Clues in the News – Stocks, Negative Rates, Oil, Gold and You

If you’re wondering which way the financial winds are blowing … look to the news!

From the rollercoaster ride of the stock market, to negative interest rates on mortgages, to big moves in gold and oil … it appears the winds are changing. Something is coming. 

Savvy real estate investors are reading the signs and asking, “What should I do?”

Join us as we study the mystery that is the headlines and discuss what all these things mean for investors like YOU. 

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

  • Your headliner host, Robert Helms
  • His mysterious co-host, Russell Gray 

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The dance between stocks and bonds

On today’s edition of Clues in the News, we’ll go beneath the headlines to find out how all the goings-on in the market impact real estate. 

They say that the time to repair the roof is when the sun is shining. 

Right now, markets are good. Real estate is strong. Rents are durable. Jobs are great. Gold is high … so we need to dig into the headlines. 

Even though we’re in real estate, it’s important to pay attention to other industries and markets like oil, bonds, and gold. 

When we try to understand what’s going on in the world economically, it’s like that old game Mouse Trap. Every action has a reaction. 

And there seems to be a dance between the stock market and the bond market. 

When people are feeling good, investors buy stocks … because they are feeling bullish that the asset value of the stock that they bought was going to go up. 

When they get fearful … they sell stocks and go for safety in bonds. 

Bonds are basically IOUs. The best bond you can get is from the U.S. government, which prints the world’s reserve currency … the dollar … making it impossible for them to ever default. 

But as we saw in 2008 … it is possible for your credit to seize up. 

So, you can rearrange your affairs in order to capitalize on the opportunities that will be created by whatever is going to happen to the market in the future and mitigate the risks. 

Signals from the yield curve inversion

When you hear bonds and stocks, you may be thinking that it doesn’t have much to do with real estate. 

But it does … because interest rates are the fuel that we use to drive our real estate purchases. 

You’ve probably heard recently that rates are headed down and the Federal Reserve is planning to cut rates another quarter of a point. 

We certainly look at that to see what the long-term prognosis is for owning real estate. Then we look at the short-term housing markets. 

But in between, there are all kinds of signals. 

One of the big signals that happened last week was a yield curve inversion. 

You don’t have to necessarily understand what that is at a deep level. What you do have to understand is what it means. 

In other words, if you’re driving down the road and see that oil pressure is green, you know you’re good. 

If it falls below the green, you know that if the light turns red and you don’t put oil in your car, your engine is going to blow. 

A yield curve is like that. It’s the relationship between short-term interest rates and long-term interest rates. 

When you take on a loan, the yield curve should slope up so that the lower rates are closer to you and as time progresses they go up as they forward further in time.

When the curve inverts, it goes the other way. 

All you really need to know is that the last seven recessions were preceded by a yield curve inversion. On average, the recession came 22 months later. 

Whatever happens, there is always a flow of money to and a flow of money away. You want to make sure that you’re always in the flow of where it’s coming. 

Growth in gold

Meanwhile, gold prices are reinvigorated by the yield curve. 

Gold prices pick up on fears of a global recession because those two markets, the stock market, and the liquid metals market can hit the buy or sell pretty fast. 

That’s in part because gold is a proxy for currency. Gold is at record highs in many currencies around the world, not just the dollar.

When countries are trying to compete in international trade, they have an advantage when their goods are cheaper. 

So, if they devalue their currency so that the purchasing power of their trading partners goes up, they can sell more goods. 

When people begin to lose faith in their currencies … they look for something that allows them to step out of a currency and still hold liquid wealth. 

Some people are using Bitcoin, but the vast majority of investors … especially institutions and sovereign governments … are using gold. 

Last year, central banks around the world purchased more physical gold than at any other time since 1970.

If you think about insider trading when it comes to currencies … there’s nobody more insightful than central banks. 

The effects of oil

All economic activity is derived from energy … and in modern society, that energy is primarily oil. 

So, as the cost of oil goes up … it’s actually friction in regard to economic activity. 

When you think of what happened coming out of the great recession, the economics in the United States that were producing all theat jobs leading to recovery … were ENERGY PRODUCING LOCALITIES. 

The other side of it is an economic problem … a lot of the oil that has been built upon bonds issued by oil companies are counting on higher oil prices. 

When those oil prices drop, they still have the same debt service.

There’s a lot of fragility out there … and nobody knows what could be the catalyst that’s going to ignite the debt bomb that creates the next debt implosion. 

But one of the things to pay attention to is all of the debt in the oil industry. 

We look at it for the cost of the input to the daily lives of our tenants. When gas is more expensive, it increases their cost of living. 

