Now the Fed’s up to $400 billion …

Last week the Fed pumped over $200 billion of freshly printed cash into the repo market.

Since then, the Fed’s upped the ante to $400 billion … and counting.

For those young or asleep during the 2008 financial crisis …

… back then, the Fed provided an infusion of $85 billion per month to keep the wheels on the financial system bus.

Today, they’re pumping in nearly that much PER DAY.

That’s MIND-BOGGLING.

They’re trying to keep interest rates DOWN to their target. Of course, interest rates matter to real estate investors. We typically like them low.

But this isn’t about real estate. It’s more about banks who hold debt (both mortgages and bonds) on their balance sheets.

As we explained last time, when interest rates rise, bond values fall

… and a leveraged financial system with bonds as collateral is EXTREMELY vulnerable to collapse if values drop and margin calls trigger panic selling.

The Fed seems willing to print as many dollars as necessary to stop it.

And that brings us to an important question …

If the Fed can simply conjure $400 billion out of thin air in just a week … is it really money?

This matters to everyone working and investing to make or save money.

For help, we draw on lessons learned from our good friend and multi-time Investor Summit at Sea™ faculty member, G. Edward Griffin.

Ed’s best known as the author of The Creature from Jekyll Island. If you haven’t read it yet, you probably should. It’s a controversial, but important exposé on the Fed.

In his presentation in Future of Money and Wealth, Ed does a masterful job explaining what money is … and isn’t.

In short, money is a store of energy.

Think about it …

When you work … or hire or rent to people who do … the energy expended produces value in the form of a product or service someone is willing to trade for.

When you trade product for product, it’s called barter. But it’s hard to wander around town with your cow in tow looking to trade for a pair of shoes.

So money acts as both a store of value and a medium of exchange.

The value of the energy expended to create the product is now denominated in money which the worker, business owner, or investor can trade for the fruits of other people’s labor.

This exchange of value is economic activity.

Money in motion is called currency. It’s a medium of transporting energy. Just like electricity.

When each person in the circuit receives money, they expect it has retained its (purchasing) power or value.

When it doesn’t, people stop trusting it, and the circuit breaks. Like any power outage, everything stops.

So … economic activity is based on the expenditure and flow of energy.

This is MUCH more so in the modern age … where machines are essential to the production and distribution of both goods and information.

Energy is a BIG deal.

This is something our very smart friend, Chris Martenson of Peak Prosperity, is continually reminding us of.

Here’s where all this comes together for real estate investing …

New dollars conjured out of thin air can dilute the value of all previously existing dollars.

It’s like having 100% real fruit juice flowing through a drink dispenser.

If someone pours in a bunch of water that didn’t go through the energy consuming biological process of becoming real fruit juice in a plant…

… the water is just a calorie free (i.e., no value) fluid which DILUTES the real fruit juice in the dispenser.

Monetary dilution is called inflation.

Legendary economist John Maynard Keynes describes it this way

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Inflation waters down real wealth.

Fortunately, real estate is arguably the BEST vehicle for Main Street investors to both hedge and profit from inflation.

That’s because leverage (the mortgage) let’s you magnify inflation’s effect so your cash-on-cash ROI and equity growth can outpace inflation.

Plus, with the right real estate leverage, there’s no margin call. Meanwhile, the rental income services the debt.

Even better, the income is relatively stable … rooted in the tenant’s wages and lease terms. Those aren’t day-traded, so they don’t fluctuate like paper asset prices.

Effectively, you harness the energy of the tenant’s labor to create resilient wealth for yourself. And you’re doing it in a fair exchange of value.

Of course, the rental income is only as viable as the tenant’s income.

This brings us back to energy …

Robert Kiyosaki and Ken McElroy taught us the value of investing in energy … and markets where energy is a major industry.

First, energy jobs are linked to where the energy is. You might move a factory to China, but not an oil field. This means local employment for your tenants.

Your tenants might not work directly in the energy business, but rather for those secondary and tertiary industries which support it. But the money comes from the production of energy.

Further, energy consumers are all over the world, making the flow of money into the local job market much more stable than less diverse regional businesses.

It’s the same reason we like agriculture.

While machines consume oil, people consume food. Both are sources of essential energy used to create products and provide services.

So when it comes to real estate, energy, and food … the basis of the investment is something real and essential with a permanent demand.

Though less sexy and speculative, we’re guessing the need for energy and food is more enduring than interactive exercise cycling.

Real estate, energy and agricultural products, are all real … no matter what currency you denominate them in.

And the closer you get to real value, the more resilient your wealth is if paper fails.

Right now, paper is showing signs of weakness. But like a dying star, sometimes there’s a bright burst just before implosion.

Remember, Venezuela’s stock market sky-rocketed just before the Bolivar collapsed.

Those who had real assets prospered. Those who didn’t … didn’t.

Are we saying stocks and the dollar are about to implode? Not at all. But they could. Perhaps slowly at first, and then suddenly.

If they do and you’re not prepared … it’s bad. It you’re prepared and they don’t … not so sad. If they do and you’re prepared … it could be GREAT.

Real assets, such as well-structured and located income property …

… or commodities like oil, gold, and agricultural products (and the real estate which produces them) …

… are all likely to fare better in an economic shock than paper derivatives whose primary function is as trading chip in the Wall Street casinos.

So consider what money is and isn’t … the role of energy in economic activity … and how you can build a resilient portfolio based on a foundation of real assets.

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

Until next time … good investing!


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The Fed pumps $200 billion into system in THREE days …

It’s been a busy week of alarming financial news!

Of course, events that rattle financial markets sometimes barely register to real estate investors. That’s because rents and property values aren’t directly involved in the high-frequency trading casinos of Wall Street.

So while paper traders frantically scramble to avoid losses or skim profits from currency flowing through the machinery …

real estate investors calmly cash rent checks and wonder what all the fuss is about.

However, as seasoned investors discovered in 2008 …

Wall Street’s woes sometimes spill over and become Main Street blues … primarily through the linkage between bond markets and mortgages.

So even though the Saudi oil almost-crisis garnered a lot of attention …

something BIG happened in an obscure corner of the financial system which has alert observers concerned …

Repo Market Chaos Signals Fed May Be Losing Control of Rates
Bloomberg, 9/16/19

Repo Squeeze Threatens to Spill Over Into Funding Markets
Bloomberg, 9/17/19

And no, this isn’t about people losing their cars or homes. It’s about systemically important part of the financial system.

Before you tune out, remember …

… when you see words like chaos and losing control and “spill over” in the context of interest rates and funding markets … it’s probably worth digging into.

When credit markets seize up, asset prices collapse. While this is troublesome for Main Street … it’s DEVASTATING to the financial system.

And when the financial system breaks down, it affects EVERYONE … even smug real estate investors who might think they’re immune.

So grab a snack and let’s explore what’s happening …

Wall Street operates on obscene amounts of collateralized leverage. Real estate investors use leverage too, but there’s an important distinction.

