Archive for category Turn Key Real Estate
A vast number of people think that what we’ve been through during the last four years is just another episode in the economic crises history of the United States. They believe a president has the power to continue the trend or reverse it. So they put their faith in the next presidential elections. They think their favorite candidate, whether Romney or Obama, will bring about the change they wish for. So they go and vote. Then, if their candidate wins they expect miracles from their leader until yet another economic event hits them and the dream fades away. And so it goes every four years while the giant Titanic is sinking.
The reality of it all is that it matters little whether Obama or Romney becomes the president. Why? Because – contrary to what we’ve been told – since 1913 the president or congress has had no control of our monetary policy. The central bank has such powers.
During the last four years Mr. Obama has followed the policy of the Federal Reserve. His major campaign contributors during 2008 elections are listed here. If he wins, he will continue the same policy. If Mr. Romney wins he will take over the torch because the money that funded his presidential campaign accepts no opposition.
I bring this up not to be political but to demonstrate to my readers that our next president won’t have the ability to fix the economic crises. Therefore we should not rely on the government to make our lives and/or our children’s lives better. It is up to us to learn, assess, and prepare for the future by making educated decisions, while we still have the ability to do so. Let me explain.
Sound monetary policy is vital to the economic recovery. That is because it is the bad monetary policy that caused the problem, not once, not twice, but throughout history according to the Austrian School of Economics. Asset bubbles form due to artificial expansion/inflation of money supply. This is the key, this is the underlying cause. When newly created (by the Fed) money – out of thin air – finds its way in the economy it flows into assets such as real estate, commodities, or securities. The result is artificially inflated assets. This is not sustainable. If it was we would be trading houses today in the millions of dollars. It is not sustainable because in such a scenario the market forces would lead to a currency collapse. If the bad monetary policy continues we will eventually end up with a dollar not worth a continental.
Since the real estate bubble burst there was no good monetary policy. Money supply is still being expanded via bailouts and QE’s. There was no good policy before either. Such policy helped to induce the bubble. A good monetary policy means stopping the creation of new money. It means stopping the Fed’s printing pres, which in turn would cause the interest rates to go up. Corporations would go bankrupt. People and the government would be forced to live within their means. Produce a lot, spend a little, and save more. It would be painful. Even though it would be temporary it would be necessary for a healthy recovery. But again, it would be painful. It means experiencing the withdrawal symptoms after years of addiction. No politician wants to have that happen on his term. Thus, the politicians will continue to kick the can down the road.
The question is what could potentially happen as a result of the failed monetary policy? At least two problems. Currency collapse and/or astronomical rise in the interest rates. Both are conducive to loss of purchasing power for the average man. Both require a pro-active approach in lieu of the common reactionary one. I would not expect such approach from the government. So, it is up to the average Joe to take the matter of his finances in his own hands.
I titled my article “The Greatest Transfer of Wealth” because such event is ongoing now. Bad monetary policies destroy the working middle class. It happened to the Romans leading to the collapse of the empire. It happened to Weimer Republic in the early 1920’s leading to the rise of Hitler. It happened to France, China, Russia, Argentina, Mexico, and most recently to the wealthiest country in Africa, Zimbabwe. For a history on money and governments out of control read Daily Reckoning’s “Fiat Currency: Using the Past to See into the Future“.
Still not convinced? Consider your net worth during the real estate boom and before the 2009 collapse of the stock market. If your net worth is higher today you deserve to be congratulated. You are in the 5% bracket. If your net worth is lower today then you’re in the 95% bracket.
Within a few short years there’s a reasonable likelihood that the middle class will only keep its name. In real life it will be partially or fully dependent on the government. Being dependent on the government comes with strings attached. Working a 9 – 5 job will not make the average Joe independent. To get in the 5% minority bracket one must be truly visionary. He must live his life unlike the 95% majority. He must think like a contrarian and he must invest like a contrarian.
Because I spend my time helping people finance commercial property I get to be exposed to unconventional ways to increase wealth. Whether they are in real estate equities or debt, in commodities or the stock market, the driving criteria is to buy when the majority is selling and to sell when everyone else is buying. There is an incredible opportunity today to buy quality real estate at extremely low prices. Yet, the real estate market activity is supported mainly by investors. Part is domestic and part being the citizens of other countries.
But the 95% doesn’t get it. They continue to keep their retirement with their stock broker. They would rather have their hard earned money invested in the artificially inflated stock market. They are now comfortable that the Dow Jones – and their retirement account – is getting close to the levels pre-2009. Never mind the cost of living jumped up. Never mind that there are investments in hard assets today which are considered by a few (the 5% bracket) less risky than the stock market. Never mind that such assets produce a monthly stream of income better than most of the dividends paid by corporations. They won’t take the risk, or at least this is what they think. In reality the risk is in following the conventional wisdom and maintaining the status quo. American writer, Lillian Smith once said “When you stop learning, stop listening, stop looking and asking questions, always new questions, then it is time to die.” So will be the faith of the average retirement account.