So, they’re going to be more resistant to rent increases … and they will be moving out of the higher priced places into the lower ones. 

And then of course, it can also point to the health of the credit markets. 

Time to pay attention

There’s a lot to be licking your chops at … so to speak … with what is happening in the world right now. 

And NOW is the time to pay attention. 

Learn more from the Clues in the News by listening in to the full episode. 


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Podcast: Clues in the News – Stocks, Negative Rates, Oil, Gold and You

From Mr. Stock Market’s Wild Ride to negative interest rates on mortgages, to the big moves in gold and oil … the news is full of clues that the financial winds are shifting.

What’s a real estate investor to do?

Listen in as we take a look at the hottest headlines and consider what they mean to Main Street investors.


More From The Real Estate Guys™…

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


Love the show?  Tell the world!  When you promote the show, you help us attract more great guests for your listening pleasure!

Tariffs, Taxes and Trade Wars – Insights for Real Estate Investors

There’s a lot of talk in the media about tariffs, taxes, and trade … what does all of that really mean for real estate investors?

As a real estate investor, you need to understand what is going on economically. What’s happening at an international level can trickle down to your local playing field.

To help you navigate the news, we brought in our good friend Peter Schiff. Peter is an author, stock broker, and financial commentator … and he has some strong ideas to share.

Learn to more successfully sail the economic sea and weather financial storms.

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

  • Your financial seafaring host, Robert Helms
  • His economically seasick co-host, Russell Gray
  • Author, stock broker, and financial commentator, Peter Schiff

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Tariffs and the big picture

If you’re the type of investor who reads the headlines … and you should be … then you’ve probably seen lots of talk about tariffs, taxes, and trade.

But most investors don’t understand what these headlines mean for their money.

What’s the deal with these three big “Ts” … What are they? How do they work? And why do they impact your business?

As a real estate investor, you’ve got to understand the economic and financial sea that you swim in.

You need a basic understanding of all things economic.

Tariffs … in particular … are a great place to start.

Before 1913, the United States didn’t have an income tax. Instead, we funded our federal government through tariffs.

A tariff is a tax on people that want to sell in our markets … and today, President Trump is using tariffs as leverage in negotiations to level the international playing field.

You may agree or disagree with these politics … but whatever your personal opinions, you still need to know what such action really means for you.

Any kind of tax or tariff affects how much things cost in our economy … and it can also affect where jobs are created … which affects where people live.

By instituting tariffs, the federal government hopes to bring more manufacturing jobs back to the United States … potentially resurrecting manufacturing ghost towns.

Real estate investors need to look out at the horizon and see the bigger picture. You want to be riding the wave … not chasing the trend.

That’s why we asked our good friend Peter Schiff to share his knowledge and experience with us.

The US-China trade relationship

Peter says a great place to start increasing your understanding of the current economy is to look at the US relationship with China.

According to Peter, China does TWO big things for the US … they supply us with real goods, and they lend us money.

We get everything from China. It’s all manufactured products that make our lives better.

People go to Walmart and buy cheap stuff … and where is it coming from? China, of course.

China is also the biggest buyer of US bonds … which means they are our lender. They are lending us money that we would otherwise not have.

While the federal government talks about losing $500 billion a year to China, Peter thinks the US is still getting the better end of the deal.

China supplies us with real goods … and in exchange the US gives them a stack of paper that is arguably worth less every day that they hang on to it.

So, if the US places tariffs on China and enters a trade war, who is worse off in the end?

Peter says the Chinese will still have all their stuff … and we’ll just have a stack of paper.

The US government hopes that by instituting tariffs, companies will make their products in the US instead. Peter says that is easier said than done.

Pulling together the infrastructure, raw goods, and man power to manufacture these products in the US could take years … and it will cost businesses more money … not to mention a major shortage of goods in the meantime.

Peter explains that switching the US back over to a more manufacturing-based economy would require tremendous changes … and most likely result in a huge depression until the new economic flow was established.

“When we were a big manufacturer in the past, we had limited government, lower taxes, fewer regulations, a lot of savings, and a skilled workforce. We don’t have that stuff now,” Peter says.

Peter does mention that the US is probably going to have to make some of these changes eventually … but proposed tariffs and trade wars would accelerate the timeline in a painful way.

And the United States doesn’t realize how painful it will be.

If tariffs make it harder for the Chinese to sell stuff to America … they’ll sell it domestically instead.

As the Americans get poorer … the Chinese would be getting richer.

Right now, the Chinese labor, and we get the fruits. Suddenly, they would get both.

And what about our intellectual property?

“They’re going to keep ripping off our intellectual property because we can’t stop it, but now they’re not going to be giving us this big subsidy by loaning us money and supplying us with goods,” Peter says.