There are no margin calls on real estate. So when property values collapse temporarily for whatever reason, positive cash flow let’s you ride out the storm.

Not so in bond markets. When the value of a bond that’s pledged as collateral falls, the borrower faces a margin call.

This means the borrower needs cash FAST. This is a risk of the game they play.

But when traders are confident they have ready access to cash at predictable and reasonable prices, they stay very active in the market.

This is important because healthy markets require an abundance of assets, cash, buyers, sellers, and TRUST to keep things moving.

When any one falters, markets slow down … or STOP … credit markets can freeze, economic activity stalls, and it hits real estate investors too.

The head Wizard at the Fed says not to worry … just like they said about the sub-prime problem back in 2007.

Fool us once, shame on you. Fool us twice, shame on us.

But we’re far from expert on the repo market, so we encourage you to read up on what it is and why everyone’s talking about it.

Meanwhile, we’ll hit the high notes to get you started …

In short, the repo market is where short term borrowing happens. It’s like a pawn shop where market participants hock bonds to raise some cash.

But when repo rates spike like this …

image

 

Source: Bloomberg

… it means there’s not enough cash to go around.

Cash is like oxygen. You can live for a while without food (profit) or water (revenue) … but when you’re out of cash, it’s game over.

No wonder Wall Street freaked out …

‘This Is Crazy!’: Wall Street Scurries to Protect Itself in Repo Surge
Bloomberg, 9/17/19

Of course, we don’t really care if Wall Street takes it on the chin.

But when craziness on Wall Street has the potential to spill over to Main Street, we pay attention.

In this case, the situation is dire enough the Fed stepped in with $53 billion of emergency cash … in ONE day.

This is the first time since the 2008 financial crisis the Fed’s needed to do this.

The next day they added another $75 billion.

Then the Fed announced another rate cut … and hinted at more rate cuts … and suggested a willingness to print more money.

Then the VERY next day …yet ANOTHER $75 billion.

$53 billion here. $75 billion there. Pretty soon you’re talking serious money … in this case about $200 billion in THREE days … and quite possibly a serious problem.

So what? What does any of this mean to real estate investors?

Maybe not much. Maybe a lot. We certainly hope the Wizards behind the curtain pull the right levers the right way at the right times.

But if this is a pre-cursor to The Real Crash Peter Schiff is concerned about, things could become more complicated than “just” a 2008-like collapse of asset prices.

As we chronicle in the Real Asset Investing Report and the Future of Money and Wealth video series, the world’s faith in the Fed and dollar were shaken after 2008.

Meanwhile, negative interest rates on nearly $17 trillion in global debt is a symptom of a huge bond bubble today.

Here’s why …

Just as rental property cap rates fall when investors bid prices up … so do bond yields fall when investors bid bond prices up.

And just like when over-zealous real estate speculators bid property prices up to negative cash flow … so over-zealous bond speculators have bid bond prices up to negative yields.

Negative yields are a symptom of a speculative bubble.

These unsustainable scenarios typically end badly when there’s no greater fool left to bid the price up further.

And then, when the market goes “no bid” … prices collapse. Bad scene.

Remember, bonds are the foundation of the credit market and financial system.

This repo problem is like finding a big crack in the foundation of your favorite property.

The bigger concern is the size of the building sitting on the faulty foundation … and how much it might take to patch the crack.

So here’s the inspection report …

Global debt is around $250 TRILLION. These are bonds … many of which are pledged as collateral for loans … creating an almost incomprehensible amount of derivatives.

Worse, many of those pledged bonds are subject to margin calls.

This is a HIGHLY unstable situation and operates largely on trust.

Think about what happens if bond prices fall …

Borrowers who pledged bonds are upside down and need to raise cash fast.

When they get to the market, they find there aren’t enough dollars to go around. Cash starved sellers start discounting to attract buyers … causing rates to rise.

Again, it’s just like trying to sell an apartment building in a slow market. As you lower the price, the cap rate (yield) goes UP.

As yields rise, bond values everywhere fall … triggering more margin calls, more demands for cash, more desperate sellers … and a dismal downward death spiral.

And then it spreads …

As the demand for cash grows, anything not nailed down is offered for sale … often at a steep discount to compete for a limited supply of dollars.

This is contagion … falling prices spreading like wildfire across daisy-chained balance sheets.

Yikes. (Of course, if you have cash, it’s a shopping spree)

Enter the Fed’s printing press to save the day. But this ONLY works long-term if the market TRUSTS the Fed and their printed product.

In 2008, the world worried as the Fed took its balance sheet from $800 billion to $4.5 trillion. And that was just to paper over the now relatively small sub-prime mortgage mess.

It worked (temporarily) partly because the world didn’t have much choice. Dollars were the only game in town.

Today is much different than 2008. The world is wiser. Alternatives to the U.S. dollar and financial system exist or are being developed.

And the SIZE of the potential implosion is MUCH bigger than 2008.

Meanwhile, the Fed has already returned to lowering rates … and now is injecting substantial amounts of fresh cash into the system.

The question is … can the Fed print enough dollars to paper over a serious bond implosion … and if they do, will the world still trust the U.S. dollar?

Perhaps this is why central banks have been loading up on gold.

Coming back down to Main Street …

Whether the repo market is a canary in the coal mine signaling looming danger … or just a friendly wake up call to stay aware and prepared for something else later …

… there are some practical steps Main Street real estate investors can take to build a little more resilience into their portfolios.

First is education. The more you understand about how things work and how to recognize warning signs, the sooner you’ll see shifts so you grab opportunity and dodge problems.

It’s why we constantly encourage you to study, attend conferences, and get into meaningful conversations with experienced investors.

Next, it’s important to pay attention.

Most of what’s happening is widely publicized. But things are easy to miss when events don’t seem directly relevant to your Main Street life. They often are.

From a practical portfolio management perspective, it’s probably a great time to lock in low rate long-term financing, cash out some equity and retain a good level of liquidity.

When prices collapse, cash is king … and credit doesn’t count.

Be attentive to cash flows in current and future deals.

Invest in keeping your best tenants and team members happy. Look for ways to tighten up expenses and improve operations. Cash flow is staying power.

Focus on affordable markets and product niches supported by resilient economic, geographic, and demographic drivers.

Real estate is not a commodity or asset class. Certain markets and niches will outperform others. Be strategic.

Most of all, stay focused on the principles of sound fundamental investing. Be careful of having too much at risk on speculative plays.

As we’ve said before, an economy can be strong based on activity, but fragile based on systemic integrity.

If the system breaks down, then economic activity slows … sometimes dramatically … and if you’re only geared for sunshine, the storm can wash your wealth away quickly.

Until next time … good investing!


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


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Something weird is happening with mortgages …

Real estate investing is largely the business of using debt to acquire streams of income and build oceans of equity.

