Archive for category USA cash-flow property
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!
In today’s economy, one thing is guaranteed. The world is attempting to ditch the US dollar as the reserve currency and keeping your money in CDs and money market accounts is straight forward unsafe. For decades savers and investors found it safe to keep their money parked with their banks however the current near zero rates of interest and volatility of the U.S. dollar are justified reasons that compel more folks to find better investment strategies for their money. That’s why many investors start looking for investments which keep up with inflation (real estate, gold/silver, commodities, and certain foreign currencies and stocks.)
If Real Estate investing has been on your mind but aren’t sure where to invest, how to find the best deals or how to properly evaluate one, you may want to explore the opportunity of a passive way to invest in a Syndicated Real Estate Fund. A real estate syndicate is simply a group of investors who pool their money to purchase real estate. By pooling their money together these investors are able to purchase larger real estate properties with or without bank financing. This method of real estate investing has been a popular method of financing the purchase and sale of commercial properties such as shopping centers, office buildings and warehouses.
Private Real Estate syndicates raise funds through a private placement which is a security – an ownership interest in a company that owns and operates investment real estate. Unlike the REITs (Real Estate Investment Trusts), these investment vehicles are not publicly traded and are not priced to market on a daily basis. While REITs may have high dividend returns their publicly traded shares are subject to a significant degree of price volatility, an event less likely to occur with private syndicated funds.
Many real estate syndicates are offered as private placements, so it is important for you to understand the process and risk factors related to private placements. One of the most common risk is that the underlying investment is real estate, as a result these investments may be less liquid than shares in a REIT; when time comes the fund may be unable to sell the real property at a high enough price to generate the expected profits; or outside factors such as a further deterioration of the economy might negate the value added through rehabilitation work. Then, there is that uncertainty of unforeseen future expenses, taxes, and liability, all of which being typical real estate issues that seasoned investors are familiar with. My recommendation is that you thoroughly evaluate the risks directly from the private placement memorandum.
Syndicated real estate funds are carefully crafted by using the expertise of attorneys, accountants, contractors, investment bankers, mortgage bankers, and real estate brokers. They are structured in form of a partnership agreement or limited liability company (LLC), whose code of ethics requires full disclosure of all material facts. To further determine whether this kind of investment is for you, you’ll want to find out the experience and accomplishments of all directors and managers, the minimum required investment, the time-frame of your investment, and the potential annual return and capital gains on your money.
What I found enticing is the fact that one can invest in a private real estate syndicate by using his retirement account (IRA). A self-directed IRA is a unique hybrid tool that uses a self-directed IRA custodian and a specialized legal structure. Investments made with a self-directed IRA may grow untaxed provided the income generated is passive income.
Some other potential benefits associated with investments in these funds are:
- Gaining net spendable cash flow through a passive investment. Owning real estate individually requires skills in assessing property values, negotiating purchase agreements, financing, negotiating leases and managing the property. An investor in such a fund has access to a group that has proven knowledge and experience to deal with all aspects of real estate.
- Achieving a higher yield by investing in larger and more profitable properties. By pooling the funds of a number of investors, real estate syndicates can achieve overall better returns when compared to many individual investors.
- Taking advantage of the distressed commercial real estate market by using the expertise of vulture investors.
- Hedging against Inflation. Because inflation erodes the value of hard earned money and reduces the individual purchasing power, investment diversification in tangible assets may potentially represent a more desirable way to maintain your current living standard.
- Potential profit from property appreciation. Commercial real estate value is determined by its level of stabilization. High occupancy rates, stable revenues, carefully assessed expenses, and experienced property managers overall largely contribute to the increase in value.
- Favorable tax treatment. Check with your tax adviser regarding tax savings on private real estate syndicates which may not be available when investing in a public company.
- Various Investment Positions. As an investor, you can choose from a variety of positions that best suits your investment requirements.
Overall I still think it’s a smart move to diversify your investment portfolio with a hard asset such as real estate. But no matter what you invest in keep in mind that a “healthy investment” is the kind that…
- generates substantial revenues for you during good times and bad times;
- is made out of real assets that don’t vanish;
- does not lose its earnings potential with time;
- maintains its capital value;
- keeps up with inflation;
- is made out of assets that satisfy one or more human needs (housing, food, energy);
- can be passed on to your heirs and generate passive income for them.
Finally, if you’re seriously considering placing a chunk of your money into such a fund don’t forget to ask the hard questions such as if the managers and directors are investing their own money in the fund; how can you verify that the company is real and not a hoax; what could go wrong and if it does what happens to your investment. Use common sense and your own instinct, learn as much as you can, make decisions, and act on them quickly so that when the economic dust finally settles, your egg nest will still be there, intact and unharmed.
