Profits, jobs, and opportunity …

In spite of rising rates and concerns about bubbles … real estate is looking pretty good right now.  At least the right real estate in the right markets.

Of course, “real estate” can mean a lot of different things.  In this case, we’re talking about good ol’ fashioned single-family residences.   Houses.

Yes, we know mortgage rates are rising.  But that just means it’s harder for renters to buy a home … which keeps them renting … from YOU.

And if you proceed with caution, there are some reasons to pursue single-family homes even though prices have recovered substantially from the 2008 lows.

Consider this Yahoo Finance headline:

Small business earnings hit all-time high, NFIB declares

“Small business earnings rose to the highest levels in at least 45 years last month, according to the results of a survey from the National Federation of Independent Businesses (NFIB) …” 

“ …  the 17th consecutive month of ‘historically high readings.’”

That’s good news for small business owners … and for the U.S. economy.  It’s commonly believed that small business drives a majority of job creation.

So perhaps this CNBC headline isn’t a big surprise …

Job openings hit record high of 6.6 million

Of course, job creation is good for landlords.  It’s a lot easier for tenants to pay rent when they actually have jobs.

But there’s the issue of wages.  Even though the unemployment rate fell below 4% … which is considered “tight” … wages still haven’t risen substantially … yet.

Meanwhile, life is getting more expensive as rising interest ratesgas prices and healthcare premiums are among several factors squeezing household budgets.

While jobs are good, it’s hard to save up for a down payment when living costs are going up faster than paychecks … which keeps people renting.

And if all that isn’t a big enough challenge, there’s the problem of high housing prices.  Obviously, higher prices also make it harder for renters to become homeowners.

So all that’s not horrible news for landlords … especially those who are investing in more affordable markets and property types.

But there are two more parts to the story …

First has to do with a deeper dive into the jobs market.  The April jobs report didn’t seem great at first blush.

But in the past, the reports looked great at first, then you’d drill down and discover the jobs created were low-wage service industry jobs.

Notably, recent jobs reports reflect a subtle but important shift in the composition of jobs.

So while the quantity of jobs created might be not bad … the quality is actually looking pretty good.

According to this Wall Street Journal article, manufacturing added 24,000 workers in April … after adding 22,000 and 31,000 in the last two months.

“While manufacturing employment has been generally declining for decades, hiring picked up in the sector over the past year.” 

Way back our 2011 blog, What Washington Could Learn from Real Estate Investors, we argued that not all jobs are equal. We like what’s happening.

Seems to us if the American economy can keep this up, it’s a tailwind for housing … in spite of rising rates, inflation, and high debt levels.

And speaking of wind …

As we discussed at length during Future of Money and Wealth, the entire financial system is based on debt.  So to grow the economy, debt MUST grow.

The why and how of all that is too big a topic for today’s discussion, but if you take it at face value, it really explains a lot.  It also has some big ramifications for real estate.

After 2008, lenders ran away from real estate … but debt still needed to expand.  So new debt-slaves borrowers were needed.

Student debt soared.  Sub-prime auto loans spiked.  Credit cards hit record highs. Corporations borrowed heavily to bid up their own stock.

But today, students are reconsidering the value of a financed college education.  Auto sales are slowing.  Credit card losses are mounting.

Corporations are slowing down their borrowing … with nearly 14% of the largest companies unable to pay their interest payments from earnings.

In fact, a recent Bloomberg article quotes Gregg Lippman of “Big Short” fame as saying corporate debt will trigger the next financial crisis.

“ … corporate debt and equities will face the biggest pain when the next downturn comes. Investments linked to consumer debt, unlike the last crisis, will be relatively safe …”

“The consumer is in much better shape than corporates. Consumers are less levered than they were pre-crisis. Corporates are more levered than they were pre-crisis …”

So let’s wrap this all up and put a bow on it …

If it’s true debt MUST expand, lenders will be looking for where they can make loans.  Remember, your debt is their “investment”.

There are already tremors in the debt markets.  Lenders will be looking for quality.

Similarly, there are tremors in the stock markets.  Investors and consumers will be looking for an alternative for their wealth building (remember, consumers consider their home an investment).

So we think there’s a good chance the focus will shift to real estate again.  Just like it did in the early 2000s.

Yes, we know the run-up from 2000 – 2008 ended badly.  But not for everyone.