In the hands of a professional real estate investor, mortgages are like a super-charged power tool … making the job of wealth building easier, faster, and more profitable.

Of course, powerful tools in the hands of amateurs can do a lot of damage … hacking off chunks of equity or creating wounds which hemorrhage cash flow.

But in all cases, for any investor who has, or is building, a lot debt in their portfolio … it’s wise to pay close attention to the condition of credit markets.

Sometimes new tools create opportunity. Sometimes there are hints that something might be breaking down.

In a little more esoteric corner of our news feed, we noticed a potentially concerning headline …

MBS Day Ahead: Another Chance to Watch MBS Suffer
Mortgage News Daily, 8/27/19

For the uninitiated, MBS isn’t referring to the controversial crown prince from Saudi Arabia. They’re talking about Mortgage Backed Securities.

Mortgage-backed securities are the vehicle Wall Street uses to funnel investment dollars into Main Street real estate.

As you may recall, it was Wall Street stuffing toxic sub-prime mortgages into the MBS they sold to institutional investors that triggered the 2008 financial crisis.

So it’s well known that MBS suffering can lead to serious Main Street suffering, especially for aggressive users of mortgages … like real estate investors.

The notable takeaway from the article is this chart which shows mortgage rates have decoupled from 10-year Treasury yields …

image

Source: Mortgage News Daily

According to The Real Estate Guys™ secret decoder ring, this means mortgage rates aren’t falling as far as fast as those of the 10-year U.S. Treasury bond.

This is notable, because it’s generally accepted among mortgage pros that the two are inextricably linked … because it’s always been that way.

But not now. Weird.

Of course, it begs the question … WHY?

According to the article, bond “traders are citing increased supply … with an absence of buyers …”

Now you can see from the chart, this has only been going on for a couple of weeks … so perhaps it’s just a little anomaly and nothing to freak out about.

But just like some war vets have panic attacks when a backfiring engine pops like live ammo, we get a little spooked when the bid on MBS dries up.

After all, it was MBS going no bid was the nuclear bomb which ignited the 2008 credit market collapse.

No one is saying another Great Financial Crisis is imminent … although for the aware and prepared, it could be a HUGE opportunity …

… but softness in MBS demand is a dot on the curve worth noting.

Looking at some other dots …

US home price growth slows for 15th straight month
Yahoo Finance, 8/27/19

“The market for existing-home sales remained soft in June despite some boost from lower mortgage rates as consumers remain wary of high home prices …”

Remember, home prices reflect the value of the collateral for mortgages being packaged up and put into mortgage-backed securities.

When property prices are rising, lenders (the buyers of MBS) see their security go up in the form of greater “protective equity” which insulates them from loss in the case of default.

Also, equity gained from rising property values creates greater incentives for the borrower to make the payments.

Sometimes, in a rising price environment, as lenders compete to make loans, they’re willing to take on more risk at inception …

… because they believe rising property values will increase their security over time.

So whereas a lender might really want 20-25% protective equity (75-80% loan-to-value) … they might be willing to originate a loan at only 10-15% to get the loan.

Then, as prices rise and equity builds, the lender quickly ends up with the protective equity they’re looking for.

But when prices slow or reverse, you’d expect the opposite …

FHA sets limits on cash-out refinancing
The Washington Post, 8/27/19

“Beginning Sept. 1, FHA borrowers will now be limited to cash-out refinancing a maximum of 80 percent of their home value.”

We’ve also heard rumors that Fannie Mae will be limiting access to cash-out loans on multi-family properties.  Stay tuned on that one.

Is this a meltdown? Hardly. But it’s a subtle shift in the wind which bears watching.

Meanwhile, rates are GREAT. Loans are still largely readily available.

And if you’ve got lots of equity and cash flow, now could be a great time to liquefy equity using long term debt while paying careful attention to cash flow.

If there’s a chance prime properties in solid markets will be going on sale in the not-too-distant future, you’ll want to be prepared to go shopping.

Meanwhile, there are still affordable rental markets offering reliable cash flows TODAY.

Repositioning equity from high-priced markets to affordable cash flow markets or product niches can be a great way to make your balance sheet work harder … without having to wait for a recession (or worse) to provide bargains.

After all, sometimes markets don’t crash suddenly or at all. They simply recede slowly for a season before ratcheting back up.  So sitting on the sidelines waiting for “the big one” could take your entire career. Base hits win games, too. Never swinging means you’ll never get on base.

Meanwhile, it’s probably a good idea to pay close attention to credit markets on the macro level and cash flow on the micro level.

Until next time … good investing!


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


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Goldman Sachs says it’s time for cash flow …

If you follow the financial news, you’ve probably noticed some talk about “the everything bubble”. Basically, it’s rising asset value prices for … everything.

We know that sounds great. At least as long as YOU own the assets BEFORE they inflate. When you do, equity happens to you and it’s awesome.

But until you sell, it’s only paper wealth. To get usable cash, you must relinquish the asset.

If you’re playing the buy low / sell high game … a bubble is a great time to sell.

Of course, selling means you pay taxes and fees.

Worse, you’ll need to buy low and sell high all over again … or eventually you and inflation will consume all your wealth. That’s not sustainable.

And if you’re trying to buy into a bubble, it gets dangerous. It’s easy to get fooled into chasing the market.

So how do you know the difference between a good buy and good-bye?

Two words … cash flow.

Wait! Before you ASSUME you know where we’re headed and wander back to the tyranny of all your urgent busyness …

there’s a BIG opportunity on the backside of this friendly public service announcement about the safety and stability of cash-flowing real estate.

Consider this headline, which appeared on the front page of two major news aggregators …

High-Dividend Stocks on Historic Discount as Yields Plunge, says Goldman Investopedia, 8/20/19

Goldman Sachs says some dividend paying stocks are super-cheap right now … even in the midst of an “everything bubble.”

What does that tell you about how paper investors have been thinking about income up to this point?

Seems like they’d rather buy unicorns like Uber or WeWork on hype … over proven companies with real earnings. Buy and hope a greater fool comes along to cash you out.

It’s been working.

But Goldman’s comments imply Wall Street is realizing the winds are changing. And in bubbles, when it’s time to sell, it’s a stampede.

So where’s the opportunity for real estate investors?

Goldman sees opportunity in yields between 4.3 and 6.8 percent … with the potential for equity growth.

Remember, Goldman is talking to stock investors who’ve been whip-sawed on the share price roller-coaster. They’ve been holding on for dear life.

But fleeing stocks for the “safety” of bonds has been a problem because bonds are bubbly too. That’s why rates are so low.

As of this writing, the 10-year Treasury is only yielding about 1.6 percent.

That means someone retiring with $1 million invested for income is trying to live off $16,000 a year. A year ago, it was twice that … which still wasn’t great.

Someone can be a millionaire yet have income below the poverty line.

Are they rich? Or are they poor?

Unless you think eating the seed corn is sustainable farming, they’re poor.