My goal is to share economic news with my readers. Then, present them with possible solutions. Please note that any type of investment represents a risk. It is your responsibility to research, learn, and evaluate whether any investment presented on my site is right for you. At your request I put you in touch with the representatives of the companies I promote. You should evaluate the company, the projects, and ask questions. You should visit the property. You should also seek advise from your accountant and/or a professional you trust before investing in any of the investment opportunities offered on my site.
By Gary North
In the United States, women outlive men by at least four years. In most cases, wives are several years younger than their husbands are. Combining these two statistical facts, we reach an inevitable conclusion: today’s wives are likely to spend more than half a decade as widows.
The reality of widowhood is that a woman will become dependent on somebody other than her husband unless she is fully in control of her faculties and her finances.
A woman who wants to remain independent in widowhood should understand from the day she gets married that she must learn the basics of family finances. The better she gets at handling money, and the better she gets at making money, the more likely she will retain her independence during the inevitable years of widowhood.
The problem is, people discount the future. They assume that the future will take care of itself, and that the future will be mostly positive. The trouble is, the older we get, the less likely that our future will be positive. The clock is ticking.
It is common in the United States for women to control the household budget. Couples should work together to establish spending and savings, although I don’t think this is as common as we like to believe. These days, programs like Quicken make it relatively easy to budget and to track a family’s spending patterns. It is easier than it was 20 years ago, and surely easier than it was 30 years ago. It is common for wives to handle the Quicken accounts. The question is this: Do wives have equal input on how the money comes in, and do they have equal input on what should be done for the long-term support of both of them in their retirement years?
We think that people act in their own self-interest, but we find that people prefer to defer. They prefer to kick the can down the road. They prefer to imitate Congress. The trouble is, the decision of Congress to kick the Medicare can down the road guarantees that the vast majority of women who are alive today will spend their final years as complete dependents on their children, and that they will probably be destitute.
There really is no escape from this statistically. We know the Medicare system is going to bankrupt the government, and therefore we know that the Medicare system will be modified so as to break the promises the politicians have made regarding the last years of our lives. There is no escape from this. It is going to hit every Western industrial nation. No one who looks at the numbers expects anything else.
Nevertheless, the vast majority of wives in the United States and the West do not begin to assert co-authority over the spending patterns of their households, despite the fact that they will be alone in their final years. They refuse to make decisions today that might give them a degree of protection in their old age.
One of the reasons why I favor the purchase of investment real estate is this: in people’s old age, the houses are owned free and clear, and the rental money is gravy. A person who owns half a dozen homes free and clear is going to make enough money to have a comfortable middle-class lifestyle in retirement. I realize that not everybody can own half a dozen homes, but everybody who subscribes to this website can.
One way or the other, wives are going to have to make decisions over where the money goes. They can begin to make these decisions in joint consultation with their husbands today, or they can wait until their husbands are dead.
Twenty-five years ago, Mark Skousen’s wife JoAnn published a newsletter for women. It focused on investing. The newsletter did not gain enough subscribers to stay in business, and so she ceased writing it. It was a very good newsletter. It was quite relevant. It didn’t matter, because she couldn’t get enough women to subscribe.
About that time, I interviewed Charlotte Foehner. She was the author of a very good book called The Widow’s Handbook. Her targeted audience was women like herself. Her husband had died unexpectedly, and she knew virtually nothing about investing. She had enormous responsibilities, and these responsibilities hit in a time when she was most psychologically vulnerable. Her husband was dead, and she had to put his affairs in order. He should have done this before he died. She should have insisted that he do it before he died. He didn’t, and she didn’t.
Answers can be painful. Answers increase the level of personal responsibility. Nobody can claim ignorance if someone has answered a major question. People think that they are better off by remaining in the dark, because they assume the problems are not going to hit them, and they might as well not think about it.
This is the attitude of the vast majority of Americans today. If they had any idea of what will happen to them, statistically speaking, more of them would start asking questions. But they don’t know, and even if they did, they would not like the answers. The answers would force them to restructure their lives. Answers would force them to restructure their dreams.
The fact that women become dependent on their husbands early in their marriages, because women have to take care of the family, gets them into a mentality of dependence. It is easy to become dependent upon the husband’s decisions. This has been the traditional approach throughout most of history. But with the vast increase in the division of labor over the last century, and with the increased life expectancy of women, this tradition is now a liability for women.
A woman has got to face statistical reality. She is going to be a widow in the final decade of her life. She is going to have to make her own decisions, and if she is incapable of doing this, either mentally or financially, somebody else is going to make her decisions for her. Traditionally, this has meant her oldest son and her daughter-in-law. She may trust her oldest son, but she has to face the reality of potential vetoes by her daughter-in-law.
A woman who is determined not to be dependent upon the judgment of her daughter-in-law should face reality early. She has got to have an independent stream of income, and she has got to have somebody other than her daughter-in-law making the decisions about how this stream of income is going to be allocated, and by whom.
