December 1978
Vol 1 No 4
The 1978 Graduate Series was concluded with a total of 263 in attendance who were inducted into the CommonWealth Trust as Trustees. Through the use of advanced option and financing techniques, they will carry the burden of increasing Trust Assets while escorting them safely through the uncertain years lying just ahead. Trustees will meet in several locations throughout 1979 to consider ways in which the combined Trust Assets (which now total an estimated $67,000,000) will be preserved. Trust meetings will be announced on page 4 each month.
Fortune Seminars Inc. has announced that only 12 Miller/Schaub Seminars will be conducted in 1979! These will be scattered across the country in regional centers so that all who wish might attend. The complete schedule appears on page 4.
Our December crystal ball sees a real credit crunch looming for the next 6 months. We are already seeing automobile repossessions starting to pick up. We expect the expanding retail sales picture to be reflected in credit card purchases. When the monthly statements from these hit, home-owning consumers are going to be caught in an economic vise. With the possibilities for the Spring bracketed between rigid Government regulation of wages and prices on the one hand, and Big Labor demands accompanied by muscle-flexing strikes, the middle class might find itself in the unhappy position of having to liquidate home equities to pay short term bills. With interest rates at all time highs and going higher, we could see a sell-off of homes particularly in the cold-belt areas. In the Spring, cash is going to be King in many areas. Be on the lookout for discounted paper opportunities and bargains in house equities. We see a Buyer’s market for the prepared investor which can yield profits.
Meanwhile, back at the Economy, the inflationary trend is still up IN SPITE OF THE BUSINESS SLOWDOWN! The Administration has crossed the Rubicon in the fight against inflation, but too late. According to figures published by the National Taxpayers Union, the Government is already committed to $9,033,000,000,000 in unfunded obligations. That amounts to almost $113,000 for every taxpayer. Since we don’t produce sufficient goods and services to tax to raise this money, it has to be manufactured by Government. The U.S. money factory has fallen so far behind its needs that the Copper Dollar (you wonder what happened to the penny? It’s now called a dollar) has been designed BECAUSE TI CAN BE PRODUCED FASTER AND CAN BE USED MORE TIMES BEFORE IT WEARS OUT! The Real Estate Insider Newsletter projects that an SFH worth $40,000 today will cost $125,000 in ten years. Apartment rents will more than TRIPLE in the next 5 years!
How did we get into this fix? Let’s look at the record of the Administrations as they devalued our currency through inflation. Starting with a 100 cents Roosevelt dollar at his death. Truman left us with a 66.8 cent dollar, Eisenhower cost us another 7.1 cents, Kennedy and Johnson together 9.7 cents, Nixon left office with a dollar worth 35.6 cents, Ford shaved it another 5.2 cents and after 18 months in office, Carter is asking us to accept 8% inflation with a dollar worth 27 cents. We’ve said it before and we’ll say it again: you no longer have any option about investing. You must do it to survive. You must employ all you assets continuously in as prudent a manner as possible, and train your mind to make correct choices.
If you’d like to buy mint-proof sets, now’s the time. Write to: The Bureau of the Mint, 55 Mint Street, San Francisco, CA 94715. Money’s a collector-item it seems. For the more spiritual, the Universal Life Church, Inc., 601 Third Street, Modesto, California 95351 (209) 537-0553 offers Tax Salvation. You too, can become an ordained Minister by writing them. They have some interesting facts for you for free!
NOW and AFT accounts are here. These accounts now allow commercial and savings banks to automatically transfer funds from Savings Accounts (or alternately) to pay interest on checking accounts, or allow you to write checks (negotiated orders of withdrawal, ergo: N.O.W.) on savings accounts. They cost more, but look into it, especially with large Trust Accounts, they could be profitable.
“Gold Clauses” have been legal since November 1977 to give Mortgagees protection against inflation in paper instruments. The trouble is they are bulky and confusing. Howard Ruff suggests considering hedging debt instruments by buying a Gold Contract in the commodity markets as a way to protect future dollar’s purchasing power when debt has a long way to run. We have started using several other instruments.
