bust at the turn of the century … frightened capital found a safe haven in real estate. It just might be happening again.
For those already there, it could make for a fun ride.
Until next time … good investing!
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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
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Working with Real Estate Agents Who Understand Investment Property
The world is full of real estate agents and brokers eager to do a deal … but only a small handful of those agents are qualified to service your unique needs.
The best partnerships between agents and investors create mutual success. How do you find an agent that works FOR you and WITH you?
In this episode of The Real Estate Guys™ show, we chat with Bob Helms, the Godfather of Real Estate. His experience as both an investor and a broker spans decades … and he knows how valuable relationships between professionals are to successful deals.
You’ll hear from:
- Your play-maker host, Robert Helms
- His playful co-host, Russell Gray
- Bob Helms, the Godfather of Real Estate
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This is a relationship business
One of the most critical relationships you have as an investor is with your real estate professional.
Whether you’re working with an agent or a broker … and we’ll use the terms interchangeably … the partnership you have with the individual legally representing you in a deal is vital to your success.
We call Bob Helms the Godfather of Real Estate … and for good reason. Bob has spent decades actively brokering properties, teaching and managing agents, and investing in deals himself.
“This is a relationship business,” Bob says. And it’s absolutely true.
Your agent isn’t your enemy. The very best deals we’ve ever been involved in have been with real estate professionals who know their stuff.
When it comes to real estate brokerage, it’s about cooperation … not competition.
“It’s urgently important that you not practice business by trying to take advantage of the person on the other side of the transaction,” Bob says.
Both sides have to win
So many investors think they have to squeeze every last dime that they can out of a deal in order to call it a win. They think they have to get the upper hand to be the winner … which means the buyer or seller is the loser.
The best transactions are when a deal closes and everyone in the room gives each other a high five.
Those are the deals you want to do again. And real estate investment is a long-term game.
Unlike the typical homeowner … who moves every four to seven years to a different marketplace … investors do multiple transactions over time in the same market. And you do more business more often.
There’s a good chance you will do additional deals with these same people, so your attitude is important, Bob says.
If you’re the guy who is trying to exploit the other guy, no one will want to work with you again.
Remember, it’s about relationships. There IS a better way!
Working well with your agent
How do you work with an agent or broker to get the best deals at the right prices?
The first thing to keep in mind is loyalty.
You might think it’s a good idea to have several agents working for you in a single marketplace. But more often than not, this competition doesn’t work in your favor.
If an agent knows you have other agents working for you too, they are less likely to invest time in finding you the best deals.
On the other hand, if an agent knows you are invested in a long-term relationship with them, they’ll work hard to impress you and keep you around.
Exhibit loyalty to your agent, and they’ll be loyal to you.
Find the best agent you can, and set up a meeting. If they are at the top of their market, they probably already have a full portfolio of clients.
Show the agent you are worth their attention. Be able to articulate why you are qualified, why you are serious about making things happen, and how you can add value to their business.
Can’t get an appointment? Try taking the agent to lunch. Everybody has to eat!
You may have to start with a “C” agent and work your way up to an “A” agent … and that’s ok.
Even if your agent of choice isn’t ready to take you on, take advantage of their experience.
“Say, ‘I want to be your best client in five years. If you were me and starting over today, what would you do? What do you wish your current clients knew?’” Bob says.
Show you’re there for the long haul, and start building a relationship.
Why agents should work with investors
The majority of real estate agents sell houses to people who want to live in them. But the investment property niche can be very profitable.
So, if you are reading this from the perspective of a real estate agent, here are four big reasons to get involved with investors …
- Do more transactions. Investors purchase properties in the same market again and again.
- Get more referrals. Investors tend to work in multiple marketplaces. They rely on a network of agents to help them. You can pass clients to other agents and have clients passed on to you. That saves you money you would have spent tracking down new buyers and sellers.
- Earn bigger commissions. Investors graduate to bigger and bigger properties over time. That means bigger and bigger commissions for agents.
- Become an investor yourself. Be your own best client. Learn from the investors you work with. Make a living selling to other people and get success by buying yourself.
Keep brokering real estate deals, but invest your money into deals of your own.
Investors love working with agents who invest too. That means the agent knows the rules of the game, and will bring investors the deals they can’t do … but would do … themselves.
Most real estate agents don’t work with investors because they don’t know how.
Bob Helms’ new book Be in the Top 1%: A Real Estate Agent’s Guide to Getting Rich in the Investment Property Niche is a great resource for getting started.
The book is aimed at agents, but investors can benefit from its lessons too … because by working together, agents and investors can form long-term relationships destined for success.
More From The Real Estate Guys™…
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- Don’t miss an episode of The Real Estate Guys™ radio show. Subscribe on iTunes or Android or YouTube!
- Stay connected with The Real Estate Guys™ on Facebook, Google+ and our Feedback page.
The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
Love the show? Tell the world! When you promote the show, you help us attract more great guests for your listening pleasure!
Seven lessons for better investing …
With less than 7 weeks remaining in 2018, we’re taking a short break from our obsessive-compulsive perusal of the financial news.
Because with an exciting New Year about to begin … full of hope, challenges, and opportunities … it’s a great time to focus on some important fundamentals.
Lesson# 1: Invest in yourself first and frequently
Think of the amount of money you put into fixing up a property in the hopes of generating a few thousand dollars of profit or cash flow.
How much MORE important are YOUR education, skills, and network over the rest of your career?
For a fraction of what you’ll spend sprucing up just a single property, you can increase your sales skills, gain more strategic clarity, expand your economic education, and grow your professional network.