Preparing for a drop in the dollar with gold

Another notable headline today … the Chinese and Russian governments are buying gold and putting it away.

Peter says that the Chinese and Russian governments recognize that the dollar’s day as the reserve currency are numbered.

Nobody knows when the dollar’s time will be up … but if it loses its role as the primary reserve asset for central banks, what will take its place?

Right now, what gives a currency value are the foreign reserves … we’ve got this huge pile of US dollars that gives currency value.

Before central banks used other currencies as their reserves, everybody used gold. That’s what backed up your paper.

Originally, the transition from the gold standard to the dollar standard happened because the dollar was as good as gold.

US Federal Reserve notes were obligations of the Federal Reserve to pay. So, foreign central banks held Federal Reserve notes, which were redeemable on demand in gold.

Then, in 1971 the US said it would not give other countries gold for these reserves. The value of the dollar went down … and the value of gold went up.

All the central banks kept holding the dollar as a reserve even though it wasn’t backed by gold anymore.

Peter says that the US has borrowed so much money … and printed so much money … that it is heading for a currency crisis.

“In that environment, central banks are going to have to show that their currency is backed by something,” Peter says.

Some banks are buying more of other currencies … like the euro or the yen … but if people lose confidence in the dollar, the same could go for other currencies.

“I think that central banks are thinking they better have actual money in gold, because in the future, gold could be a much more important component of their reserves,” Peter says.

And if the price of gold continues to rise, the appreciation alone is going to increase the percentage of their reserves that are in gold.

Preparing yourself for the future

So what’s an investor to do?

Peter recommends getting out of US stocks in general … and bonds are way over-priced right now.

“If you’ve been fortunate enough to have invested in US stocks and seen a big gain, you need to cash in. Take that gain before the market takes it away from you,” Peter says.

That doesn’t mean you shouldn’t own stocks … Peter says it just means to think about moving out of dollar-dominated US stocks.

Consider taking a look at foreign stocks … emerging markets and developed markets are looking really good right now.

These stocks are international and derive their revenues outside of the US. If the dollar crashes … these stocks will rise in proportion to that decline.

Peter also believes that investors should have some sort of gold in their portfolio. It’s a good way to get diversified.

There’s no sure way to know what will happen in the future. We can only do our due diligence and make an educated guess.

Remember that not every strategy works for every investor. Find what works best for you. Always talk to an expert that understands your financial needs and situation.


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The big story for 2019 will be …

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

Taxes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But it gets better …

The world is really starting to buzz about Opportunity Zones

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

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

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

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

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

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

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

Until next time … good investing!


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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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Intoxicating investments can be toxic …

It’s the time of year to get together and have a good time celebrating the holidays.  Sometimes this involves indulging in some intoxicating activities.

Those who want to enjoy themselves know their limits … and prudently rely upon a sober person to get them safely home.

Naturally, we’re talking about investing.

Just take a look at just a few of the many recent intoxicating headlines …

It’s important to remember … investing vehicles are supposed to get us to our financial destination SAFELY.

Crashes are DANGEROUS … which is why sobriety is advised.

Of course, in a room full of intoxicated partiers, a sober person can come off as a party-pooper … and NO ONE likes a party-pooper.

So let’s see if we can serve up some investing eggnog and with a dash of optimism … and no nasty hangover or risking a life-threatening crash.

First, let’s take a quick dive into the aforementioned headlines …

Housing

Home-builders are REALLY confident … presumably because they believe conditions are ripe for them to buy land, materials, and labor … turn them all into homes which they can sell at a profit.

That’s because home prices are UP … unlike those dark days in the wake of the recession when existing homes were selling below replacement cost … making it nearly impossible for home builders to build profitably.

Stocks

The U.S. stock market … and most global stock markets … have been rocketing higher.

In fact, the U.S. stock market has taken out all-time highs … over SEVENTY times in 2017 … an all-time record.

All this amid rabid share buybacks by corporations flush with cheap cash from low interest rates… and now from tax breaks which appear inevitable in the new tax bill.

Of course, when corporations take stock OFF the market (reduce supply), while demand surges as bullish investors are piling in … prices rise.  Go stocks!

And speaking of rising prices …

Bitcoin

Of course, the meteoric rise of Bitcoin is THE asset price boom story of the year … perhaps of our lifetime.  It’s gotten to where accidental Bitcoin multi-millionaires are even starting hedge-funds.

Are we jealous?  Maybe just a lot.  But we’re not sure missing the Bitcoin boom makes us stupid … any more than Bitcoin billionaires are suddenly investing geniuses.