This is the problem facing thousands of people transitioning into retirement every day.

You may be thinking, “I could create over $100,000 a year of passive income with $1 million of equity in real estate.”

Yes, YOU could. But Goldman and their clients aren’t real estate investors.

So Goldman says it’s time to look for real income through dividends instead of share price hype.

They point out that dividend stocks are offering a much higher yield than bonds … plus some price appreciation potential.

Sound familiar?

That’s exactly what income producing real estate does.

Of course, real estate also provides arguably the best tax breaks of any investment, which dramatically improves after-tax yield.

Plus, real estate allows generous and affordable leverage, which can drive long term total returns to well over 20 percent annually … even based on conservative assumptions.

But there’s even more to the story …

The Wall Street casinos are fun when there’s a lot of air being pumped into the jump house. Asset prices inflate. Balance sheet wealth increases.

People FEEL richer. And on paper, they are.

But the jump house machinery is complicated. Sometimes it malfunctions.

And when asset price investors get spooked, they seek shelter in good old-fashioned income. For stock investors, that’s dividends.

The point is REAL wealth is INCOME, whether it’s dividend yield on stocks, or positive cash flow from rental properties.

We discuss this in detail in The Case for Real Estate Investing … and it’s an important concept to understand if you’re going to put together a resilient portfolio.

The fact that income producing stocks are relatively cheap at a time when unicorn companies are successfully going public while losing money …

… shows asset price investing can be intoxicating.

Goldman’s recommendation indicates investors may be sobering up as the punch bowl runs dry.

We think stock investors are likely to be interested in sound real estate deals.

And when Wall Street’s primary answer to asset price volatility is to simply hold on, they actually strengthen the case for real estate.

After all, if you’re going to buy and hold, the relative illiquidity of real estate isn’t much of an objection. It’s a small price to pay for stabilizing your portfolio.

And when it comes to building long-term income and equity growth higher than inflation, it really doesn’t get any better than income producing real estate.

The only real advantage Wall Street can claim is convenience. It’s pretty easy to open up a brokerage account and buy stocks.

Of course, the growing popularity of real estate private placements provides an option for busy people to partner with active real estate investors.

And when you consider the privacy and asset protection features of private placement investing, it’s probably well worth a little more work on the front end to get involved.

That’s why we think syndicating real estate is one of the best business opportunities of our time.

Millions of Main Street investors have trillions of dollars at risk in the Wall Street casinos … and they’ve been holding on for the long term.

But now, even the venerable Goldman Sachs is touting the benefits of buying equity for yield … something real estate does better than anything Wall Street offers.

But whether you decide to invest in real estate on your own, through a syndication, or as a syndicator

… headlines say the timing is right to focus on income producing assets to build long-term sustainable wealth.

Until next time … good investing!


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


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359 reasons why this is NOT the end …

Mass consumers of financial news and commentary get fed a steady diet of hope, hype, doom, and gloom.

That’s because fear and greed are the two primary investor emotions.

So anyone selling anything to investors, from media to money management, are working overtime to stoke one or both of those primary emotions.

And if you’re an A-student investor, you’re diligently looking for insight and wisdom to build and protect wealth. As you SHOULD be.

But sometimes your diligence can make you overly vulnerable to sensationalism.

The problem isn’t that reporters and pundits are pointing out problems. That’s their job.

And of course, information and perspectives are necessary inputs for making good decisions. We need them.

And it’s also not terrible that enterprising people develop products, services, and strategies to solve problems … and they’re eager to offer them to you.

We all need solutions.

The REAL challenge is avoiding becoming paralyzed by skepticism, cynicism, or information overload.

“Even if you’re on the right track, you’ll still get run over if you just sit there.”
– Will Rogers

Today, as financial conditions become more extreme and polarized, the noise levels are picking up. It’s easy to just sit down and wait for clarity.

But even normal “safe zones” for triggered investors … like cash in the bank … are suspect. The world isn’t working like it once did.

There’s a good reason an iconic multi-billionaire investor like Ray Dalio is turning to alternative vehicles for wealth preservation in today’s world.

Some might look at any of a number of significant factors as evidence that unsustainable problems mean we’re at the end of the road.

And from their vantage point, they’re 100% correct.

But in a 360 degree view, one vantage point leaves 359 others to consider.

Perhaps Helen Keller (who’s primarily famous for being deaf, dumb, and blind … though she wasn’t a pinball wizard) said it best …

“A bend in the road is not the end of the road …
unless you fail to make the turn.”

It’s a great quote which implies the value of both perspective and adaptability as key components of resilience.

Think about it …

If you put blinders on and see a path or a problem only through one perspective, when things change and the path curves, you can’t see the bend … just the end.

Both the end and the bend are true … depending on your perspective.

There are people who developed a paradigm of financial management in the era of sound money … when currency and money were one and the same.

Back then, paper dollars weren’t money. They were just claims on money … like a check or an IOU. You could redeem them for real money … silver or gold.

We address this in our Future of Money and Wealth video series.

In the era of sound money, savings was valuable and debt was dangerous. So people saved money and avoided debt.

But then the road curved …

The financial system changed. The value of the dollar became unstable with a long-term downward trend.

Inflation was no longer feared … but overtly and aggressively pursued and promoted as something good and necessary.

Debt became and remains both a hedge against inflation and a powerful tool for creating equity. Pro real estate investors make liberal use of it.

Interest paid on savings fell. So savers became losers, as our friend Robert Kiyosaki often points out.

Growing levels of private, public, and global debt was not just encouraged, but NECESSARY to prevent the implosion of the financial system.

And so, the era of perpetual exponential debt and deficits was born. That’s the world we’ve been operating in for nearly 50 years.

Today, it seems the road is about to curve again. Some call it the end of the road. We’re not so sure.

But we agree the odds of a quantum shift happening in the near future are high.

When the 2008 crisis kicked off with a mortgage industry meltdown, we were in the thick of it.

Not only did we operate a mortgage business, but we were launching an online television network for mortgage professionals.

The project was backed by a venture capitalist with no experience in the mortgage business.

When Fannie Mae collapsed, he cancelled the TV project, concluding “there’s not going to be a mortgage industry.”

From his perspective, it was the end of the road.

From our perspective, we believed people would continue to need homes and few would pay cash.

We reasoned that some way, capital would find a way to fund those loans and earn a profit. In fact, we saw big opportunity in private capital.

As for the mortgage pro TV network, we thought our opportunity actually got better … because now an industry in transition would need training, inspiration and news.

The VC saw the end of the road. We saw a bend in the road. We weren’t smarter. Just well-advised with a broader perspective.

That’s because our mortgage TV faculty included some of the smartest people in the mortgage business … so we had access to more perspectives.

So the big question every investor should ask today is whether they have blinders on …

… or if they’ve built a big enough network of smart people with diverse perspectives to help them see the bigger picture.

We know we can’t hit every note in the symphony.