Anyone who does not have an independent stream of income is inevitably going to be dependent. Any woman who does not want to be dependent upon another woman, especially a younger woman who resents the added expense of a mother-in-law, had better take great care in building a separate estate for herself in her old age.
Look at the median net worth of American families. Adjusted for inflation, it has not risen in 20 years. Most of this wealth was in the family’s home. That’s why it peaked in 2007.
This includes all age groups. Older people have more money. Whites at age 65 probably have about $225,000 in net worth. It was higher in 2007. Then the housing bubble popped.
http://www.agingstats.gov/agingstatsdotnet/Main_Site/Data/2010_Documents/Docs/OA_2010_Updates_123010.pdfThis is the measuring rod. Each family should assess its net worth.
How long will you last in retirement? In calculating this, add to expected expenses the replacement of Medicare, which on average pays $900 a month per household member. That was in 2009. It’s higher today; medical costs keep rising. Figure $1,000 per person per month. Two members means $2,000 a month. That is what it will cost to stay alive and healthy after age 65 when Medicare goes bust, which it will.
Who will be able to afford this? For how long?
If a person sells his home to pay for medical costs, where will he live? Add another $1,000 a month for rent. But medical costs will not decline.
Preparing for retirement is not easy. It involves asking questions. Any woman who does not ask questions is basically saying that she is content to live under the jurisdiction of her daughter-in-law in her old age. She had better have a financially secure daughter-in-law, and that daughter-in-law had better have her mother-in-law’s best interests at heart.
It is better to ask questions now than to be told what to do later.
Note: Gary North is one of the most brilliant men I know. He is a virtuoso in the field of economics and investing. Check out his website at http://www.garynorth.com/. Also, if you’re thinking of investing in real estate click HERE to read the criteria for my Turnkey Real Estate program.
To many people, the slumlord — alias ghetto landlord and rent gouger — is proof that man can, while still alive, attain a satanic image. Recipient of vile curses, pincushion for needle-bearing tenants with a penchant for voodoo, perceived as exploiter of the downtrodden, the slumlord is surely one of the most hated figures of the day.
The indictment is manifold: he charges unconscionably high rents; he allows his buildings to fall into disrepair; his apartments are painted with cheap lead paint, which poisons babies; and he allows junkies, rapists, and drunks to harass the tenants. The falling plaster, the overflowing garbage, the omnipresent roaches, the leaky plumbing, the roof cave-ins and the fires, are all integral parts of the slumlord’s domain. And the only creatures who thrive in his premises are the rats.
The indictment, highly charged though it is, is spurious. The owner of ghetto housing differs little from any other purveyor of low-cost merchandise. In fact, he is no different from any purveyor of any kind of merchandise. They all charge as much as they can.
First consider the purveyors of cheap, inferior, and secondhand merchandise as a class. One thing above all else stands out about merchandise they buy and sell: it is cheaply built, inferior in quality, or secondhand. A rational person would not expect high quality, exquisite workmanship, or superior new merchandise at bargain rate prices; he would not feel outraged and cheated if bargain rate merchandise proved to have only bargain rate qualities. Our expectations from margarine are not those of butter. We are satisfied with lesser qualities from a used car than from a new car. However, when it comes to housing, especially in the urban setting, people expect, even insist upon, quality housing at bargain prices.
But what of the claim that the slumlord overcharges for his decrepit housing? This is erroneous. Everyone tries to obtain the highest price possible for what he produces, and to pay the lowest price possible for what he buys. Landlords operate this way, as do workers, minority group members, socialists, babysitters, and communal farmers. Even widows and pensioners who save their money for an emergency try to get the highest interest rates possible for their savings.
According to the reasoning that finds slumlords contemptible, all these people must also be condemned. For they “exploit” the people to whom they sell or rent their services and capital in the same way when they try to obtain the highest return possible.
But, of course, they are not contemptible — at least not because of their desire to obtain as high a return as possible from their products and services. And neither are slumlords. Landlords of dilapidated houses are singled out for something that is almost a basic part of human nature — the desire to barter and trade and to get the best possible bargain.
The critics of the slumlord fail to distinguish between the desire to charge high prices, which everyone has, and the ability to do so, which not everyone has. Slumlords are distinct, not because they want to charge high prices, but because they can. The question that is therefore central to the issue — and that critics totally disregard — is why this is so.
What usually stops people from charging inordinately high prices is the competition that arises as soon as the price and profit margin of any given product or service begins to rise. If the price of Frisbees, for example, starts to rise, established manufacturers will expand production, new entrepreneurs will enter the industry, used Frisbees will perhaps be sold in secondhand markets, etc. All these activities tend to counter the original rise in price.
If the price of rental apartments suddenly began to rise because of a sudden housing shortage, similar forces would come into play. New housing would be built by established real estate owners and by new ones who would be drawn into the industry by the price rise. Old housing would tend to be renovated; basements and attics would be pressed into use. All these activities would tend to drive the price of housing down, and cure the housing shortage.