We are using a one-year debt instrument which becomes due and payable in full at the end of one year. It may be replaced by another instrument in which the full principal amount has been increased by an amount to offset the loss of purchasing power ANTICIPATED over the COMING YEAR. Of course, it may be paid off completely if money becomes available from institutional sources, or the third party Trustee who is holding the Deeds of Conveyance may return the property to us without recourse. Thus, we have created an instrument which yields cash-flow at the maximum rates of interest while it appreciates in step with inflation to hedge our dollars.
“It was the best of times. It was the worst of times. It was the age of wisdom. It was the age of foolishness.” Charles Dickens sounds like a contemporary to me! We have seen the rent control implemented in Massachusetts and Los Angeles. It was rejected in Santa Monica and Wisconsin. The VA increased veteran loan entitlement to $25,000 with some veterans being eligible after only 90 day’s service. At the same time, the price of money makes it unobtainable in most areas to those who would borrow it. Congress voted a tax-cut just in time to permit voters necessary funds to pay the increased Social Security Taxes. In California, they are considering INCLUSIONARY ZONING which forces builders, REGARDLESS OF THEIR COSTS, to include one house out of every 4 under constructions in a price range of about $55,000 in return for the government’s PERMISSION to build at all. This is planned in an area in which the average house costs in excess of $80,000. The average price of a new home in San Diego is now $99,100 according to the Realtor Report from San Diego.
With house equities zooming everywhere because of inflation at the precise moment when the National Housing Partnership is spending 121 million dollars to provide for poor and low income housing, Bankers are beginning to realize what a safe investment the single family house really is. Reverse annuity mortgages which pay homeowners for their equities in monthly installment checks have been around for some time. Now Money magazine reports that Home Equity Lines of Credit are being considered. You will have your house equity established by appraisal, and will soon be able to write checks against your equity in the same manner as Master Charge and Visa work now. Once you have reached your limit, you will have to settle your Account. Interest rates should be lower than credit card and overdraft checking account charges because of the quality of the security offered.
In the short-burst department, Albert J. Lowry’s book: “How You Can Become Financially Independent by Investing in Real Estate” is a good beginner book (Simon and Schuster, New York). A freebie: Imaginative Ways with Bathrooms (593E) and a cheapie: Renovate an Old House? (060E) (35 cents) are available from Consumer Information Center, Pueblo, Colorado 81009.
On the Tax front, things are looking up. Several goodies which aren’t so widely advertised apply to owner-occupied homes. The energy credit on insulation (up to $300.00 or 15%) of the first $2,000 spend; and a provision which allows you to sell your personal residence which was purchased to defer taxes on a former personal residence. You can take the profit and roll it on over into yet a third and presumably fourth house (providing it is done because of your employment) without triggering the tax on your gain under Section 1034.
But the really BIG NEWS is the tax credit for rehabilitating commercial buildings which have been used 20 years. 10% of rehab costs can be credited against your tax bill, and this can be an 11th hour fine-tuning vehicle to adjust your taxes. Coupled with the historic building fast write-downs, this can be a fantastic opportunity for tax strategy planning. According to Mike Samson, Tax Consultant for the Academy of Real Estate, a golden opportunity lies in optioning down town outmoded hotels where they can qualify for the fast write-downs afforded historic buildings. In a few months there may be a land rush on to buy these buildings and a lot of money could be made by the person who acts now.
If you are planning any sale of your houses, hold the closing off until 1979 if possible. As an alternative, avoid taking principal payments in any significant amount so that the bulk of your gain may be realized in 1979 under the more advantageous tax laws. Another alternative would be to sell an OPTION with not tax effect in 1978, but with the sale to be held in 1979.