“Stupid is as stupid does.” – Forrest Gump

Pre-2008, we knew a lot of people who thought they were real estate investing geniuses because real estate was going up fast everywhere.

They’d put $20,000 down and buy a little house, and a year later it was worth $100,000 more.  There’s NOTHING wrong with that.

BUT … it’s a mistake to think you’re an investing genius because you bought a bubble asset at the right time.

Of course, if you’re not smart enough to get out before the bubble deflates, it can take all gains … and your investing “genius” … with it.  We know.

“I may be drunk, Miss … but in the morning, I will be sober … and you will still be ugly.” – Winston Churchill

Rising asset prices are FUN.  Easy equity is intoxicating.  Who doesn’t like to see the spread between assets and liabilities grow?

But asset price parties can turn ugly fast if you’re not careful, which brings us to the point of today’s musing …

In good times and bad, always remember what REAL investing and wealth are …

… and no matter how intoxicated with bubble wealth you are, be sure you get home safely.

How?

To our way of thinking, the purpose of investing is to accumulate units of real value and the productivity of others.

Wealth is measured by how many useful items you own … like buildings, trees, crops, barrels of oil, ounces of strategic or precious metals, etc.

These are things people MUST have in order to live, work, or make things of value.

When you have more units of real value, and more people sending you a portion of their productivity, you are WEALTHY.

And when you pick items of real value which also reduce exposure to counter-party risk, your wealth is even safer.

Intoxicated investors look at their balance sheet and celebrate their net worth … perhaps even borrowing heavily to spend on consumption.

In fact, this is EXACTLY what the government and banks WANT you to do.

Sober investors look at their balance sheet as merely a tool for building their CASH FLOW statement.  Spending comes out of the productivity of the asset … not it’s equity.

This is no small differentiation … because what you do with equity defines you as an investor.

The investor who buys low, sells high, skims some spending money, then pushes the stack back in and rolls the dice again, needs to keep playing the game … or the cash flow stops.

You can be a full-time investor, but you’re still on the treadmill.

The investor who buys low, then uses equity gains to acquire streams of positive cash flow will eventually become free from the need to personally produce to eat.

Robert Kiyosaki calls this “out of the rat race” … and it’s an enviable place to be.

The world is awash in paper (balance sheet) equity right now … in stocks, real estate, and now cryptos.  None of them are bad.  Equity is awesome!

But the market giveth equity … and the market taketh equity away.

We think it’s smart to take equity off the table before Mean Mr. Market takes it first … and then use your new equity to acquire productivity … cash flow.

It’s even better when you can pair equity with cheap long-term debt, so you can own MORE units of real value (properties) and income (tenants).

Of course, the right real estate is an ideal vehicle to acquire an income producing asset with cheap long term debt.

If prices decline, the income provides a basis of value and control.  And if prices take off, your bigger collection of assets will create even more equity faster.

If you haven’t already, now’s a good time for a portfolio sobriety check.  It doesn’t mean the party’s over … but it just might make it a bit safer.

Happy holiday and 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.

Lessons from Puerto Rico for real estate investors …

“Those who do not remember the past are condemned to repeat it.”

   – George Santayana


This is one of our favorite quotes.  It’s simple yet powerful wisdom … useful for individuals, businesses, governments … and certainly for investors!

We could take this theme in a thousand different directions, but this CNBC headline caught our attention this week …

Here’s how an obscure tax change sank Puerto Rico’s economy

With tax reform in today’s financial headlines … and our memories of what happened to real estate after the 1986 tax reform …

… we think it’s a good time to consider the impact of tax policy on the economy, jobs, and real estate.

As for Puerto Rico … it’s a huge mess after Hurricane Maria.  Lots of infrastructure and real estate have been destroyed.

Of course, the financial mess in Puerto Rico was in the news long before Maria showed up.  The natural disaster just made the financial disaster a whole lot worse.

Let’s dig in and look for lessons for real estate investors …

The CNBC article points out, “Even before a devastating hurricane … the government was struggling with an economy in shambles …”

And, “That fiscal mess has its roots in the repeal of a controversial corporate tax break that helped spark an exodus from the island that sent its economy into reverse.”

Yikes.  Will people and businesses really move just because of some “tiny” tax law?

Yes.  Yes, they will.  It turns out taxes (and avoiding them) are kind of a big deal to people and businesses.

In this case, a tax break, “enacted in 1976, allowed U.S. manufacturing companies to avoid corporate income taxes on profits made in U.S. territories, including Puerto Rico. Manufacturers … flocked to the island.”

This lead to an economic and employment boom in Puerto Rico.

Of course, when politicians see money they just can’t help themselves.  The Puerto Rican politicians started spending, and borrowing to spend even more.