If landlords tried to raise the rents in the absence of a housing shortage, they would find it difficult to keep their apartments rented. For both old and new tenants would be tempted away by the relatively lower rents charged elsewhere.
Even if landlords banded together to raise rents, they would not be able to maintain the rise in the absence of a housing shortage. Such an attempt would be countered by new entrepreneurs, not party to the cartel agreement, who would rush in to meet the demand for lower priced housing. They would buy existing housing and build new housing.
Tenants would, of course, flock to the noncartel housing. Those who remained in the high-price buildings would tend to use less space, either by doubling up or by seeking less space than before. As this occurs it would become more difficult for the cartel landlords to keep their buildings fully rented.
Inevitably, the cartel would break up, as the landlords sought to find and keep tenants in the only way possible: by lowering rents. It is, therefore, specious to claim that landlords charge whatever they please. They charge whatever the market will bear, as does everyone else.
An additional reason for calling the claim unwarranted is that there is, at bottom, no really legitimate sense to the concept of overcharging. “Overcharging” can only mean “charging more than the buyer would like to pay.” But since we would all really like to pay nothing for our dwelling space (or perhaps minus infinity, which would be equivalent to the landlord paying the tenant an infinite amount of money for living in his building), landlords who charge anything at all can be said to be overcharging. Everyone who sells at any price greater than zero can be said to be overcharging, because we would all like to pay nothing (or minus infinity) for what we buy.
Disregarding as spurious the claim that the slumlord overcharges, what of the vision of rats, garbage, falling plaster, etc.? Is the slumlord responsible for these conditions?
Although it is fashionable in the extreme to say “yes,” this will not do. For the problem of slum housing is not really a problem of slums or of housing at all. It is a problem of poverty — a problem for which the landlord cannot be held responsible. And when it is not the result of poverty, it is not a social problem at all.
Slum housing with all its horrors is not a problem when the inhabitants are people who can afford higher quality housing, but prefer to live in slum housing because of the money they can save thereby.
Such a choice might not be a popular one, but other people’s freely made choices that affect only them cannot be classified as a social problem. If that could be done, we would all be in danger of having our most deliberate choices, our most cherished tastes and desires characterized as “social problems” by people whose taste differs from ours.
Slum housing is a problem when the inhabitants live there of necessity — not wishing to remain there, but unable to afford anything better. Their situation is certainly distressing, but the fault does not lie with the landlord. On the contrary, he is providing a necessary service, given the poverty of the tenants.
For proof, consider a law prohibiting the existence of slums, and therefore of slumlords, without making provisions for the slum dwellers in any other way, such as providing decent housing for the poor or an adequate income to buy or rent good housing. The argument is that if the slumlord truly harms the slum dweller, then his elimination, with everything else unchanged, ought to increase the net well-being of the slum tenant.
But the law would not accomplish this. It would greatly harm not only the slumlords but the slum dwellers as well. If anything, it would harm the slum dwellers even more, for the slumlords would lose only one of perhaps many sources of income; the slum dwellers would lose their very homes.
They would be forced to rent more expensive dwelling space, with consequent decreases in the amount of money available for food, medicines, and other necessities. No. The problem is not the slumlord — it is poverty. Only if the slumlord were the cause of poverty could he be legitimately blamed for the evils of slum housing.
Why is it then, if he is no more guilty of underhandedness than other merchants, that the slumlord has been singled out for vilification? After all, those who sell used clothes to Bowery bums are not reviled, even though their wares are inferior, the prices high, and the purchasers poor and helpless. Instead of blaming the merchants, however, we seem to know where the blame lies — in the poverty and hopeless condition of the Bowery bum.
In like manner, people do not blame the owners of junkyards for the poor condition of their wares or the dire straits of their customers. People do not blame the owners of “day-old bakeries” for the staleness of the bread. They realize, instead, that were it not for junkyards and these bakeries, poor people would be in an even worse condition than they are now in.
Although the answer can only be speculative, it would seem that there is a positive relationship between the amount of governmental interference in an economic arena, and the abuse and invective heaped upon the businessmen serving that arena. There have been few laws interfering with the “day-old bakeries” or junkyards, but many in the housing area. The link between government involvement in the housing market and the plight of the slumlord’s public image should, therefore, be pinpointed.
That there is strong and varied government involvement in the housing market cannot be denied. Scatter-site housing projects, “public” housing and urban renewal projects, and zoning ordinances and building codes, are just a few examples. Each of these has created more problems than it has solved. More housing has been destroyed than created, racial tensions have been exacerbated, and neighborhoods and community life have been shattered.
In each case, it seems that the spillover effects of bureaucratic red tape and bungling are visited upon the slumlord. He bears the blame for much of the overcrowding engendered by the urban renewal program. He is blamed for not keeping his buildings up to the standards set forth in unrealistic building codes that, if met, would radically worsen the situation of the slum dweller. Compelling “Cadillac housing” can only harm the inhabitants of “Volkswagen housing.” It puts all housing out of the financial reach of the poor.