Any ONE of those things can pay you back 10x or more in just a few years. Plus, investing in your education and networks sets you up for …
Lesson #2: Focus on relationships, not transactions
Sure, we understand you need to do deals … to produce profits … so you can pay the bills and keep investing. But transactions are really just a by-product of great relationships.
When you put the transaction over the relationship, you risk killing the goose that lays the golden eggs.
And remember, every person you know knows MANY more people you don’t.
So even if the person in front of you isn’t ready to do a deal today, someone they know might be.
This is where YOUR education and network come into play …
When you know things other people don’t, but need to … or when you know people other people don’t, but need to …
… YOU have something of great value to enhance a relationship or work through one contact to reach another.
Most people won’t give you a referral if they think you want to sell their referral something.
But they’ll happily connect you if they think you will HELP their referral. That’s based on trust, which is based on the relationship.
It sounds so easy … and it is. But for some reason, most people focus on the small value of the transaction and miss the HUGE value of the relationship.
Lesson #3: Emphasize mission and values
The old adage says, “People don’t care how much you know, until they know how much you care.”
It’s true. But it goes further …
People do business with people and brands they trust. And when you focus on mission and values, and filter all you say and do through them …
… over time, you’ll create a trustworthy reputation.
Of course, a good, trustworthy reputation will attract more people into your life … and that means more relationships, and ultimately, more deals.
Lesson #4: Build a business and portfolio that works for YOU … and not vice-versa
We’re old enough to remember when Michael Gerber’s now classic title, The E-Myth, was the hot new business book.
But the timeless lessons are as applicable today as ever.
Too many people … employees, entrepreneurs, and investors … do the “two-step.”
They set out to do whatever they can find to make money based on the belief that if they can just make enough money, THEN they can go do what they REALLY want.
The problem is when you don’t love what you do, either you let off the gas and never really succeed …
… or worse, you lose yourself in service to a business, portfolio and lifestyle you don’t really enjoy.
And then you just hold your breath until the day you can sell it or retire on your investments.
Better to ask yourself EARLY what’s really important to you … how you want to live … what you love to do … and then build a business and/or portfolio around THAT.
It’s a harder problem to solve, but you’ll LOVE the answer when you find it.
Lesson #5: Develop and maintain a clear vision
We all run around with pictures in our mind. How we see the world … how we see ourselves … what we’re working to accomplish.
The challenge for many is the picture is fuzzy.
It’s like driving in the fog. You have a sense of direction … but aren’t exactly sure how to get there.
You’re feeling your way … scared to go too fast and miss a turn or fall into a ditch.
Yet some people are taking bold action and moving aggressively through life.
What’s the difference?
Clarity.
Bold action takers can “see” exactly where they’re going, what they’re building, and WHY … and that vision inspires and emboldens them to move towards the goals with enthusiasm and confidence.
We say, “When you have clarity of vision, strategy and tactics become evident.”
So when you’re not sure what to do, focus on your vision. Just seeing the end from the beginning is often enough to tell you what to do next.
Lesson #6: Always see the downside
Really? Doesn’t focusing on the negative create paralysis?
Only for amateurs. Pros are more afraid of what they DON’T see than what they do … because you can’t avoid or manage risks you aren’t aware of.
Billionaire real estate investor Sam Zell says everyone sees the upside. That’s what they look for and what motivates them to go for it.
But Zell says his success comes from being able to see the DOWNSIDE too … and then making plans to mitigate it … even if it means walking away.
Pessimists ONLY see the downside and can’t act. Optimists only see the upside and hope for the best.
We’re pretty sure hope is not an investment strategy. Be a realist and get good at seeing and managing risk.
Lesson #7: Always pay attention to cash and cash flow
Profit and net worth are important. Cash and cash flow are essential.
A business mentor of ours once taught us that cash is like oxygen, while revenue is like water, and profit is like food.
You can survive for a long time without profit … if you have revenue and cash.
You can survive for a little while without revenue … if you have cash.
But run out of cash … and you’ll be dead very soon.
Pre-politician Donald Trump once told us it’s always good to have cash in the downtimes. We say, “Cash Flow controls and Cash Reserves preserve.”
So have some liquidity at all times. Write off the lost opportunity cost on the cash as an insurance premium.
And do NOT count on credit for liquidity. We did that once … and it didn’t end well. Lenders tend to cut off credit when you need it the most.
Bonus Lesson: Use firewalls to avoid portfolio contagion
Let’s face it. Some investments are more risky than others.
But if you don’t have firewalls, then just ONE risky investment can implode your entire portfolio.
You might have a solidly built, cash-flowing portfolio of properties, and a high net worth with good liquidity, and hedges against inflation and deflation.
But just ONE lawsuit, or personal loan guarantee on just ONE risky deal, or pulling money out of performing property or business to feed a loser …
… and EVERYTHING goes … UNLESS you use legal structures, mental discipline, and emotional control to isolate risk.
It’s a bigger topic than we have time for here, but we address it in ourIntroduction to Strategic Real Asset Investing webinar.
You can get the webinar as a free bonus when you order the Future of Money and Wealth video series … which is a great primer on several risks ALL investors should be paying attention to right now.
Until next time … good investing!
More From The Real Estate Guys™…
- Sign up for The Real Estate Guys™ Free Newsletter
- Check out all the great free info in our Special Reports library.
- Don’t miss an episode of The Real Estate Guys™ radio show. Subscribe on iTunes or Android or YouTube!
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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
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