If you buy the right markets, use sustainable financing structures, and pay attention to cash flow, there’s an argument to be made that single-family homes still have solid potential for long-term wealth building.

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.

The margin is calling …

Shhh … do you hear it?  It’s the margin calling …

“Margin” is a term we hear all the time but can be a little confusing … because it means different things depending on the context.

But margin comes up often in financial conversations because it’s an important concept … and worth taking a look at.

In stock trading, margin is debt secured by the stocks you’re buying.  It’s like the way real estate investors use mortgages to acquire property.

Typical margin leverage with stocks is fifty percent.  So you put in half and borrow the rest.  If the stock goes up, you get to keep ALL the gain … just like real estate.

BUT … if the stock goes DOWN … you get a “margin call” … which means you need to bring in cash to restore the loan-to-value ratio.  No fun.

We’re sure glad that doesn’t happen in real estate!

The term “margin” has another important meaning.  It’s the “edge” or “fringe” … things that are farthest from the center of the target.

So when you think about your personal budget, you have things at the core … food, clothing, shelter, medical care, etc.

Out at the far edges … the margin … are highly discretionary, non-essential expenditures.  These are things you can easily live without, but you enjoy when you’re flush.

These are the first things to get cut when you’re squeezed.

Households, corporations, even governments all have “core” expenses and activities … and “marginal” expenses and activities.

Again, when prosperity recedes … things at the margin fall off the target.

Our point in all this is you can learn a lot about the direction of the economy simply by watching what happens at the margin.

Make sense?

That’s why this headline caught our attention …

Rising Home Prices Push Borrowers Deeper Into Debt

– Wall Street Journal, April 10, 2018

“ … higher mortgage rates make homeownership out of reach for many,

pressuring lenders to ease credit standards.”

“ … rising debt levels are a symptom of a market in which home prices are rising sharply in relation to incomes, driven in part by ahistoric lack of supply that is forcing prices higher.”

Hmmm … some of that doesn’t make sense to us.  But before we go there, consider this headline …

Home builder confidence slides for fourth straight month

– MarketWatch, April 16, 2018

“The 69 reading is still quite strong. In the go-go days of the housing bubble, between 2004 and 2005, sentiment averaged 68. Still, the fact that confidence is declining so steadily is notable. When NAHB’s index started to fall in late 2005, it was one of the signals that foreshadowed the coming housing bust.”

“ … builders are keeping the pace of construction slow and steady. And they’re worried about their costs.

And then there’s this one …

US home building rose slightly in March, led by apartments

– Associated Press via ABC News, April 17, 2018

“… driven by a big 16 percent gain in apartment buildings. Single-family home construction slipped 3.7 percent.”

“There is a severe shortage of existing homes, which has pushed up

prices in cities around the country … That’s lifting demand for new homes.”

Again, a few things here that don’t make sense to us.  And we could probably write a book just on the excerpts from these three news articles.

But let’s see if we can unpack all this briefly …

First, rising mortgage rates and prices are causing people at the margin of prospective home-ownership to remain tenants. Not great for them, but not bad for landlords.

Usually when prices rise based on DEMAND, builders ramp UP production to profit by selling into the increased demand.

So it seems to us home-builder confidence should be growing.  But it’s not.

That makes us think the number of people who can afford to buy isn’t growing either … it’s shrinking.

That’s because when prices rise faster than incomes, the ability to borrow eventually peaks.  Falling interest rates can delay the problem by getting more mortgage for the same payment.

But now that rates are rising, it seems people at the margin are getting pushed off the back of the affordability bus.

That may also explain why apartment building is growing, but single-family home building is declining.

It may also explain why Freddie Mac is lowering lending standards.

They can’t create jobs or increase incomes, but they can make it easier to borrow in spite of rising rates … and they are.

Freddie’s making it easier for first-time home buyers to get in and push up the market from the bottom.  It’s like the air inlet in an inflatable jump house.

The concern is when lower lending standards act as the air pump trying to compensate for higher interest rates and insufficient income … how long can the debt inflation go before it tapers off … or worse?

Don’t get us wrong.  We LOVE passive equity.  It’s fun to buy a property and just watch the equity grow.

But the market giveth and the market taketh away … unless you’re smart enough to get your equity off the table with cheap long-term debt while both are still available.

As John F. Kennedy said, “The best time to repair the roof is when the sun is shining.”