Contact me if you think investing in a Private Real Estate Fund is for you.
If you’re in the market to buy a new residence this advice may come in quite handy for you. If you’re thinking about it but you’re scared, there may be some gains awaiting for you if you do your homework first. Even if you’re not versed in the real estate market there are many good reasons to diversify your investment portfolio with some income producing properties. I like Real Estate as part of my retirement portfolio for more than one reason. First of all Real Estate is a hard asset, it’s real and it does not vanish like the paper assets manufactured by Wall Street. If bought at the right price and with the right terms it can generate substantially better returns than money kept in the bank. Why many Americans found it to not be a good investment is because most of them bought during the peak of the real estate boom, they over-leveraged themselves, and they did not have the right professional to help them make good decisions.
Not long ago a friend of mine asked me for advise. My friend is smart. He knows that buying real estate today is less risky than buying during the real estate boom. He wants a property in which he can move. But he doesn’t just look for a personal residence, he wants something that he can also call investment. A condo he thought would not be a bad idea yet I found other ways that could potentially be better than this type of real estate.
The first property I owned as a personal residence was a duplex. The experience I gained while owning it helped me feel more comfortable investing in other properties. That’s one of the reasons I am fond of real estate. Statistics reveal that most of the owner occupant buyers in the U.S. go for the single family homes. Indeed there may be some benefits to it with one being the privacy issue. When buying a townhouse or a condo the element of privacy is eliminated since neighbors are “attached” to you. Other than that when you own a house there is still responsibility that comes with it. When it comes to your mortgage and money matters however, here are some thoughts worth considering.
Let’s just say for the sake of proving my point we use a hypothetical example where we compare a house to a duplex. This is not geared towards anyone looking to move into a million dollar mansion. It’s for average folks like many of us out there. Buying a $100,000 house and getting a mortgage with a 10% down payment would result in an estimated $700 per month payment (at today’s low fixed rates), that includes property taxes, insurance, and mortgage insurance. You may say that’s not bad considering you’re probably spending that much in rent. But what if you spend only $425 or less on your mortgage and turn your residence into a real estate investment? If you find a duplex (2 attached units in a building) chances are it won’t cost you double in purchase price, taxes, insurance, etc. At $140,000 price with a 10% down payment the total house payment should be at an estimated $975. Of course, you must have a tenant next door from which to collect rent every month. In our example if the rent you charge for the other unit is $550 you end up paying $425, almost $300 per month less than if you paid the mortgage on a house. You can use this example and modify it based on real estate prices and rental market in your area…you may have a very nice surprise.
You can also use this idea and calculate the figures based on buying up to 4 attached units (fourplex). You may end up having all your tenants pay for your mortgage and in some cases – if bought at the right price – you may benefit from a nice little cash flow. If you don’t need to get financing – and you pay cash – your cash flow would be much higher. One other thing worth mentioning is that if you use financing to purchase a duplex you can qualify just as you would for a single family mortgage; that’s because 1-4 units are classified as residential loans. FHA may even be the right program for the smart and qualified first time home buyer.
Before you start dreaming of buying a duplex let me explain the challenges. Your investment comes with responsibility. You must determine however how much of that are you willing and/or able to handle. You can take on full responsibility or you can hire a reliable property manager. When managing on your own you should know how to pre-screen potential tenants, how to handle plumbing leaks or hire the right plumber that will do a good job charging you a reasonable fee, how to make your tenants responsible for the units they occupy, how to write up lease agreements, and other tasks that require your time and effort. If this is not for you hiring a competent property manager is highly recommended. For a charge of about 10% of the gross monthly rents a professional can handle most of the issues. In addition, you are next door so if you see something that a tenant does – that does not comply with his responsibility under the lease agreement – you can immediately notify the property manager to take action.
You may – and there’s a high likelihood that you will – have times when one or two units will become vacant and there may be a month or two until other qualified tenants move in. In the meantime your mortgage payment is due every month. The lender doesn’t care how many units you have vacant. But that’s why it’s even more important to know what to do with the savings that you get during the times when the property is fully occupied. The savings must be turned into liquid reserves. Those reserves will help you when you have vacancies and they will also help you when repairs in the other units must be completed. The savings I am referring to should be calculated based on how much you’d spend on a mortgage for a single family house – in the above example being $700 – and what you end up paying for the mortgage after receiving the rents from the other units on a multi-units property. In the above example the monthly savings are $275 but they could be more or less depending on each individual case. Spending the money instead of saving it in a separate account will end up with a tragic outcome. Being disciplined with your money will help you turn your residence into a successful investment.