Perhaps the most critical link between the government and the disrepute in which the slumlord is held is the rent control law. For rent control legislation changes the usual profit incentives, which put the entrepreneur in the service of his customers, to incentives that make him the direct enemy of his tenant-customers.
Ordinarily the landlord (or any other businessman) earns money by serving the needs of his tenants. If he fails to meet these needs, the tenants will tend to move out. Vacant apartments mean, of course, a loss of income. Advertising, rental agents, repairs, painting, and other conditions involved in re-renting an apartment mean extra expenditures.
In addition, the landlord who fails to meet the needs of the tenants may have to charge lower rents than he otherwise could. As in other businesses, the customer is “always right,” and the merchant ignores this dictum only at his own peril.
But with rent control, the incentive system is turned around. Here the landlord can earn the greatest return not by serving his tenants well, but by mistreating them, by malingering, by refusing to make repairs, by insulting them. When the rents are legally controlled at rates below their market value, the landlord earns the greatest return not by serving his tenants, but by getting rid of them. For then he can replace them with higher-paying non-rent-controlled tenants.
If the incentive system is turned around under rent control, it is the self-selection process through which entry to the landlord “industry” is determined. The types of people attracted to an occupation are influenced by the type of work that must be done in the industry.
If the occupation calls (financially) for service to consumers, one type of landlord will be attracted. If the occupation calls (financially) for harassment of consumers, then quite a different type of landlord will be attracted. In other words, in many cases the reputation of the slumlord as cunning, avaricious, etc., might be well-deserved, but it is the rent control program in the first place that encourages people of this type to become landlords.
If the slumlord were prohibited from lording over slums, and if this prohibition were actively enforced, the welfare of the poor slum dweller would be immeasurably worsened, as we have seen. It is the prohibition of high rents by rent control and similar legislation that causes the deterioration of housing. It is the prohibition of low-quality housing by housing codes and the like that causes landlords to leave the field of housing.
The result is that tenants have fewer choices, and the choices they have are of low quality. If landlords cannot make as much profit in supplying housing to the poor as they can in other endeavors, they will leave the field. Attempts to lower rents and maintain high quality through prohibitions only lower profits and drive slumlords out of the field, leaving poor tenants immeasurably worse off.
It should be remembered that the basic cause of slums is not the slumlord, and that the worst “excesses” of the slumlord are due to governmental programs, especially rent control. The slumlord does make a positive contribution to society; without him, the economy would be worse off. That he continues in his thankless task, amidst all the abuse and vilification, can only be evidence of his basically heroic nature.
The current U.S. real estate bear market comes with different perceptions. On one side are those – the majority – claiming the market is depressed and it’s “too risky” to invest in real estate today. On the other side are the few taking a bullish approach because of the great bargains, low prices and excellent monthly returns. Competition is minimal because most people wouldn’t endeavor to make real estate part of their investment. A good number of owner-occupant buyers, the largest segment of real estate activity has been eliminated. These folks won’t turn their credit, income, and savings over night. Banks will continue to “proceed with caution” thus keeping many Americans renting – instead of owning their own homes – while the concept of easy credit standards will soon be history.
To get clarity on the Boom and Bust aspects of real estate it’s essential to revisit last decade’s events from an economic standpoint. Back during the early 2000’s the real estate boom started as a result of the credit expansion policy of the Federal Reserve. Add to that the government’s intervention in the lending sector and the deregulation of Wall Street’s paper derivatives and you have the recipe for an “artificial” booming economy. I refer to it as artificial because it had no ingredient of a free market growth.
A bust was inevitable yet it was only foreseen by a few while everyone else was gambling on continued rising values. The first sign expressed itself in the form of sub-prime loans default, the catalyst for the banking chaos that eventually erupted. This event was followed by a chain of defaults in the prime sector causing the stocks of the many financial institutions react in a free fall. When Wall Street bailout was approved by Congress and used in response, the conventional wisdom was that it saved the entire economy from collapsing. That wisdom can definitely be debated. Whether it’s right or wrong to transfer the losses of Wall Street institutions onto the shoulders of the taxpayer is a topic I will leave for another article. For now I’ll just focus on whether real estate may be a potential investment to park your money.
Real estate activity along with market prices reached their peak in 2006 only to collapse in 2007. 2009 suffered a serious decline in activity while prices continued to decline. Relative to 2006 peak prices homes have dropped a stunning 45% but they have not reached pre-2000 levels. If you’re wondering what the future holds for real estate it’s possible that a healthy activity – resulting from an increased number of qualified buyers – may return within six to ten years but no inflationary boom for a very long time. I know it doesn’t sound very encouraging but keep in mind that buying low and selling high is only the speculative side of investing. If, for example, you’re currently invested in mutual funds or stocks enjoying dividend returns your real estate portfolio can generate – in many cases – better monthly cash-flow returns. Ten, twelve, or fifteen percent annual returns are quite feasible but chances are your financial adviser will not want you divested from Wall Street’s paper assets.