The sun is shining on real estate right now.  Enjoy it. But be sure you’re preparing your portfolio for stormy weather.

It’s probably smart to have some cash on hand … to be prepared for credit markets to tighten unexpectedly … and to lock in long-term rates where you can.

It’s also wise to pay close attention to cash-flow and avoid dependence on market factors to increase rents or values.

Make sure your deals pencil TODAY … based primarily on things you can reasonably control.

Sure, you might have to walk on some marginal deals … even though they’d be “winners” as long as the tide is high and the sun is shining.

But if the tide goes out and the storm comes, then marginal boats sink.  And if they’re tethered to your best boats, they ALL sink.

Now if you just can’t resist taking a chance on a marginal deal … consider structuring it so it can’t take down the rest of your portfolio if things don’t go as planned.

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.

Home prices surge … and subprime is BACK …

We’re just two weeks removed from our incredible Future of Money and Wealth conference … an it was an EYE-OPENER.

(If you missed it, you’ll be glad to know we video-taped the ENTIRE event and it’s in postproduction right now.   Click here to pre-order at a really great price.)

Meanwhile, now that we’re getting back to our normal routine, we noticed some real estate related news that looked interesting …

Home prices surge to a near four-year high, Case-Shiller shows 
– MarketWatch, April 24, 2018

“Rather than moderating, as many economists expected, home prices are accelerating.  The 6.8 percent annual gain … was the strongest since mid-2014.”

“ … finally broke above the peak it last touched in 2006.”

Hmmm …. is that good?

It kind of feels good.  Then again …

Subprime mortgages make a comeback—with a new name and soaring demand
CNBC, April 12, 2018

“The subprime mortgage industry vanished after the Great Recession but is now being reinvented as the nonprime market.”

A rose by any other name?

“allow … borrowers to have FICO credit scores as low as 500 … can take out loans of up to $1.5 million … can also do cash-out refinances … up to $500,000. Recent credit events, like a foreclosure, bankruptcy or a history of late payments are acceptable.”

“ … will also securitize them for sale to investors.”

Uh oh.  We’re having flashbacks …

“Big banks are also getting in the game, both investing in the securities and funding the lenders …”

Like “too big to jail fail” banks?

“It’s large financial institutions. A lot of people with private capital sitting on the sidelines …” 

Okay.  Let’s take a deep breath and try to figure out what’s really happening, and how it might impact all us lowly Main Street real estate investors …

First, does this mean another grandiose sub-prime implosion that drags the global economy into yet another Greater Recession?

Not sure we’d bet on that happening again.  At least not the same way.

Peter Schiff tells us he thinks the real crash will be the dollar.  He thinks when the debt markets implode, central banks will destroy the dollar in a vain attempt to reflate asset prices and save banks.

Wow.  That’s pretty apocalyptic.  But hey, it’s Peter Schiff.

James Rickards thinks the stage has been set to replace the dollar on the world stage with the IMF’s SDR.  Not sure what that means?  Read Currency Wars and The Death of Money.

But no one we’ve talked to think it’s all going to happen in a day. It’s a process.  And if you’re paying attention, you can see it coming and take pre-emptive action.

Of course, that’s a big topic and too much to dissect in this missive.  That’s why we hosted Future of Money and Wealth … and video-taped the whole thing.

Some of what we learned is that as the dollar begins to fail, dollar denominated bonds would fall out of favor.  After all, who wants to loan “strong” dollars today and get paid back late with weaker dollars?

Foreigners buy fewer U.S. longer-dated Treasuries at auction 
– Reuters, April 23, 2018

Well, THAT’S interesting.

Less bidders on bonds usually means interest rates rise …

Mortgages, other loans get pricier as 10-year Treasury rate tops 3% 
– USA Today, April 24, 2018

Okay, that’s getting closer to home … literally.

But usually when the world isn’t buying bonds (and yields rise) … the money goes into stocks and stocks go UP.  But they went DOWN.

Hmmmm…. it seems the paper players of the world aren’t wild about bonds or stocks.

Since stock investors aren’t piling into bonds for safety, where are they going?

Could be cash … for now.  That would explain the aforementioned, “… a lot of people with private capital sitting on the sidelines.”

We can’t claim to be paper asset experts … far from it.  But it seems to us if there’s cash on the sidelines, the issue isn’t liquidity as we’ve heard some say.