It takes an orchestra full of talented people all playing their perspectives boldly to help us all hear the complexity of the composition.

That’s why free speech and passionate debate are the foundation of a functional society, boardroom, and family.

Ironically, in this internet enabled world, it’s easier than ever before to burrow into an echo-chamber of like-minded thinkers. It’s affirming and fun.

But it’s narrow. And when the curve comes (and it will) and no one in your circle sees it until you’re off the road in a ditch (or worse) …

…that’s when you discover the value of the viewpoints you may have ignored before.

That’s why we recommend you start or join an investor master-mind group … engage in book studies together and discuss current events …

attend conferences like the New Orleans Investment Conference or our Investor Summit at Sea™, where you can hear from a variety of thought-leaders and experienced investors (even in asset classes and niches you’re not involved in).

Sure, it’s not as easy as sending all your money to a Wall Street enabled “wealth manager” … who have their own blinders on. But it’s arguably safer.

Of course, if you’re reading this, you’re probably not inclined to blindly trust Wall Street anyway. But you also know the majority of people out there do.

And THAT creates a big opportunity for a real estate investor to create a syndication business to offer a new perspective to folks with an over-exposure to Wall Street.

Our point is things are changing … as they always have. And as they do, it creates both chaos and opportunity.

What it does for YOU depends on how you see it … a cliff or a curve … and how well you prepare for it.

We think as the world changes people are going to come home to real assets … and if you’re already there, then you’ll be ahead of the curve.

Until next time … good investing!


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Boom or bubble … where are we in the cycle?

A lot of folks have been asking lately … where are we at in “the cycle”?

Of course, the question presumes cycles exist (they do).

But with so many new people getting into real estate investing … including many who’ve never invested through a “correction” (geek speak for a downturn) …

… it’s amazing there’s anyone who isn’t wondering when the next one’s coming … and HOW to know.

It’s not really that complicated, unless you’re trying to get the timing down to the precise day and time.

Then again, if it were truly easy, everyone would know it and be on the right side of it.

This is where it gets tricky …

That’s because for there to be a right side, there’s got to be a wrong side.

This means if everyone knows it’s coming and acts accordingly, not only will it not not happen …

(We know … that’s a notty sentence.  Our English teachers are rolling over in their graves.  They never liked it when we were too notty.)

… but it’s actually more likely to happen because everyone knows it’s coming.

Our point is cycles are as much psychological as fundamental.

So when everyone sees it and moves in anticipation … it’s their very movement that makes it happen.  It’s a self-fulfilling prophecy.

You see it play out all the time in the paper markets.

Like a high-speed tailgater … even a flash of brake lights causes the lemmings of Wall Street to rush from one position to another …

… all trying to outrun each other to the exit of the entrance of a trade.  The rush pushed prices up or down depending on which way the crowd’s running.

Of course, as we often point out … real estate investing is boring by comparison … in a good way.  Real estate is slow, steady, and relatively stable.

That’s because real estate is not a commodity.  Real estate can’t be traded in large lots at lightning speed … because every deal is different.

And with real estate, the logistics of the transaction …

… verifying title, arranging financing and insurance, getting inspections and appraisals, and simply vacating the property …

… are all glacierly slow when measured in Wall Street nano-seconds.

Nonetheless, real estate is not immune to a rush for the exits … especially now that Wall Street players own huge blocks (pun semi-intended) of homes.

But even though real estate cycles like everything else, it’s still very slow.  It’s easy to fall asleep at the wheel. 

Of course, even if you’re alert (and we all know the world needs more alerts) … you need to know what to pay attention to.

And THIS is where newbie investors get confused.  They don’t know which gauges to watch.

Is it the stock market?  Interest rates?  Jobs?  Wages?  Taxes?  Cap rates?  Days on market?  Year-over-year price changes?  Price trends?  Occupancies?

Yikes.  It’s information overload.

No wonder people just want to ask someone they perceive as smart to flip to the back of the book and point at the answer.

Sorry to burst your bubble (calm down … it’s just a figure of speech), but the truth is no one knows for sure.

That’s partly because real estate is highly local.  And there are many niches … each with their own unique dynamics.

Still … there are some basic principles to apply to whatever product niche and market you’re investing in.

It comes down to the willingness and capacity to pay more.  And it’s important to note those are NOT the same.

Just because you want something, doesn’t mean you can afford it.

So effective upward pressure on prices comes when the supply in the market is being overwhelmed by demand from buyers fueled with the capacity to pay more.

So, the key ingredients to understanding what drives pricing are …

  • Supply, and the capacity for supply to expand
  • Demand, in terms of number of people chasing the supply …
  • Capacity to pay, which is generally a factor of incomes, interest rates, and loan availability.

(For rental properties, incomes are rents and net operating incomes. For single-family consumer housing, income means wages.)

Of course, to be precise with timing, you’ll need to dig into each of these factors for your specific geography, demographic, and product niche.

But when addressing “where we are in the cycle” (bet your thought we’d never get there) …

… you’re looking for a divergence between growth and the underlying driver.

Since housing is a hot topic for everyone … and usually the first thing that pops to mind when asking about real estate cycles …

… take a look at this chart:

Housing Price Index to Production Wage Index

Interesting Image
SOURCE: FEDERAL RESERVE ECONOMIC DATA   HTTPS://FRED.STLOUISFED.ORG   
(The data came from the Fed, but the chart was put together by  The Heritage Foundation  here )

Notice that wages and home prices are tightly correlated from 1991 to 1999.Then something apparently happened to create a divergence in 1999.  Of course, from 2000 to 2007 a “bubble” blew up and peaked.

We’ve all heard or experienced how that ended.  Not pretty for those who weren’t prepared for the possibility.

Severe deflation (the housing crash) ensued.

And as the chart shows, prices relative to incomes over-corrected … falling below the wage trend line …  so by 2011 housing was actually very affordable.

But it didn’t last long.  And you can see where we’re at in the “cycle” now.

Kind of makes you stop and go hmmmm….

Of course, there’s a lot of insight hidden in the history of events from 1999 to 2019.

And because real estate is about buying and holding for the production of income over the long haul …

… it’s probably worth a trip down memory lane to see what can be gleaned from the last 20 years and applied to the next 20 years.

We’ll take that up in our next edition.

Until next time … good investing!


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The Pink Panther strikes again …

Old dudes like us have fond memories of beer-belly laughing out loud at the hysterical antics of Peter Sellers’ Inspector Clouseau in the original Pink Panther movies.

If you’ve never seen them, check them out.  Two of the best are Return of the Pink Panther (1975) and Revenge of the Pink Panther (1978).

Clouseau is a bumbling idiot.  But through sheer dumb luck he always ends up succeeding … in unexpected ways as a result of unintended consequences.

The Senate’s recent hearings on housing reform remind us of Clouseau.