As time goes by more of the loan balance will be paid down and more equity will be gained. If you have to move in another city or another country it may actually become one of the best investments in your life. With a great property manager your once primary residence can become part of your retirement portfolio. Sure, it would have to be well maintained and placed in the hands of a competent professional but it will not vanish like the Wall Street manufactured securities.
We certainly live in times of economic uncertainty. Not only at the macro level but the micro aspect, as well, considering that the big economic picture directly affects individuals’ lives. Volatility is the term used by most economists and finance managers and that simply means risk. So the big question for most people is how to position themselves during such risky economic times and what can they do to protect what they worked so hard for? A small group however is more geared towards how to profit from the opportunities that are offered by an economic crises.
I have thought long and hard on the subject of real estate. It is true that prices have dropped tremendously since the bubble burst and it may be an understatement to say that a large group of Americans have been hurt by such an event. Real estate today is in a freezing mode for most potential buyers yet it’s keeping busy a very few that continue to have success with it. I am not surprised because the national media had done a good job of putting Americans in a panic frenzy. But I’ve always been a non-conformist and looked much deeper into assessing the scenario so the first thought that comes to mind is what are those few that find success in real estate today know that the rest of the people don’t? No matter in what investment arena we focus on we’ll find the unwritten rule that a good opportunity exists ONLY until the majority of the people find out about it. Once too many people have discovered it the opportunity loses its value.
One of the things politicians and mass marketers have in common is that they know most people act based on emotions. A politician knows how to make his constituents “feel good” while he/she makes promises (that in many cases are not kept). A TV, radio or Internet commercial is designed to turn a viewer into a buyer. It doesn’t matter if the buyer has a need for the product, it matters how he/she “feels” owning the product. So was the idea of “home ownership for all” promoted by the government, politicians and banks not long ago only to find out that not everyone is fit to own a home just like not everyone is fit to be a doctor. I don’t want to cross the boundary into the political arena so I’ll get back to my original point and keep it simple. Emotions are not facts. Acting or reacting based on emotions is different than acting based on careful evaluations, factual data, and logic.
Investing in real estate is not a glamorous event. I won’t tell you that you’ll wave the magic wand and without any effort you’ll be rich. Now, you may not have to work on doing repairs, collecting rents, or necessarily deal with tenants, but nevertheless there’s effort to be put in planning, budgeting, and managing the managers.
Without planning there’s no reason to even consider investing in anything. A plan is what everyone should have, and experienced investors know this better then anyone else. Sure, plans would have to be adjusted based on factors that often arise but that’s no excuse for not implementing one. Planning is like homework. It gets done you move forward, if it doesn’t get done…well, you get my point!
So what does planning entail? To start with it helps to know where and what you’ll invest in. Are you going to stay in your own backyard or are you going to explore the idea of going in other places of the country? Are you going to invest in houses, apartments, or other type of property? Real estate today is not like ten or more years ago. Technology has made it so much easier to diversify your investment portfolio whereas staying strictly in your neck of the woods may limit your opportunities.
The idea that the property has to be located in your town is viewed by the pro’s like the idea of insuring the stock you invest in has to be of a company that is located close to you. I am convinced that if you are invested in stocks or mutual funds you don’t care where the companies are located as long as they make you a profit. So if you trust a stock broker or a commodity broker to invest for you there must be a good reason to invest through him. Same applies for real estate and you’d have to insure you use a good property manager.
Is it going to be cash or financing? Will you use an IRA to acquire the property? Is it going to be a LLC, LLP, or a corporation in which you’ll take title? If you need financing are you equipped to even qualify for a loan? Do you have enough capital to invest in real estate? You may not know all the answers but that’s why associating yourself with worthy professionals may be a good start. All this takes time and effort and keep in mind that tough times have always made investors more resilient. Barriers insure that only those driven and focused stay on the path and become successful while the rest quickly give up the idea. You see, I am not here to make you “feel good”! Consider it a good dose of reality. After all not everyone is an Olympic champion, right?
Oh yes, just because you have a manager, a maintenance crew, or an accountant it doesn’t mean that you’re off the hook. You still have to watch and question, when necessary, their actions. Going back to my example of trusting your stock broker I hope that you often ask why he’s investing your money in whatever ways he is. You should do the same with your property manager. How does he/she screen potential tenants? How do they handle tenants in default? If they handle repairs for you and your rents pay the bill would they give you a copy of the repair bill? These and so many other questions are important. You may not have to roll up your sleeves and start painting a property but you’ll want to know what’s right and what’s not right. For example, you wouldn’t want to pay $500 for changing a door-lock.