And if there’s plenty of cash … and plenty of stocks and bonds to buy … then maybe the issue isn’t liquidity or inventory, but quality.

Think about Detroit real estate at it’s worst.  There was PLENTY of properties.  And they were cheap.

You could buy a whole house for $2500.

But few did.  In fact, they bull-dozed lots of properties because on one wanted them.

The problem wasn’t price or availability, it was quality … or lack thereof.  No sale.

So MAYBE paper asset investors are a little afraid of stocks and bonds right now.  Maybe they’re starting to look for more real alternatives.

That’s what happened at the turn of the century.  Stock and bond investors poured into real estate and mortgages.  From their perspective, they’re safe.

Real estate is like that loyal, sometimes boring best friend in high school.  When things are free and easy, you hang out with your party pals … but when life gets hard, it’s that old faithful best buddy you lean on.

There’s a LOT of debt in the world right now.  More than ever before.  Much of it created in the last 10 years … providing the jet fuel for some pretty powerful paper pricing runs.

Of course, some of the cheap money has also made its way into real estate.  So real estate’s been good too.

But it’s quite possible the party is coming to an end.  Rising rates and declining stock prices could be warning signs.

And yes, a slowdown will probably impact real estate PRICES … especially for homes, which get overbid in good times.

However, incomes and rents are often less affected by downturns, making income producing properties much more stable in slowdowns.

And if you’re smart enough to lock in low cost long term financing, you’ve got a real competitive edge in a rising interest rate environment.

Meanwhile, if history is any indicator, when the paper party ends … it usually means an increased interest in real assets … especially real estate.

At least for now, it seems to us the volatility caused by rising interest rates is a MUCH bigger deal to the paper crowd than for real estate investors.

BUT … even Main Street investors should be paying attention to Treasuries, interest rates, the dollar, gold, and energy.  They’ll provide early warnings for bigger concerns real estate investors should be aware of.

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.

Is this the end of easy money …

We’re just back from another incredible Investor Summit at Sea™ … and it was EPIC!

With 234 people, 2018 was our biggest ever … and many have already reserved their place for next year.  Click here to get YOUR name on the Advance Notice List.

We kicked off the 2018 Summit with a two-day land conference based on our theme, The Future of Money and Wealth.  Our speakers hit it out of the park!

Fortunately, we videotaped the whole thing.  Watch for more details … or if you already know you want it, click here to pre-order the entire two-day series.

Meanwhile, it seems the world continued to spin while we were gone.  So as much fun as it might be to keep cogitating on currency, bonds, gold, oil and interest rates …

… we decided to dig into our real estate news feed and see what’s happening with our favorite investment sector.

But a funny thing happened …

A couple of related headlines jumped out as particularly interesting after a week of contemplating the future of money and wealth.

First …

CRE Valuations Are Trending Down – NREI Online, April 6, 2018

For the uninitiated, CRE is short for Commercial Real Estate.  And when the industry talks CRE, it includes large multi-family.

But even if you’re a Mom & Pop single-family home investor, you can still learn a lot from following CRE trends.

So this first article opens with …

“… real estate investors can expect that property prices will trend downward in the near future …”

“‘Value appreciation has practically stopped …”’

“However, there are variations among sectors.  Industrial … has seen rising values … malls have seen big losses …”

“Cap rates have been inching up … for all sectors except industrial …”

After two days at Future of Money and Wealth, then another seven days at the Investor Summit at Sea™, these comments make a whole lot more sense to us.

First, interest rates are rising.  But the impact on real estate is much deeper than just mortgages getting more expensive.  If only it were that simple.

So without getting lost in the weeds, consider the impact of rising rates on the overall economy …

With record levels of consumer, corporate, and government debt … rising rates put a pinch on budgets at every level.

This means it’s harder for consumers to spend more, for businesses to sell more, and for landlords to raise rents on those consumers and businesses.

And when you realize income property values are driven by income, it’s easy to understand why stagnant rent growth means stagnant equity growth.

But this article also reminds us why we LOVE real estate … “there are variations among sectors” … so while retail (malls) are losing value, industrial is gaining.

We discussed this trend in our February 14 newsletter, so we won’t revisit it here.  The point is …. when things shift, pain and profit are NOT equally distributed throughout the economy.

So if you’re alert and proactive, you can get in front of an opportunity … or out of the way of a problem … faster than investors on cruise control.

Meanwhile, while rising cap rates can come from income rising faster than prices, most of the time it’s from prices falling.