Meanwhile, back in the U.S., the CNBC article says …

But by the early 1990s, the provision faced growing opposition from critics who attacked the tax break as a form of corporate welfare.”

So in 1996, a ten-year phasing out of the tax break began and “plant closures and job losses followed.

Which bring us to tax policy and real estate investors …

The law had nothing to do with real estate or investors … but then again, it had EVERYTHING to do with real estate investing …

… because real estate investments are highly dependent on JOBS.

And whether you think it’s fair or not, corporations make decisions about where to do business (or not) based partially on tax policy.

In this case, tax breaks attracted corporations to set up shop and were good for jobs and real estate.  The removal of those breaks had the opposite effect.

Of course, the law in question was passed and repealed at the federal level.  It wasn’t under Puerto Rico’s control.

But Puerto Rico got the lesson.

So in 2012, Puerto Rico passed Act 20 and 22 … effectively becoming an attractive tax haven for both businesses and individuals.

We first heard about this from Summit at Sea™ faculty member Peter Schiff … who moved his asset management company and himself to Puerto Rico to save taxes.

He’s not the only one.  We have several other friends who’ve done the same thing.

Right now, the tax law still exists … though much of Puerto Rico doesn’t.

We think there’s probably a way to combine those two circumstances to create an opportunity for real estate investors.

Of course, back in the U.S., tax reform is in the air again …and corporate tax breaks are in the mix.

Will corporate tax breaks bring businesses to the U.S. and create an employment boom? If so, where?  And will the breaks be permanent or temporary?

It’s too soon to tell, but it’s something we’ll be watching closely.

Meanwhile, there’s another lesson from the Puerto Rico story …

We know a tax break brought in a tide of corporate investment, and the removal of the tax break decades later took the tide back out.

But there was a lot of opportunity in between.

Of course, to catch a wave, you need to be watching the horizon.  And when you see the wave forming, you need to paddle quickly into position.

In Puerto Rico, as in Florida, Houston, and the several Caribbean islands all decimated in varying degrees by the back to back hurricanes …

… there’s going to be a big tide of capital flowing in to repair everything.

And because of the scope of the problems, the season of rebuilding could last quite a while.

Recently, we talked with our boots-on-the-ground turnkey property provider in Orlando, and he says he sees a lot of opportunity in his market right now …

Problem properties are popping up with pricing that leaves some meat on the bone for investors.

That’s good news … not just for investors, but for the community at large … because investment capital is needed to help with the recovery process.

The same is true in Houston, Puerto Rico and other areas ravaged by the storms.

Of course, conditions in each market are different.  Orlando is in far better shape than Houston which is far better shape than Puerto Rico.

All that to say there are different levels of distress, bargains, risk and reward in each market.

Unfortunately for the average individual part-time investor, the gap between seeing opportunity and being able to take advantage can be too big to bridge.

For most U.S. citizens, their “investment” into these disaster zones will be a de facto donation through their taxes, as federal relief funds pour into each area.

Of course, many kind-hearted individuals will make modest personal donations, which is admirable.

But to get LARGE amounts of private capital into each area to help rebuild, it’s going to take an investment opportunity.

And we think private syndicators have a role to play.

Motivated real estate entrepreneurs with skills and availability have an opportunity to start a private investment fund to aggegate private capital and make profitable investments in each of these areas.

Busy qualified investors who don’t have the time or skills, but see the opportunity, can make an investment in these private funds and earn a profit while helping heal ravaged markets.

This is the kind of capitalism that makes a positive difference in the world …  people helping themselves by helping others.

Or as our good friend Gene Guarino often says, “Do well, by doing good.”

Until next time … good investing!


 More From The Real Estate Guys™…

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

Tech, stocks, and real estate riches …

Imagine you’re the proud owner of a modest 50-year old, four-bedroom, two-bath home … less than 2,000 square feet.

You put it on the market and it sells FAST … for $728,000 MORE than the asking price!!!

That’s not the sales price … just the premium OVER what you listed it for!

You might think this happened in that mythical marketplace … Fantasyland … but according this report, it just happened in Sunnyvale, California.

This average home was listed at $1,688,000 … which is RIDICULOUS in and of itself … but the actual sales price was a WHOPPING $2,470,000!!!

WOW.  Equity happened BIG TIME for that lucky owner!

But HOW?  And more importantly, what does it mean … and is there a way to get in on the action?

Let’s break it down …

First, equity is always about the right mix of supply, demand, and capacity to pay.

When there’s too little of something that lots of people can afford to pay more for … prices get bid UP.

In this case, the San Francisco Bay Area has next-to-no capacity to increase the supply of homes.