When the manager sends you the monthly report you should have a good knowledge of how your rental income is being distributed to pay for management, taxes, insurance, and maintenance items. By the way, you’ll also want to make sure you have the right insurance coverage for the best premium. Even with a manager, an accountant, or any other professional, know that it’s not their job to shop for you. If you want to save money on insurance then you shop for the best insurance company.
In the end you may say “so if I have to know or learn so much, if it’s not glamorous, and it doesn’t make me feel good why then should I invest in real estate?” I sure hope that this really is not going through your mind. If it is I can honestly say real estate – or any other investment – is not for you. But again not everyone is fit to be successful even though everyone has the same opportunities. If you’re not discouraged by everything that I shared with you then you may be one of the few that has what it takes to become the investor that you envision.
by Ron Holland
The Confiscation Event
At some time during the next decade, a global run on treasury debt and the dollar will also likely take the American stock market down past lows not seen since the financial meltdown crisis in 2008 and 2009. The 50% to 75% stock market pullback during the actual bankruptcy of the Washington debt and paper dollar will send shock waves through retirees and current plan participants as their private retirement plan balances plummet.
At this time, Washington will “come to the rescue” and guarantee all private retirement plan market values back to pre-crisis levels. The gullible American public will overwhelmingly support this effort by switching their dwindling funds into the Guaranteed Retirement Annuity managed by the government. For the first few years, Washington will probably label those few of us who warn that Americans have lost their retirement benefits as extremists, Ron Paul paranoids and Tea Party advocates.
Then it will become crystal clear to all Americans that their retirement benefits have been given away for a promise by an evil group of plunderers who have never in their history kept a promise, a guarantee, or their word on anything. The greatest theft of wealth in the history of the world will have taken place and only those few who took heed of an early warning will still have their retirement benefits and security.
Your Retirement Plan Will Soon Become Washington’s ATM Machine
Today over $15 trillion is sitting in tax-favored retirement plans, including $4 trillion in IRA accounts. Retirement savings make up 35% of all private assets. Washington is broke, the deficit is soaring and Congress simply can’t wait for Americans to retire so they can start taxing these funds. The politicians are tired of waiting; they need your money now.
The Trojan Horse
The nationalization will begin with a modest proposal to increase retirement security and basically create a new, third level of mandatory retirement benefits in addition to private plans and Social Security. This will be described as a Guaranteed Retirement Annuity or Account. Teresa Ghilarducci is the author of this leftist plan which first appeared in 2007 at the Economic Policy Institute: Agenda for Shared Prosperity. In 2008, she became the new Director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research. In her book When I’m 64: The Plot Against Pensions and the Plan To Save Them, she hypes her retirement solution for millions who do not have adequate retirement savings. Her ultimate solution is to confiscate most of the retirement assets of successful and wealthy Americans.
In the proposal, the government will even make an annual contribution to every citizen’s account of around $600 annually, covering the unemployed, under-employed and all working Americans. The initial problem for productive, successful Americans is that Washington will require, in exchange for their contribution, that all working Americans contribute 5% of their annual salaries or income into this new “guaranteed account” managed and run by the hard-working bureaucrats at the Social Security System. Successful Americans will of course complain about losing the deduction for this contribution, which is little more than a new 5% tax on income. But this is just the beginning of the problem for Americans with substantial retirement savings and outstanding benefits.
The Devil Is In the Details
Different proposals would delay retirement age until age 64, and some even later. The guaranteed retirement annuity would be structured to allow the government to hold and invest the money. Unlike your current private plan, it would be very difficult for members to withdraw their money before and even after retirement, except over the life expectancy of the participant.
I fear, following implementation of the contributory GRA program, a future legislative action by Congress would be to end the tax deductions and tax-deferred growth of all retirement plans, thus forcing these funds into the government controlled annuity. Your forced retirement contributions would be pooled and professionally managed by Social Security. Also, beneficiaries would be cheated out of half of any benefits remaining at the death of a participant because Ghilarducci’s plan has 50% of all balances at death reverting to the Feds, not the beneficiaries.
Remember, these retirement proposals are just in the discussion stage but progressives are promoting this confiscation agenda to the Obama Administration as a new source of revenue for a bankrupt federal government desperate for additional sources of revenue. When the next economic or stock market crisis hits, your retirement assets will be at risk from this type of confiscation effort regardless of whether the Democrats or Republicans are in control.
WATCH THE VIDEO TO LEARN ABOUT WHAT TO DO WITH YOUR MONEY…KEEP IT, IT’S YOURS!!!