(Again … no investor left behind … cap rate is income divided by price.  Just grab a calculator and play with numbers until you understand. It’s an essential investor skill.)

So why might cap rates be “inching up” … that is, why would buyers be offering less for the income?

Conversely, why would sellers be offering more income for less price?

(That’s two different ways of saying the same thing … go back and play with the numbers until you get it.)

One likely reason is investors aren’t willing to overpay today (bid up) expecting income to grow in the future.  The numbers need to make sense TODAY.

So cap rates are like a barometer of sentiment.  Rising cap rates are an indicator of a less bullish, more bearish outlook.

If rents rise (creating more income) and/or interest rates decline (reducing expenses), then cash flows improve.

If the rents don’t rise (stagnant income) and/or interest rates climb (expenses increase), then cash flows stagnate or decrease.

So investors are saying the think either rents won’t rise, or interest rates won’t decrease (or even increase), or both.  That is, they don’t expect market forces to improve cash flows going forward.

Make sense?

Which leads to the next headline …

Competition Intensifies for Value-Add Assets, NREI Online, April 17, 2018

“… competition is becoming increasingly stiff as the industry faces the likely end of the cycle and rent growth has moderated for core assets.”

“As yields get lower and lower … two strategies have emerged … speculative building and value-add …” 

Quoting a research director at a commercial research firm …

“‘Value-add has become quite attractive … people are less afraid to take on vacancy risk and reposition buildings.’”

So let’s break this down real quick, then you can go get a snack …

When you hear “the likely end of the cycle”, it’s code for “the party’s nearly over.”

Real estate, like the rest of the economy, has been partying on easy money since 2009.

At Future of Money and Wealth, Fannie Mae chief economist Doug Duncan reminded us we’ve been in one of the longest (and weakest) recoveries in modern history.

In other words, we’re nearing “the likely end of the cycle.”  Duncan thinks the U.S. will be in full-fledged recession in 18-24 months.

So now instead of just buying a property and riding a wave, you actually have to buy smart and do some real work to improve the income … like “take on vacancy risk and reposition buildings.” 

And if you’re like our pal, the apartment king Brad Sumrok, and you’ve already been doing value-add and achieving spectacular results … be prepared to settle for “only” solid results.

Here’s the bottom line …

Rising interest rates are moderating the economy, so it’s important to focus your growth plans on things you have more control over.

This is probably not the environment to bet big on rising rents, falling rates, and lots of passive equity growth.  You’ll need to buy smart, have a good plan, and work hard.  We call it “force the equity.”

Pick your sectors, markets, properties, and financing structures for the long haul.

And remember … real estate is a highly inefficient investment vehicle with lots of nooks and crannies for good deals to hide.

So when you’re well-connected, diligently searching, and properly prepared with a solid team and resources so you can act quickly and carefully, you improve your odds of landing profitable opportunities.

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.

The future of interest rates …

Interest rates are a big deal for real estate investors … for many reasons.

The first and most obvious reason is because interest rates are the price of the money you borrow to invest with.  Higher rates mean higher payments and less cash flow.

Of course, even when you pay cash for your properties, your tenants probably carry consumer debt … car loans, credit card, and installment debt …

Higher rates mean higher debt payments for your tenants, so less of their monthly budget is available to pay you rent or absorb rent increases.

Also, your property values, exit options, and liquidity are all affected by interest rates.

Higher rates mean buyers have less capacity to bid up comparable properties … and fewer buyers can afford to buy your property when you’re ready to sell.

For these reasons and others, most real estate investors and their mortgage advisors pay very close attention to interest rates …  especially when financing or re-financing.

But there are other very important reasons for real estate investors to care about the future of interest rates …

Interest rates are a barometer for the health of both the currency and the overall economy.

Last time we looked, most real estate investors transact and denominate wealth in currency (dollars for Americans) … and your rental properties, tenants’ incomes, and overall prosperity all exist inside of the broader economy.

So the potential for big changes to either the currency or the overall economy matter to real estate investors just like they do to paper asset investors.

In fact, based on the amount of debt most real estate investors use, interest rates are arguably even MORE important to real estate investors.

We’re just a couple of days away from our Future of Money and Wealth conference … with nearly 400 people coming … and right now we’re thinking a lot about the dollar and interest rates.