While Americans’ retirement portfolios will remain heavily invested in the volatile U.S. stock market, Australians, Canadians, British, and Asians are finding the American real estate to be appealing for their own retirement. Rather than looking at it as an inconvenient investment they are taking advantage of qualified professionals who handle everything for them including the eviction of undesirable tenants, making repairs, or whatever else is associated with the maintenance of the investment. These international buyers have learned that they can’t get similar rates of returns by investing in their own countries’ real estate. Whether leased-out single family homes or apartment buildings all the way to investing in bigger commercial projects via private real estate syndicate funds, they mean business and are unstoppable.
So, how does one assess the investment potential for real estate? First, ask yourself if it generates substantial revenues not only during good times but during hard times, as well. Today’s economic environment is not one that makes people cheer and if you choose carefully you’ll find that a ten to fifteen percent on your money is feasible. The next question to ask yourself is if it’s a real or a paper asset. Can it vanish and will it be there ten, twenty, thirty yeas down the road? Differentiate between owning the physical asset and the paper secured by a physical asset.
Does real estate lose its earnings potential with time? It could since there is no guarantee in life. But with a proper maintenance, the right team, and the fact that it’s an asset satisfying a human need (housing) the chances are diminished. Does it keep up with inflation? Its price may not go up soon but its value most likely will, and with time prices will follow values.
Finally, one of the well known rhetoric is that real estate is not liquid. That is very true. At the same time, unless you’re a short term Wall Street trader, how often have you liquidated your securities portfolio for a generous profit? My point is that if you have to sell your stocks, bonds, or mutual funds it usually is because you’re in a desperate situation and that translates, most likely, in a loss. Take this thought and apply it to a real estate investment that you hold free and clear. Its liquidation could be much faster when and if you’d be willing to take a loss. Reality is that there is no such thing as an absolute perfect investment. There are pro’s and con’s attached to each one of them. Your homework is to weigh them to determine the best fit for your investment needs. In his book “A Gift to my Children” Jim Rogers – who is one of today’s most successful investors in the world –
advises us to “Never ignore the bear market!” The one with an eye for profitable opportunities already knows it. The bear market comes with depressed values but the depression that prevails in most people’s minds represents the hidden treasure of opportunities for only a few.
If you’ve read any of my previous articles you most likely know by now that I am a big fan of hard assets. Precious metals are hard assets yet buying physical gold and silver is not an investment! It is simply a wise move to help you and your family maintain your purchasing power when the government devalues the currency (and there’s sure plenty of that going on today!) Keeping dollars in the bank (any bank) today is like putting your money under the mattress (some think it’s actually worse than that).
Real Estate is a hard asset however it may or may not represent a true investment. For years people who owned their own homes considered their residences an investment. Sure, it may have been the “cash cow” for the years prior to the economic Bust when real estate inflationary value was out of control. What most people called “property appreciation” the classic (not modern) economists were calling “a Boom in the making”. It makes me think of a client of mine, a formerly very successful builder, that was telling me how only a few years ago he was worth millions of dollars. Not anymore! His was simply an “artificial prosperity”. Artificial prosperity is created fast (usually during an economic boom) and lost as fast (usually during an economic bust).
Should you decide to invest in real estate take notice that your personal residence is not an investment. Your home is not generating an income for you…unless you own and live in a duplex, triplex, or any other kind of multi-family and you collect rents from your tenants. A real estate investment could be a house, an apartment complex, or a commercial property that provides a monthly cash flow for you. Nowadays I come across plenty of investors who prefer the small residential properties or apartment complexes. This type of investment satisfies one of the requirements for what I call “healthy investment” criteria. It’s a hard asset that provides housing to those who have no ability to own their personal home or have no desire to take on such a responsibility. In addition, there is a large influx of newly evicted homeowners which will most likely go up as more defaults are scheduled to occur in the next few years on the 5 and 7-year Option ARM loans (these loans are due to reset at higher monthly payments and had a negative amortization to start with.)
So, if you are a novice at this kind of investing, how do you determine in a few minutes if a particular property is an opportunity worth further investigation? Following are some of the things that I look at when evaluating a real estate investment.
1. The local economy. First of all let me just say that it doesn’t have to be a big city. I say that because you can invest in a metropolitan area with a large percentage of its population that is unemployed. So what good does it do to you to buy real estate at a bargain price in an area where people can’t afford the rent? Familiarize yourself with the local economy by doing research on the city’s unemployment, major employers, recent news, and crime statistics.