There’s an ocean, a bay, mountains, a green belt … and most of the available land has already been developed … or can’t be.Next, there’s a robust tech industry, great weather, and other attractions bringing an influx of immigrants from around the country and around the world.

Next, there’s a robust tech industry, great weather, and other attractions bringing an influx of immigrants from around the country and around the world.

So there’s lots of demand for housing relative to supply.But … $2.4 million for a run-of-the-mill house in an average neighborhood … bid up to $728,000 over asking price???

But … $2.4 million for a run-of-the-mill house in an average neighborhood … bid up to $728,000 over asking price???

That’s ALL about “capacity to pay” … and not from cheap mortgages.

No home lender is going to finance a mortgage on a home for $728,000 above asking price … no matter HOW great your credit score is.

So this huge overbid didn’t happen because some high-tech earner levered a fat paycheck into a fatter mortgage payment into an obese mortgage.

Without knowing the details of the transaction, we think it’s a safe bet this was a CASH purchase.  But that doesn’t mean cheap debt wasn’t involved.

Here’s how the Fed, tech, the stock market, and real estate all intersect …

It’s no secret the stock market has been on an epic bull run for quite some time.  It’s a bubble that just keeps inflating.

Inside the stock bubble are the FAANGs …  Facebook, Amazon, Apple, Netflix, Google … the tech sector.

These have been the horses pulling the stock market higher and higher.

Another part of the story is the long-term crazy low interest rates provided by the Fed.

Big corporations (like the FAANGS) then borrow cheap money to buy back their stocks … pushing up stock prices (and executive bonuses).

Of course, if you’re a compulsive-obsessive financial news watcher like we are, we’re not telling you anything you don’t already know … but stick with us …

Because what many people outside the tech industry aren’t aware of is a very common compensation incentive tech companies offer employees … called stock options.

Simply stated, a tech worker takes a slightly lesser salary, which aids cash flow for a start-up, while accepting options to purchase the company’s stock at a future date at a fixed price.

The employee is now motivated to work hard and stay long to drive the company to profitability … and a higher stock price.

When those options eventually vest, they’re what options traders call “in the money”.

In some cases, it’s a LOT of money.

Long-term Silicon Valley residents are accustomed to spurts of fast real estate equity caused when a booming stock market creates tech stock-option millionaires … and fuels bidding wars for scarce housing.

Of course, you don’t have to be in the tech industry or have stock options to be the beneficiary of explosive real estate equity.

You just need to be in the right market.

After all, what do you think the home next door to this $2.47 million property is now worth?

Of course, all this is intellectually interesting … but is there real world opportunity here for real estate investors?

We think so.

Way back in 2012, Forbes put out a list of top tech cities.  Among them were Seattle, Washington DC, and San Jose.

Today, with the benefit of hindsight, we know those markets have all seen substantial appreciation.

But there were other markets on the list, which didn’t have the same pop. So simply being a tech town isn’t enough.

Take a look at the list, then go back to our initial set of required conditions … low supply, high demand, strong capacity to pay.
Not all those places have a supply problem.  It’s tight supply, high demand caused by population growth, and capacity to pay … a lot … through high pay and stock options.

Here’s a 2017 list of top tech hubs for you to peruse.  You’ll see some familiar names at the top of the list.

But here’s something to think about …

Several top-of-list cities have become so expensive, tech companies are looking for new, more affordable places to move.

So cities lower on the list could be the beneficiaries of migrating and expanding companies.

Your mission (and ours) is to identify those “goldilocks” markets where the conditions are “just right” …

The market needs to be affordable today … and make sense on a cash flow basis, because if the rest doesn’t happen, we need to be able to hold the property long term and grow equity the old fashioned way.

The market needs some limitation to supply expansion, which will manifest in bidding wars, as tech wealth provides capacity to pay beyond easy mortgages.

There needs to be a solid combination of established tech companies and start-ups.

That’s where competition for talent forces small companies to offer options, which the bigger companies then need to respond to.

There are a few markets on this list that we have our eyes on … and some we’ve already developed relationships with.  So stay tuned for updates.

Meanwhile, do your own homework.  As much as we love cash flow, sometimes a big shot of equity can just brighten your whole day … and portfolio.

Until next time … good investing!


 More From The Real Estate Guys™…

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

Waiting for the next recession …

Like waves on the beach or the rising and setting of the sun … the ebb and flow of the infamous “business cycle” is something every entrepreneur and investor must navigate.

The marketplace is fluid and dynamic.  There are no lane lines or guard rails.

More importantly, there is no singular cycle because there is no singular market.  As Jim Rickards says … it’s a complex system.

At our last Investor Summit at Sea™, Fannie Mae’s chief economist Doug Duncan warned the current economic expansion is one of the longest on record.