The purported goal of the Senate shindig is to gather a group of big-brained housing industry leaders and experts to find a solution to the affordable housing “crisis”. 

But … as this Forbes article opines, some perspectives aren’t part of the conversation … perhaps for a reason.

Of course, you may have a differing opinion and that’s fine.  We have our own opinion too.  But that’s not the purpose of today’s muse.

We simply watch what’s happening today and consider how best to capture opportunity or avoid loss based on where things are likely headed tomorrow.

In this case, it seems Uncle Sam is looking for ways to make housing affordable.  That’s a noble objective.  Go team.

There are really just three basic approaches.

One is to increase supply relative to demand.  When supply exceeds demand, prices to drop.  That’s how abundance and productivity create prosperity.  

After all, lower prices make things more affordable to more people, right?

That sounds reasonable.  But it also sounds a lot like deflation.

And when bankers are in the room … the kind who make home loans secured by the dollar value of the property … they FREAK at the idea of falling prices.

So you’re probably not getting sincere ideas from bankers about how to lower prices.

Then there are the builders … 

While builders LOVE the idea of building more houses, they also want to earn a profit.   Profitable building is easier when prices are higher, NOT lower.  So you can guess which direction the builders are leaning.

What about the wizards of Wall Street? 

These guys make money shuffling paper.   So they just want LOTS of paper (i.e., mortgage-backed securities) created, so they have more chips to play with in their casinos. 

And Wall Street knows falling prices frighten the lenders who make the paper possible.  So it’s a safe bet Wall Street votes with the bankers for higher prices.   

Even at the Main Street level, there’s not much motivation to push prices down in pursuit of truly affordable housing. 

Real estate agents (the largest trade association in North America) aren’t raving fans of low prices as the preferred path to affordability … despite their rhetoric.

After all, real estate agents promote buying a home as a great “investment”.  No one wants to make an “investment” that goes down.  So higher is better.

Last but not least, there’s Dick and Jane Homeowner (often registered voters) … whom are keenly aware of their castle’s current market value, even though they have no intent on selling.

Of course, it’s fine for the prices of cell phones and big screen TVs to fall, but not home sweet home.  God forbid.

Plus, its fun for Dick and Jane to use their home equity to reset credit lines with debt consolidation loans, or to augment the falling purchasing power of their incomes.

And everyone knows home equity ATMs only work when housing prices steadily RISE. 

So yes, home BUYERS want the house affordable when THEY buy it. But after that … home OWNERS want up, up, up.  Sorry, next generation.  Figure it out.

When we asked then-candidate Donald Trump for his plan for housing , he simply said … “Jobs”.  Presumably, good jobs with higher pay. 

Higher pay leads to the ability to make higher payments which leads to bigger mortgages (happy bankers, happy Wall Street) which leads to HIGHER prices.

So it’s just a wild guess … but we don’t think there’s a chance in a very hot place that there’s any serious motivation to make housing affordable.

Not if “affordable” means “less expensive”.

ALL the incentives are to make housing MORE EXPENSIVE … but ACCESSIBLE.  That means more, cheaper, and easier FINANCING. 

So even IF the PTB (Powers That Be … it only sounds like Politboro) sincerely believe more and cheaper financing makes things more “affordable” …

(Hey, it worked for college tuition … oh, wait …)

… like Inspector Clouseau, they’ll end up pushing housing prices up by “accident”.   

That’s what happens when you use debt to pull purchasing power from the future into the present.

But whatever the motives, they certainly have the tools to make it happen … 

… lower interest rates, easier lending guidelines, government (taxpayer) guarantees, tax breaks … and the Fed’s all-powerful printing press.

Yes, we know all that is what first inflated and then deflated the housing bubble last time.

But smart, disciplined investors made not only survived the implosion … they made millions from the re-inflation.

So while this may not be the time to speculate on a housing price boom in the short term …

… it’s arguably a great time to liquidate equity, streamline expenses, solidify leases, and prepare for the long game.

Because when Uncle Sam is working on making something “affordable”, it usually means that something is showing serious signs of slowing and needs a boost. 

Of course, when you find reasonable deals in relatively affordable markets and you have a GREAT boots-on-the-ground team, it’s also a great time to use cash flow real estate to stock up on cheap long-term debt.

Remember, real estate … even housing … isn’t an asset class. 

Every individual neighborhood and property is unique.  So while deals might be harder to find, they’re still out there.

And if the cash flow makes sense, you’ll weather the storm … warmed by the notion that everyone with power to influence policy will be voting for HIGHER prices year in and year out … forever. 

Of course, they might break the financial system or crash the dollar trying to do it … so it’s smart to be prepared for that too.

That’s why we like gold, oil, agriculture, and paid for properties in non-leveraged markets … including, and perhaps especially, in non-domestic markets.

Real assets like food, commodities and land tend to hold relative value when currencies struggle.

Gold and silver can almost always be easily converted into any currency … and are a useful way to store liquefied equity privately outside a fragile financial system or hostile jurisdiction.

And if the dollar continues its long-term slide relative to gold, a little gold might go a long way toward retiring dollar denominated debt (like a mortgage).

That’s where we think gold bugs and real estate bugs don’t understand each other.  We know.  We spend a lot of time with both.

Gold is great for reducing counter-party risk and hedging against a falling currency.  But gold doesn’t cash flow.

Real estate is great for using cheap long-term debt to create tax-free cash flow and long-term equity growth. But it isn’t liquid and it takes a long time to retire the debt.

But putting gold and leverage cash-flowing real estate in a falling currency environment together makes each much more powerful.

It takes time to get your mind around it … but we encourage you to dedicate a little of your financial education time and budget to learning more. 

Because once you understand how gold and real estate make each other better, you’ll probably be more excited about both.  We are. 

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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Is THIS the next crisis?

We’re just back from yet another EPIC Investor Summit at Sea™.  If you missed it, be sure to get on the advance notice list for 2020.

It’s hard to describe how transforming and powerful the Summit experience is.  So we won’t.

Instead, today’s focus is on the flip side of the Fed’s flop on interest rates … in context of the #1 thing Robert Kiyosaki told us he’s MOST concerned about.

We recently commented about the Federal Reserve’s abrupt reversal on plans to raise rates and tighten the supply of money (actually, credit … but that’s a whole other discussion).

The short of it is … there’s more air heading into the economic jump house. 

Based on the mostly green lights flashing in Wall Street casinos since then, it looks like the paper traders agree.  Let the good times roll.

Real estate investors care because the flow of money in and out of bonds is what determines interest rates.

When money piles into bonds, it drives interest rates LOWER.

Not surprisingly, as we speak … the 10-year Treasury is yielding about 2.3% … compared to nearly 3.3% less than six months ago.

While a 1% rate change may not seem like much, it’s a 43% decrease in interest expense or income (depending on whether you’re borrower or lender).

So as a borrower, your interest expense is 43% lower.  Obviously, with record government debt and deficits, Uncle Sam needs to keep rates down.