Peter Schiff is speaking.  Peter wrote Crash Proof in 2006 and released it in 2007.  Back then, he loudly warned of an impending financial crisis whose roots would be in the mortgage market.

Sadly, back then we didn’t know Peter, and we didn’t read his book.  Then 2008 happened, and we were blindsided by the financial crisis.

So now we read more … a LOT more.

We make time to listen to people like Peter Schiff, Robert Kiyosaki, and Chris Martenson.  And we work hard to share them with our audiences.

A very interesting book we just finished is Exorbitant Privilege by Barry Eichengreen.  He’s Professor of Political Science and Economics at Cal Berkeley.

Eichengreen published Exorbitant Privilege in 2011, which means he probably wrote it in 2010.

Keep this in mind as we share these prophetic excerpts from Chapter 7, “Dollar Crisis”…

“What if foreigners dump their holdings and abandon the currency [dollar]?  What, if anything, could U.S. policymakers do about it?”

“It would be nice were this kind of scenario planning undertaken by the Federal Reserve and CIA … it would have to start with what precipitated the crash and caused foreigners to abandon the dollar.”

Note:  Eichengreen probably didn’t know at the time that James Rickards, former attorney for Long Term Capital Management (the hedge fund at the center of the near financial meltdown of 1998), was participating in precisely this kind of planning, which Rickards describes in his book Currency Wars, published a year after Exorbitant Privilege.

Back to Eichengreen’s prophetic 2011 commentary …

“One trigger could be political conflict between the United States and China.  The simmering dispute over trade and exchange rates could break into the open …

“… American politicians … could impose an across-the-board tariff on imports from [China].”

WOW … Eichengreen wrote that at least 7 years before this March 22, 2018 headline from CNBC:

Trump slaps China with tariffs on up to $60 billion in imports: ‘This is the first of many’

Back to Eichengreen in 2011 …

“Beijing would not take this lying down.”

CNN Money on April 3, 2018:

China to US: We’ll match your tariffs in ‘scale’ and ‘intensity’

Eichengreen in 2011:

“Or the United States and China could come into conflict over policy toward rogue states like North Korea and Iran.”

If you’ve been following the North Korea drama, you probably know this one’s been back and forth.

Last summer, China seemed to side with North Korea.  Then they tried to take a neutral position.

But recently Kim Jong Un paid a secret visit to China.  Of course, no one really knows what that was about.

But based on recent trade policy it seems the U.S. isn’t sucking up to China for help with North Korea.  So maybe the U.S. and China disagree on North Korea?

Now STAY WITH US … because the point of all this is … according to Eichengreen …

China’s relationship with the United States and the U.S. dollar has a DIRECT impact on the future of YOUR money, interest rates, and wealth.

And if you’re like most Main Streeters, you may not completely understand the connection …

… just like we didn’t understand what Credit Default Swaps had to do with our real estate investing in 2008 … until everything suddenly imploded …

… despite reassurances from the wise and powerful man then behind the curtain of the Federal Reserve, Ben Bernanke.

And the point here isn’t Iran, or North Korea, or tariffs, or trade wars … it’s about whether China gets upset enough with the U.S. and opts for the nuclear option …

Eichengreen in 2011:

“… China [could] vent its anger and exert leverage … by … dumping [Treasuries] … would send the bond markets into a tizzy … interest rates in the United States would spike.  The dollar would crater … could cause exporters, importers, and investors to abandon the dollar permanently.”

Obviously, there’s a LOT more to this topic than we can cover today.

Our point for now is that way back in 2010-11, Eichengreen envisioned a scenario in which conflict with China could create a dollar crisis.

As you can see, today’s headlines are living out his concerns.

When you read Eichengreen, like Jim Rickards, he talks about things reaching a tipping point … where everything happens fast.

We lived that in 2008 and it was NO FUN.  But that was only because we were on the wrong end of it.  While we got slammed, others made fortunes. They were informed and prepared.  We weren’t.

So be cautious of normalcy bias and complacency when it comes to contemplating the possibility of a dollar crisis.

Better to be prepared and not have a crisis … than to have a crisis and not be prepared.

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.

It’s fun to LOVE the right real estate …

For Valentine’s Day we thought we’d muse on why the right real estate is easy to love.

Of course, the operative word is “right” … as in Mr. or Miss “Right” …

… because anyone who’s been in a bad relationship knows it’s hard to have the right relationship with the wrong person.