2. Condition of the property. There are four kinds that I can think of: fully renovated, average, poor, and dilapidated. The first kind is self-explanatory and after an inspection you can probably be assured that for the next 3-5 years no major repairs should be required. The average condition is what a thorough inspection should disclose: the work and its estimated cost during the next 5 years. The poor condition is the type where you accurately need to estimate a full rehabilitation; and the dilapidated is the kind that you buy to bulldoze off and rebuild from ground up. This is the case where you ought to know the value is only in land and there may be a while until it can provide you with cash flowing revenues. It takes time, building permits, and lots of headaches. Beside that the prospect of financing the construction is extremely limited at this time.
3. Return on Investment. I saved this for last because this is very important and it needs to be elaborated in more detail. This formula is based on the total amount of money invested and it differs between an all-cash transaction and one where leverage is involved. An all cash transaction will show a lower ROI rate than when leveraged but there are benefits that may offset the lower rate. The two that come to mind are the peace of mind that you own the property free and clear, and eliminating the interest you’d pay on the mortgage.
The way to calculate the ROI is by first subtracting the annual Operating Expenses OE (current and/or projected) and the vacancy factor VAC (5 – 10%) from the total annual rental income (GSI for Gross Scheduled Income). This first calculation determines the Net Operating Income (NOI). Once you have this figure you divide it by the total Purchase Price(PP) and the result is the ROI also known as Capitalization Rate (CAP Rate) in the commercial sector.
GSI – OE = NOI
NOI / PP = ROI or CAP Rate
As an example let’s say you purchase a property for $100,000. The annual rental income is $15,000 and all expenses are $5,000.
$15,000 (GSI) – $5,000 (OE) = $10,000(NOI)
$10,000(NOI) / $100,000 (PP) = 10% ROI or CAP Rate
Since there is no mortgage in this case the property’s NOI represents the annual cash flow. In ten years, Ceteris Paribus, this investment would be fully recouped. In other words based on a $10,000 annual cash flow it would take 10 years to fully recoup your original $100,000 investment. ($100,000 / $10,000 = 10 years.)
If financing is involved things change because you don’t invest your entire $100,000 and you’ll make mortgage payments. In this case here are the formulas you want to use.
GIS – OE = NOI
NOI – DS = Cash Flow
NOI / Capital Invested = ROI
Remember these are all calculated on an annual basis. The Debt Service(DS) is the monthly P&I (Principal & Interest) on the loan multiplied by 12 months. The Capital Invested is the down payment plus all other costs that you invested from your own pocket (such as the cost to renovate). In our previous example if the property was already renovated and if the down payment was 30% of the purchase price here is how the figures would look like.
$15,000(GSI) – $5,000 (OE) = $10,000(NOI)
$10,000(NOI)- $5,700(DS) = $4,300(Cash Flow)
$4,300(Cash Flow) / $30,000(Capital Invested) = 14.3% ROI
The DS was calculated based on a loan starting balance of $70,000 amortized over 25 years at an annual rate of 6.5%. In this case it should take you about 7 years to recoup your investment ($30,000 / $4,300). However, by using financing the property won’t be free and clear until the loan is paid off. After seven years you’ll still have about 18 years of mortgage payments (if you make the minimum required payments.)
What I have just described is a quick way to determine if an investment is worth exploring. If a preliminary ROI is at 8, 10, 12 or higher percentage, and if the other two criteria look good in your eyes it is possible that such a real estate investment may be a good opportunity. Also, because the ROI is higher when financing is used many investors prefer to leverage their investment when they have the ability to do so. One reason is that the $100,000 used to acquire just one property in an all-cash scenario could be used to buy two or more properties when loans are secured. And because many real estate investors view their investments as long-term the end goal is what prevails, and that is the number of properties $100,000 can buy today.
Growing up in a communist regime where food and just about everything was rationed instilled in me a constant need for survival. My parents were always preoccupied with having enough food to feed the family. Whenever they had the opportunity to get anything classified as “life necessity” they would make sure they’d stock as much as they were allowed. That was of course a while back… about 30 some years ago. Being an American for more than two decades however didn’t change much in the way I think despite the abundance that our country had experienced during all this time.
I talk to people everyday and few appear to be concerned with the future. For many it’s still business as usual. Yes, food prices have gone up and so is gasoline but the concept of fiat money or a currency collapse is not really a concern.
So, let’s start with the emerging countries. Brazil, China, India, Russia are working on a plan to trade in currency other than the dollar. What that means for us here in the U.S. is that our dollar will soon not be in demand. Not long ago the Chinese government declared that it intends to strengthen the Yuan to the level of the world reserve currency. The Chinese government and people have been quite busy during the past few years buying gold. That may very well lead to a yuan currency backed by gold and gold is indeed real money. I clearly see a rising of the East and a decline of the West.
The idea that the roles between the East and the West could reverse is not far-fetched. When the Chinese people were working numerous hours for little wages in what could be known as “slave conditions” they were indirectly providing the West – including the U.S. – with a high standard of living. They were the producers and we were the consumers. Our purchasing power was phenomenal as a result of a powerful (petro)dollar and the Chinese products that were manufactured at a very low cost. After all these years of hard work at minimal wages Chinese standard of living has already started a major improvement. I see both, literally and figuratively, gold on their horizon. A nation of producers and savers, the birth of a sound currency with a strength that comes with the world’s reserve status, these events can all be “threatening’ to the American way of life.