But as a lender (bond investor) you’re also earning 43% less.  And yet, lenders (bond buyers) are lining up to purchase.

That tells us they probably expect rates to fall further and are speculating on the bond price.

But whatever the reason, they’re buying, so bonds are up and yields are down.

As you may already know, lower Treasury yields mean lower mortgage rates.  So this headline was quite predictable …

Mortgage Rates are in a Free Fall with No End in SightWashington Post, 3/21/19

Falling mortgage rates are bullish for real estate values because the same paycheck or net operating income will control a bigger mortgage.

This purchasing power allows buyers to bid up prices … IF they are confident in their incomes, and IF their incomes aren’t being directed towards rising living expenses.

So lower interest rates don’t automatically mean a boom in real estate equity.  But they help.  We’ll probably have more to say about this in the future.

For now, let’s take a look at the other side of falling rates …  the impact on savers and especially pension funds.

Remember, if you’re investing for yield, your income just tanked 43% in only six months.  Unusually low interest rates creates problems for fund managers.

During the Summit, Robert Kiyosaki revealed he’s VERY concerned about the global pension problem.

Low interest rates are only one part of the problem.  A much bigger part is the demographics and faulty model underneath the pension concept.

The net result is there’s a growing disparity between pension assets and liabilities.  And it’s not a good one.

Like Social Security, both public and private pensions worldwide are on a collision course with insolvency … led by the two largest economies, the United States and China.

This problem’s been brewing for a long time.  But it’s a political hot potato and no one has a great answer.  So the can keeps getting kicked.

But we’re rapidly approaching the end of the road.  And this is what has Kiyosaki concerned.

Yet few investors are paying attention … probably because it all seems far away and unrelated to their personal portfolio.

However, the pension problem has the potential to affect everyone everywhere.

The reasons are many, but the short of it is the problem is HUGE and affects millions of people.  The pressure for politicians to do SOMETHING is equally huge.

Peter Schiff says the odds of them doing the right thing are very small.

Our big-brained pals say it probably means 2008-like mega money printing and bailouts … except even BIGGER.

So what does all this mean to Main Street real estate investors?

Keep in mind that some of the biggest pension problems are states and local municipalities.  California and Illinois come to mind.

Unlike private corporations, public pensions don’t have a federal guarantee.

But even if they did, Uncle Sam’s Pension Benefit Guaranty Corporation (PBGC) is in trouble too.

According to this government report, the PGBC will be broke in 2026

“ … the risk of insolvency rises rapidly … over … 99 percent by 2026.” – Page 268

Sure, the Fed can simply print all the money needed to save the PGBC … and Social Security … and more … but at the risk of ruining faith in the dollar.

As we detailed in the Future of Money and Wealth, China’s been systematically moving into position to offer the world an alternative to the U.S. dollar.

Will they succeed?  No one knows, but it’s yet another story we’re paying close attention to.

Meanwhile, unlike Uncle Sam, states and municipalities can’t just monetize their debts away with a little help from the Fed.

Of course, we’ll bet if the stuff hits the fan, the Fed will “courageously” attempt to paper over it … just like they did with Fannie Mae and Freddie Mac in 2008.

But many observers contend the Fed’s recent inability to “normalize” either rates or their balance sheet means they might not have the horsepower.

In other words, it may take MORE than just the full faith and credit of the United States to persuade the world the dollar is still king.

Oil and gold might be more convincing.  Perhaps this explains some of Uncle Sam’s recent foreign policy moves?

Of course, that’s conjecture FAR above our pay grade.

But until the pension problem becomes a full-blown crisis and federal policy makers attempt to ride in on their white horses …

cash-strapped states and municipalities are on their own … and likely to do desperate things in their attempts to stay solvent.

Some will adopt policies designed to attract new business and tax revenue.

But we’re guessing most will push the burden onto consumers, businesses, and property owners.  That seems to be the way politicians roll.

So when you’re picking states and cities to make long-term investments in, pay attention to the fiscal health of the local governments.

And if your tenants are counting on private pension benefits, they may not be aware of 2014 legislation allowing a reduction of those “guaranteed” benefits.

If YOU have any direct interest in private pensions, you should read this page.

You’ll discover that plan participants can vote against a reduction. But even if most who vote reject it … if not enough people vote, it can pass anyway.

For retired carpenters in Southwest Ohio, benefits drop on April 1, 2019 … along with their ability to pay you rent.

The bad news is the pension problem is a slow-motion train wreck.  It’s rolling over small groups of people a little at a time … but it’s building momentum.

The good news is it’s slow-motion right now, so  there’s time to watch, learn, and react.

But Kiyosaki says it’s a big deal that’s probably going to get a lot bigger. 

From a real estate investor’s perspective, some markets will lose, and others will gain.

Choose carefully.

Until next time … good investing!


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Main Street needs Main Street investors …

When the 2008 financial crisis hit, the mortgage industry was at the epicenter … and the disruption of funding feeding real estate crushed housing values.

But it’s important to remember, the problem was NOT real estate.

After all, people still needed and wanted places to live.  So the demand for housing remained stable.

It was credit markets that failed.  And in a credit-based economy, everything stops when credit markets seize up … including home loans.

Without a steady influx of fresh debt to fund demand, prices collapsed … taking trillions in equity with it.  And it wasn’t just real estate.  Stocks tanked too.

Mortgage and real estate is just where it started.

The double-whammy of teaser rate resets … and the resulting big monthly payment hikes which sunk a lot of homeowners …

… and then the negative equity led to a rash of defaults by even prime borrowers …

… all of which caused a credit market contagion that scorched financial markets world-wide.

Of course, this all created huge problems for Wall Street, the banks … and for Main Street.

So Uncle Sam and the Federal Reserve got heavily involved to “help” … and to no surprise … Wall Street and the banks came out on top.

The banks needed relief from realizing their losses on their financial statements, while finding a fast path to re-inflating values.

After all, property values are the collateral for all those mortgages.  And when values drop, borrowers walk … along with the prospects of loss-recovery.

So Wall Street rallied and raised many billions of dollars to buy up Main Street houses …

… even as millions of homeowners were being demoted to the rank of tenant.

So now instead of collecting mortgage payments, they collected rent.

As a real estate investor, you probably think that’s better.  Who wants to be a lender, when you can be an owner … enjoying tax breaks and building equity.

But Wall Street doesn’t think like you … and that’s our point.

Today, those Wall Street buyers are landlords.  And by some accounts, they’re not doing a very good job for the Main Street tenants.

Shocker.

Don’t get us wrong.  We’re all for investors stepping in to clean up a mess.

Investors are like the white corpuscles of the economy … bringing capital to damaged areas and healing blight and distress.

It’s one of the reasons we’re excited about Opportunity Zones.

We just hope Main Street investors and syndicators don’t get pushed aside again by the wolves of Wall Street.