The odds, Duncan says, are high another recession is around the corner.

And as we’ve noted before, 10 of the last 13 times the Fed embarked on a rate raising program … the result was recession.  So …

Should real estate investors wait for the next recession to add to their portfolio?

The answer is … it depends.

That’s because it’s probably not smart to apply a one-size-fits-all simple strategy to an investing question about a complex system.

And even trying to “narrow” the question down to “real estate” is still complex.

After all, “real estate” covers a lot of ground (sorry, couldn’t help it) … in terms of geographic markets, property types, teams, available financing, and specific deal terms.

Common sense says if you look at enough deals, you’ll probably find a good one … in any cycle … because every real estate deal is unique.

So macro conditions are interesting for deciding which markets to shop in, but less so for deciding whether or not you want to find a deal.

Because if you won’t even look because you’re waiting for a macro-sale, you might miss a micro-sale… and find yourself sitting out much longer than you planned.

Remember, you can’t profit on property you don’t own.

Markets get hot for a reason …

When a real estate market gets hot, it’s because buyers are bullish about the future.  Sometimes they’re wrong, but often they’re right.

Local real estate markets are driven by local factors … the local economy, local tax and business policies; local infrastructure, weather, amenities and population trends.

When LOCAL factors are positive, LOCAL real estate prices and rents rise.  Sometimes in sync.

But sometimes, prices get ahead of rents.  Cap rates (rent ratios) fall.  Investors are willing to pay more for the same income in that market … for a reason.

And in a recession, the problem can actually get worse.  In other words, it’s not unusual in hard times for quality markets to become even MORE expensive.

That’s because when clouds form … or it starts raining … money seeks shelter in quality.

So strong markets and property types often attract MORE capital in uncertain times … thereby raising the price to acquire safe haven assets.

As we discussed last time, Americans and foreigners have already shown a strong preference for U.S. real estate … housing in particular … even as stock markets are raging to record highs.

Royal flushes are rare …

When a macro-event comes and slaps down the national or global economy, sometimes great markets get caught in the downdraft.

This happened in 2008 and it created some of the best buying opportunities since the real estate bust of 1989.  For those who were in position when it happened and acted, it was awesome.

But think about that.

If you missed buying the bargains coming out of 1989 and sat out waiting for the next real estate recession, you’d have been on the sidelines for nearly two decades.

Meanwhile, lots of people made lots of money in real estate … without getting the bargain of the century on every deal.

Pigs get fed.  Hogs get slaughtered … or starve.

This variation on an old investing adage still rings true in today’s investing climate.

The idea is there’s danger in getting greedy.  It’s about being overexposed to a market top, and taking on a lot of downside risk trying to squeeze out a little more upside gain.

But it’s also true about waiting … and waiting … and waiting … for the BIG correction, so you can swoop in and gobble up distressed assets for pennies on the dollar.

Remember … you can also strike out by standing at the plate waiting for the perfect pitch.  It’s usually better to swing.

What are YOU waiting for?  

A PIG is a Passive Income Generator … like rental real estate.  It’s the kind of asset which actually attracts capital in a recession.

That’s because when asset prices are uncertain, income is reassuring.  And as prices of stocks, bonds, commodities, and currencies go up and down like a roller coaster …

… working-class people ride the merry-go-round of getting up and going to work every day to pay their rent.

And if they don’t, you can replace them with someone who will … IF you’re in a market and product type with solid supply and demand dynamics.

To be there, you may have to pay a premium for quality.  The deal still needs to make sense, but it doesn’t have to be cheap to be a bargain.

“Bargain” is a relative term … and price is only ONE component.  There’s more to value and desirability than just price.  Few people want the cheapest brain surgeon.

So long as the market, team, property, and deal make sense … meaning you’ve got staying power to ride out a recession if it comes …

… then you can sail through the business cycle riding a PIG.  It’s not sexy.  But it’s better than starving or getting slaughtered.  You can score a lot of points with base hits.

Until next time … good investing!


 More From The Real Estate Guys™…

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

Real estate wins …

Real estate investing can be lonely.  Very few financial conferences or commentators even talk about real estate … much less endorse it as a wealth building vehicle.

So real estate investors huddle together in obscure corners of the financial community … quietly making money and muttering about the trials and tribulations of tenants, toilets and 1031 tax-deferred exchanges.

But recently, mainstream financial headlines seem to be painting a rosier picture of real estate …

Several news outlets published articles referencing this Bankrate.com article and survey which says Americans prefer real estate over cash, stocks, gold and bonds …

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The article says …

“… for the third consecutive year real estate is the favorite way to invest money not needed for at least a decade …”

“… home prices have gone gangbusters recently, climbing back above their record pre-crisis levels … according to CoreLogic.”