And the same is true with real estate.

Right now, stock investors are realizing their investment vehicle of choice is a little bi-polar.  When it’s good, it’s great.  But when it’s not … watch out below!

As we’ve already noted, we view the volatile stock market as a wonderful gift.

And while we don’t want to judge anyone else’s relationship … for us, it refreshes our love affair with the right real estate.

So let’s take a look at some clues in the news about where we might find the right real estate.

Retail vs Industrial vs Multi-Family

As is often the case, the flip-side of a problem is an opportunity.  In the case of the allegedly Amazon fueled retail apocalypse, the flip-side winner is industrial.

In fact, this NREI Online article reports on their survey of commercial real estate investors … and some interesting points are raised …

“ … the industrial sector is giving multi-family a run for its money.”

“ … whether it comes to occupancy rates, rents or even cap rates, sentiment has improved …”

“A majority [of respondents] think [the expansion cycle] will last more than a year …”

Now if you’re not a commercial property investor (yet) … there’s still useful insights here for you too.

For residential real estate investors … both single- and multi-family … it’s smart to pay attention to the flow of industrial and office investment.

After all, your residential tenants need places to work.

So when you see capital flowing into industrial and office properties, it can be a good sign for local area employment.

The survey also found …

“… a majority of respondents (64 percent) said warehouse / distribution facilities in traditional locations would be most in demand going forward.”

And quoting one of the respondents …

“E-commerce has resulted in changes to product shipment from distribution centers, as opposed to from retailers.”

These surveys are interesting because they represent fairly current viewpoints of marketplace actors.  These aren’t economists, researchers, or academics.

The respondents are the people with the checkbooks … who are deciding whether and where they’ll invest … or not.

So it’s one thing to listen to experts speculate on what decision-makers will do … and another to hear directly from market participants.

It’s just another of the MANY reasons why we attend live conferences where we can have “man in the market” conversations …

… often with people who have no marketing agenda … and are willing talk candidly about what they’re doing and why.  Those conversations are gold.

While far from scientific, it’s a great way to get a sense of a market, sector, or demographic … and affirm whether or not some pundit’s prediction has any real-world validity. 

Shift Happens

As e-commerce changes how retail businesses operate, their landlords feel the pain too.

But as the retail business shifts from walk-in to delivery service … while challenging for mall operators,  it means a big boom for distribution …

.. .and the markets, properties, and jobs that make distribution happen.

We’ve been longtime fans of distribution towns like Memphis and Dallas for this reason.

Other great things about distribution include the creation of working class jobs (great for tenants),  in relatively affordable areas (better ROI on properties).

And those jobs are impossible to offshore because the work needs to be done near the consumers.

Of course, we hope President Trump’s pledge to bring manufacturing back to the United States works out “bigly”.

So we’re watching for the revival of rust-belt markets.  If we see commercial money move in, then residential is probably not too far behind.

But until manufacturing brings the front-end jobs back to the U.S., distribution is the other end of the supply chain.

After all, when all the stuff made in China and Mexico arrives in the United States, it needs to be distributed to the local consumers.

Commercial Investing … Not Just for the Rich

If you’ve ever gone shopping for a warehouse, big apartment complex, or mobile home park, you probably noticed they’re a little pricey.

But you don’t need to feel left out.

The secret to going bigger is syndication.  It’s a way to take your real estate investing hobby and turn it into a full-time enterprise … with a lot of upside.

It’s not as complicated as it seems because you can even hire the experts and mentors you need in whatever niche you choose.

We’ve seen many mom-and-pop investors build big multi-million-dollar portfolios simply by sharing their deals with private investors.

Of course, the other side of the opportunity is to be one of those “silent partners” in a syndicated deal.

So we created the Investor Registry to help private investors find the kind of opportunities they’re interested in.

Looking for Mr. (or Miss) Good Deal

Only the older folks will have any idea what that means … but everyone who’s ever date to find a good match knows it can be a minefield.

And yet, almost everyone does it anyway.

We realize the urge to invest isn’t as compelling as … well, you know …

But the point is there’s some work to do to find the investment markets, sectors, and opportunities best for you.  No one can do it for you … and it won’t happen by itself.

But like true love … when you find it, it’s awesome and totally worth the effort.

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.