The issue is there’s a BIG difference between the way Wall Street money and Main Street money behaves.  And it’s not about savvy … it’s about heart.

Big money guys (and gals, we suppose) have a way of looking at things.

Remember this classic 2012 quote from mega-multi-billionaire and legendary investor Warren Buffett …

“I’d buy up ‘a couple hundred thousand’ single-family homes if I could.” 

Of course, we all know money’s not the gating issue for Buffet.  He can buy anything he wants.  So what could his hesitancy be?

Maybe he agrees with Sam Zell, who’s been quoted as saying this in 2013 …

“An individual investor can buy 25 houses and monitor them. I don’t know how anybody can monitor thousands of houses.”

Really?  We know Main Street investors like Terry Kerr at MidSouth Homebuyers who successfully manage thousands of houses.

So it’s not impossible to manage a big portfolio well. You just need to be committed to doing it … one tenant at a time.

The folks we know who excel at single-family property management really care about their tenants as human beings … and deal with them as individuals.

They’re focused on creating cash-flow as the PRIMARY investment result … as opposed to simply a necessary evil to offset holding costs until a capital gain can be realized at sale.

Buffett and Zell are smart guys.  Buffett saw the opportunity in single-family homes … but had the good sense to know he wasn’t the right guy for the job.  Ditto for Zell.

Big money moves in broad strokes, which is fine when you’re dealing with commoditized assets and you can buy and sell in bulk.

But real estate … especially single-family homes … is not an asset class and can’t be effectively commoditized.  And neither can property management.

We think Main Street tenants are much better served by Main Street landlords … like YOU … so long as you remember the main thing is happy tenants.

Happy tenants means longer tenancy, less turnover and vacancy, and better real-world cash flows.

Of course, you don’t need to be a small-time investor to build a portfolio of single-family homes.

When you learn to syndicate, you can combine bulk money with individual property investing … and build a portfolio of hundreds or even thousands of homes.

Being big isn’t bad.  Wall Street’s problem isn’t its size.  It’s its mindset.

As the legendary Tom Hopkins says …

“Don’t use people and serve money.  Use money and serve people.” 

Because when you do, you’ll end up with both.

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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The role of housing in economic growth …

Some people think housing is a driver of economic growth.  But that doesn’t make sense to us.

Sure, a robust housing market creates a lot of jobs from construction all the way back through the supply chain.

But housing itself is a by-product of prosperity, not a creator of it.  After all, who buys a house first … and then gets a job?  It’s the other way around.

So we think housing is not a leading indicator, but a trailing indicator.

With that said, in addition to reflecting economic prosperity, housing definitely plays a role in driving economic activity.  But not in the way most people think.

So let’s take a look …

Economic activity isn’t about asset values.  It’s about velocity … transactions … how fast money is flowing through society.  That’s why they call it currency.

But it isn’t really money that’s flowing.  It’s credit. It’s a subtle, but important difference because you can’t create money from nothing.  Only credit.

If you’re not familiar with the VERY important difference between money and credit, you should strongly consider investing in the Future of Money and Wealth video series …

… because G. Edward Griffin (author of The Creature from Jekyll Island) does an amazing job of explaining it all in an easy to understand way.

The fundamental principle to understand is that a loan is an asset to a bank.

When a bank makes a loan, they effectively create “money” from nothing by issuing credit.

Obviously, the biggest loans in most people’s lives are mortgages on houses.  So that means banks are creating LOTS of “money” by extending credit.

Meanwhile, governments issue bonds, which are simply humungous, glorified IOUs … like a mortgage.  Except the collateral isn’t a house … it’s the citizens’ earnings.

And when the mother of all banks, the Federal Reserve, buys government bonds, they are effectively creating “money” by issuing credit.

Now when all this “money” gets into the financial system it pushes asset prices up.  But not evenly.  And no one know for sure where it will all end up.

If lots of the new “money” goes into bonds, bond prices go UP and interest rates go DOWN.  There was a LOT of that going on over the last decade.

Similarly, if it goes into stocks, then stock prices go up.  There was a lot of that over the last decade also.

One big driver of rising stock prices has been corporations pigging out on cheap debt and then using the proceeds to buy back their own stock.

But remember, this isn’t economic activity … it’s just inflation of asset prices.  So it’s a mistake to think a rising stock prices means a booming economy.

In fact, “stagflation” occurs when prices go up, but economic activity is slow.

And just last week, former Fed chair Alan Greenspan said he sees stagflation coming to an economy near you.

At the same time, fellow former chair Janet Yellen is warning of excessive corporate debt.  We were just talking about that in our last commentary.

Funny.  Neither Greenspan or Yellen has said anything about the Fed going insolvent.  Pay no attention to that man behind the curtain.

Meanwhile, Fannie Mae’s economics team recently announced their prediction of slowing economic activity in 2019.

And just so you don’t think they’re merely jumping on the bandwagon, Fannie Mae Chief Economist Doug Duncan predicted this in his Future of Money and Wealth presentation on our last Investor Summit at Sea™.

All this to say, there are some notable experts saying the economy could be in for some headwinds in 2019.

So back to housing and its role in goosing economic activity …

Anyone paying attention knows housing prices have bounced back nicely from their 2008 debacle.

And almost everyone who bought early in this last run-up has built up gobs of equity.  Good job.

Unsurprisingly, consumer confidencecash-out refinances, and consumer spending all surged in 2018 … as households became equity rich … and then tapped that equity to SPEND.

In other words, credit flowed through housing to consumer spending which drove a lot of economic activity.

So it’s not housing construction that’s a leading indicator … it’s rising prices and equity.

But as housing price appreciation slows … it’s no surprise consumer confidence is dipping too.

Remember, consumers are usually the last ones to realize what’s coming.

So again, it’s the flow of credit into home prices and equity … and then the flow of credit through home equity to consumers … and then from consumers into the economy … that be a leading indicator of what’s coming down the line.

There’s one more nuance to consider …

As we’ve been pointing out for the last few months, there are LOTS of reasons to think more money is heading into real estate.

A combination of the best tax breaksOpportunity Zones, and nervous stock investors fleeing Wall Street in record numbers to seek a safer haven in housing … all could have real estate setting up for a nice run.

But be cautious.

Because if Alan Greenspan is right about stagflation … rising prices without rising real wages and economic activity …

… then real estate PRICES could rise from big money seeking safety … while the rents you use to control the property could be under pressure.

Consider RentCafe’s recent year end report, which found the most popular things renters searched for in 2018 were “cheap” and “studio.”

So as we’ve been suggesting for quite some time …

… it’s probably safer to focus on affordable markets and product types… using long-term fixed financing … and focusing on solid cash-flows to position your portfolio to ride out a slow-down.

We’re not saying there will be slow down.  But others are.

And it’s better to be prepared and not have a slow-down, than to have a slow-down and not be prepared.

And remember … asset prices and economic activity are NOT one and the same.

Until next time … good investing!


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