Lots of ideas from readers came in this past month. Let’s see what we can use. How about this lease clause from Dave Chapman, Santa Barbara: “all alterations or improvements made in and to said premises shall, unless otherwise provided by agreement between the parties hereto, be the property of lessor and shall remain upon and be surrendered with the premises.” And “Lessee agrees not to change any lock or add any lock to said premises without written permission of lessor.”
This month we’re going to concentrate on maintenance in our management tips. By eliminating appliance maintenance, a major expense can be eliminated leaving cash-flows to pay mortgages with. In lieu of raising rents in a soft market, we have found that we can lower our advertised price, but eliminate any appliances. If this becomes an issue, we can sell the tenant the appliances on easy terms, and we can even structure a guaranteed buyback plan so that the tenant recovers a high percentage of his investment. The key is that during the time the tenant rents from us, he owns appliance and is responsible for its maintenance and repair!
We buy appliances as often as possible ahead of need at garage sales, auctions, bankrupt sales, etc. and store them against need. When we must provide appliances we tack a surcharge on the rent to encourage the tenant’s purchasing his own. We offer to buy it from him when he leaves if we can do so profitably. When our appliances break, our new discount lease provides for the tenant’s repairing it, or trading it in on his own new one with an adjustment of the trade-in value to us in the form of higher rent, less deposit return, etc. As a last resort, we will remove the appliance at the tenant’s request, but WE DON’T REPAIR APPLIANCES!
As a part of the rental program it is crucial to line up a reliable jack-of-all-trades maintenance man. The tenant should b e trained to call upon him directly and to pay him for maintenance. We are able to offer repair services at a lower price because our arrangement offers our man volume business if he will charge less. Of course the property should be in good repair at the inception of the lease or rental period. One owner we know issues coupons in $5.00 denominations WHICH ARE REDEEMABLE IN CASH AT THE END OF THE RENTAL PERIOD if unused. They represent a value of 5% of the monthly lease payments. When they are used up, the tenant must buy another book of tickets or pay cash for all further maintenance and repair support. The idea is to get the tenant involved in maintenance costs to make him aware of their toll. It’s amazing how repairs fall off when the tenant has to pay for what he breaks!
O’ TOOLE’S COMMENTARY ON MURPHY’S LAW: Murphy was an optimist!
Under the Potpourri section here’s a wrinkle. Dwellers in Cooperative Rental Apartments who are “tenant stockholders” in the coop have been judged to be eligible to file for homestead tax exemption. This effectively removes up to as much as $10,000 from the appraised value, increasing cash flow dramatically.
Under the new tax law, the dollar limit on cases eligible for Small Claims Division of the Tax Court will be tripled. It will probably become effective in 1979 right after all those taxes are paid.
The IRS is cracking down on do-it-yourself-churches who take donations without reporting any taxes, then hire the “minister” and pay him a salary. According to Kirby Hensley of the Universal Life Church, his church has been “court-tested” in the Supreme Court, so his ministers are on safe ground. After all, can seven million members all be wrong . . . or audited?
According to the U.S. Commerce Department of the 50 top-income cities and suburbs, 17 are in the West, 13 in the Mid-West, 11 in the East and only 9 in the South. Anchorage, Alaska was first, and Fort Lauderdale, Florida brought up the rear. House prices rise with incomes, so knowing how your state fares, is vital to your own investment plans.
One Realtor in Sarasota, Florida is taking listings based upon Gold-equivalent dollars. Needless to say, the longer his houses are on the market, the more they cost. Come to think of it, doesn’t that make a lot of sense? After all, if single family homes appreciate faster than gold, why not price them the same way?
Look for the Federal Reserve to start behaving erratically. Their open market operations use the growth of the MI indicator to trigger corrections to the rates at which they set their discount. The new AFT and NOW Account laws permit funds to flow readily between savings and checking accounts. This effectively permits literally BILLIONS of dollars to flow unmeasured between the MI and the M2 indicators. It’s kind of like having a car in which the driver is never sure whether he has his foot on the brakes or the accelerator. Oh sure, he continues to move forward, but the ride can get to be a lot more exciting. Hang on . . . here we go!
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