The Mortgage Meltdown and Healthcare

What do these two topics have to do with each other?  Well, certainly after the mortgage meltdown the US economy is in need of health care.  Not reform.  Just getting healthy!  But that’s not the topic of this post.  Instead the question is: What lessons from the mortgage meltdown can be applied to the health care debate?  And, as a real estate investor, why should you care?

Without going into an extensive history lesson, here’s a quick recap of the mortgage meltdown:

  1. Government decides to “help” the free market for mortgages by establishing Fannie and Freddie to buy mortgages in the secondary market.
  2. Assured of a buyer for their mortgages, mortgage originators aggressively market them.  They sell it silly.  People buy houses. Values go up and more people buy. Equity happens and life is good.
  3. Private industry sees opportunity and wants to play, but find themselves competing against the “Government Sponsored Enterprises” (GSE’s) Fannie and Freddie.  Mortgage rates are dictated by risk and the implied government guarantee of Fannie and Freddie means mortgages that “conform) (i.e., conforming loans) are cheaper than private industry.  Of course, the consumer will buy the cheaper loan.
  4. Private industry expands into “non-conforming” (i.e. Jumbo, sub-prime, etc) in order to be in the mortgage business without having to compete directly with the GSE’s.  They make money.
  5. In 1999, the Clinton Administration says, “Fannie and Freddie, you need to make it even easier for people to get home loans”, which is code for “lower your standards”.  Fannie and Freddie comply.
  6. Home ownership surges under George W. Bush.  He’s an economic genius.  Home values soar.  Private industry says, “I want some more!” and recruits foreign investors to plow money into “super safe” mortgage backed securities.  The money is directed at sub-prime, alt-a, investors, jumbo, etc.  Now equity is REALLY happening!
  7. Reality sets in.  People who shouldn’t have gotten loans do what people who shouldn’t have gotten loans do: they default.  The sub-prime crisis sets off a chain reaction of well chronicled events that set off The Great Recession.  As a result, the private mortgage business is almost wiped out.  Fannie and Freddie survive on the backs of the taxpayers (the working private sector).

Obviously, there’s a lot more to the story, but what are the lessons?  Here are two of the most important ones:

1. In a capitalistic society, the objective of enterprise is to make a profit.    It’s what motivates the brightest people to work hard and sacrifice to create solutions to society’s problems – solutions that can be sold for a profit.  Profits are what allow people to pay taxes, give to charity, invest in product development and new enterprises that create jobs and enrich society. Profits are not evil, they are essential.

2. When the government, though well intentioned (giving it the benefit of the doubt) enters into competition with private industry, with the goal of making a product or service “more affordable”  (code for reducing or eliminating those evil profits), the result is a) private industry is crushed, taking its jobs with it; or b) private industry is forced to compromise sound business practice in order to survive (like loaning money to people who can’t afford to pay it back) and eventually those unsound business practices result in failure – and the loss of jobs.

And the correlation to healthcare?

The President of the United States has gone on record as stating that one of the “benefits” of a public option is to create a health care insurance program “without a profit motive” to compete with private industry.  When you follow that thought track to its logical conclusion, does anyone see a train wreck?

When you think about how big the health care industry is, you can imagine how many private sector jobs would be lost if it were to melt down too.  And since the private sector economy is the one that pays 100% of the taxes, the smaller it gets, the larger the tax burden will be on those who remain.

Loss of private sector jobs and higher taxes have a DIRECT impact on your real estate investments. When more private sector capital is sucked into government, there is less of it available for private purposes. And what is available becomes more expensive (higher interest rates).

So even though “homes and healthcare for all” are noble and compassionate causes that everyone can support, the methodology of undermining the private sector to accomplish them is counterproductive in the long term IF one is operating in a CAPITALISTIC society.

There is no debate about whether we all want people to have homes, healthcare and abundance.  We all want that.  The debate is whether or not we are committed to capitalism.  If we are (and you should be as a real estate investor), then the solution will be found in the private sector as entrepreneurs work every day in their “enlightened self-interest” to invent, build and sell homes, health insurance, health services and whatever other products or services enhance the human experience.

Diesel engines run great on diesel fuel. Regular gas engines run great on regular gas.  But when you put diesel fuel in a regular gas engine or vice versa, it might run for a little while, but it won’t run well.  Eventually, it will break down and not work at all.

Until someone re-writes the Constitution of the United States, the US is a capitalistic society.  Let’s be careful about injecting incompatible “fuel” no matter how noble the motive.