Click Bait and Switch

But then the balance of the article is essentially dedicated to telling readers why the survey respondents are wrong for preferring real estate over stocks …

“Still, ‘it’s a rather poor investment,’ says [a] RBC Wealth Management financial advisor.  ‘It’s highly illiquid, and markets aren’t always rational.’”

“One study … found that housing only returned 1.3 percent per year after inflation from 1900 to 2011, while stocks tended to perform more than four times better.”

As you might guess, RBC Wealth Management deals in paper assets.

Their trite critiques of investment real estate reveal a lack of understanding at best … and a dishonest bias at worst.

Let’s break it down.  Because whether you’re raising private capital to invest in real estate …

… or just trying to convince your spouse or in-laws real estate is a viable alternative to stocks, bonds and mutual funds …

… it’s important to be able to rebut the financial fake news bias against real estate.

Liquidity – LOL

The flip side of liquidity is volatility.  When traders can move in and out of an asset quickly, it makes the asset price volatile.  So liquidity isn’t automatically a good thing.

The survey asked about money “not needed for at least a decade” … so liquidity isn’t what investors are looking for when they buy real estate.

Besides … to say housing is “illiquid” is inaccurate. 

“Illiquid” means “not easily converted into cash” and “of a market with few participants and a low volume of activity”. 

Sure, you can’t day trade houses … but we see that as a plus.  It keeps prices more stable.

And when you can usually sell a house at a fair market price in about two months, that’s hardly “illiquid”.   Drop the price, and you’ll sell it faster.

Market Rationality – ROFL

A paper asset promoter saying real estate “markets aren’t always rational” … are you KIDDING???  That seems a LOT like the pot calling the kettle black. 

Way back in the 90’s before the dot-com stock crash, Alan Greenspan famously accused stock market participants of “irrational exuberance”.

Of course, a few years later the stock market crashed … and scared investors flocked TO real estate in the early 2000’s.

With the stock market at nose-bleed levels today, we’re guessing that’s why people are preferring real estate over stocks again.

Only Returned 1.3 Percent – LMAO

The idea that “housing only returned 1.3 percent per year after inflation” is so off the mark it borders on absurd.

The argument is the PRICE of a home in 1900, adjusted for inflation to 2011, only grew on an annual basis of 1.3 percent …

… and that during that same period, stocks grew by “about four times that.”

This argument assumes the only financial benefit of real estate ownership is price appreciation, which is a false premise.

We won’t bore you with all the math, but you should grab a calculator and do it all so you can quickly blow-up this ridiculous idea that stocks beat real estate over the long haul.

Here it is in simple terms …

Leverage

When you put 25 percent down, you own property at 4:1 leverage.  So 1.3 percent appreciation is a 5.2 percent equity growth rate.

Right there, you’re even with “about four times that”.  But wait!  There’s more …

Cash Flow 

Also missing from the comparison of stocks versus real estate is the rental income.  

Even if you’re before tax positive cash flow is only two percent, with 4:1 leverage, your cash-on-cash rate is 8 percent. 

Amortization

A 30-year fully amortized loan at 5 percent reduces the loan balance (i.e., builds up equity) at a rate of over 2.6 percent per year.

Add 4:1 leverage, and you’re growing equity at over 13% per year.  Now you’re destroying stocks.

We’ll skip tax benefits, which make it even BETTER, and let you tally the total. Any ONE of the three beats “four times that” all by itself.  Together … it’s a wipe out.

People Aren’t Stupid

Main Street investors have common sense … and at this stage of the information age, they’re able to research and fact check quickly.

They know stock prices are being propped up by cheap money and corporate buybacks … and with the Fed raising interest rates, the party might be ending soon.

The Bankrate.com survey reinforced what our anecdotal conversations tell us … Main Street investors are nervous about the stock market. 

Their preference for cash over stocks for a ten year hold says a lot.  Main Street is looking for safety and surety.

And Main Street investors like real estate.  They understand real estate.  They TRUST real estate.

But it’s not just Americans seeking financial safety in real estate.  Foreign buyers just purchased a record amount of U.S. houses.

Real estate is where people park money for long term wealth development and preservation.

Go with the Flow …

Even though home ownership in the U.S. remains at decade lows, it’s actually a boon for real estate investors.  Less homeowners means more renters.

For flippers and syndicators, real estate is highly regarded and in demand.  Money wants to be in real estate … so there’s a big opportunity helping it get there.

And while anything can happen, it seems the appeal of real estate isn’t abating any time soon.

Until next time … good investing!


 More From The Real Estate Guys™…

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

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