Then we have a government that is spending like there is no tomorrow. The Central Bank in cooperation with most of the politicians have diluted the dollar to the point of no return. Take a glass of a good old scotch and throw it in the ocean…the strength and quality of the scotch are gone. That’s exactly how our beloved dollar is dissipating in an ocean of Quantitative Easing. The dollar is during its last breath and when it dies drastic changes will occur. It’s hard for many to comprehend such an “absurd” idea of living through an economic depression, or that a loaf of bread or a gallon of gas could cost $50 or more. I don’t know of any people who think incomes will go up at the same rate as the prices of goods. That would – for sure – be a naive thought. But advancement in technology does not necessarily imply a societal or economic advancement. The pendulum is moving from our part of the world and a few smart Americans have already made the steps to preserve their hard earned assets.
So, how do you keep your dollars from being stolen through inflation? A few smart people convert their dollars to real money such as gold and silver. Ron Paul, the biggest advocate of sound money, in his book Pillars of Prosperity claims that buying precious metals is not an investment but a requirement of asset preservation. Statistics of American investments in gold show an astonishing 0.6% of all financial assets investments. This does not come as surprising to those who know that the 1980’s was the beginning of Wall Street “manufacturing” a myriad of paper assets.
I also believe in investing in tangible assets such as real estate. Of course, not every real estate deal qualifies for a good investment. First, the price must be right. During the credit boom era price was not anymore an issue. Most buyers were assured price would go up and terms were more important. Not so anymore. The lending industry has gone through a major shift in the underwriting and qualifications criteria. Today, it’s either cash or the borrower and the transaction must be very strong. Going back to pricing, I say price must be right so that it’s low enough where investors can benefit from steady and large enough monthly cash-flow (after all expenses are paid.)
The type of real estate is also key to a successful investment. There are two kinds that I find exceptional. One is the multi-family real estate, you know the apartment complexes. The CNNMoney 2011 Spring Housing Guide predicts the rents to go up much higher and in a relatively short period of time, thus they are alerting renters to lock in their leases. Demand is up, supply is down…all thanks to the banks that are unwilling to negotiate a decent loan modification and are sitting on millions of vacant foreclosed houses while keeping their prices at unrealistically high levels.
Second type is the Assisted Living Facility (ALF), again the result of high demand and short supply. The aging population is becoming less independent and more dependent on a facility that is equipped with the right staff and living conditions, and so far for many residents money has not been an issue. They are willing to pay so long as they are well taken care of. This kind of investment could be a potential cash cow when purchased in the right area, at the right price, and operated by the right team.
If leverage is needed I found that lenders are much friendlier and more willing to lend on these kind of real estate transactions. After all valuation of such kind is based on the occupancy (and these tend to have higher occupancy rates in many areas) and Net Operating Income (again these tend to have a higher NOI). One of the qualifications of a good investment is that it is an asset that satisfies one or more human needs and with these types of real estate it is obvious that it satisfies the housing need.
Lenders also know that these two particular investments if managed and operated properly they have the potential to generate substantial revenues for its owners not only during good times but also and especially during rough economic times. That’s another reason they have more money to lend on these kinds in comparison to a shopping center whose tenant retailers are suffering due to revenue drops. This is what my experience had taught me and I am eager to share with all of you.
Can we fix the economic problems that our beloved country is going through? Certainly not, as we can’t make most politicians become honest. But I believe that by taking responsibility of our own future individually there will be less people hurt and fewer negative statistics. And I am all for it!
By Alar Tamming
The term “subconscious” is common in psychology. Without unnecessarily elaborating, the topic of the so-called “uncomfortable subjects” falls in the category of the subconscious. Uncomfortable subjects are those that people do not wish to deal with, because they create a feeling of uncomfortableness that fractures peoples’ worldview and forces them to reconsider their beliefs.
The subject of money is one such topic that currently weighs heavily on the global collective subconscious. Apparently, in all nations and cultures, people are perfectly comfortable with the idea that money is a little colorful piece of paper with a picture of a king or president. People don’t dwell on the nature of money, much less on the nature of our monetary system. Most people do not ask questions about how money is created; whether it should be a medium of exchange or a store of value; whether it should be a piece of paper or a commodity.
Another topic that isn’t discussed is related to currency and banking crises. Why? The Nobel Prize for Economic Sciences has been handed out to 64 “economists”, but none has contributed to understanding the banking system or has explored the banking processes. Why is that? The answer is surprisingly simple: because the current banking system contradicts the basic laws of logic, nature, and economics; because it is not sustainable in the long run. A financial system with a daily turnover of transactions exceeding annual global trade contradicts common sense and the time-honored principles of traditional banking.
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