February 1979
Vol 2 No 6
THE STATE OF THE UNION ADDRESS TO CONGRESS HAS BEEN GIVEN. As usual, it was filled with high-flown rhetoric about the challenges the future holds forth or our Government, coupled with clarion calls for sacrifice and perseverance on the parts of the citizen tax-payers. Once we get past all the glowing projections, I think the facts speak for themselves.
Despite Carter’s appointment of G. William Miller to head up the Federal Reserve, THE ECONOMY IS STILL IN TROUBLE. The M2 Money Supply increased by 60,000,000,000 dollars in the past 12 months, driving inflation above 10%. THE PLOY OF OUR SELLING OUR OWN GOLD HAS BEEN ONLY MARGINALLY EFFECTIVE IN SHORING UP OUR DOLLARS. Gold, Swiss, Franks, German Marks, and Japanese Yen are on the move again against the dollar. OPEC has increased oil costs by 14 ½ %. Big labor is ignoring wage and price guidelines. HIGH INTEREST RATES ARE NOT DETERRING BUSINESS EXPANSION OR CONSTRUCTION AS HOPED. Gold is starting up again in price.
How does all this affect us as private investors? I BELIEVE WE CAN COUNT ON CONTINUED INFLATION TO DRIVE UP THE PRICE OF SINGLE FAMILY HOMES IN MOST AREAS THROUGHOUT 1979. During the 4th quarter of the coming year we can expect a down-turn for a few months, followed by another round of inflation. Most economic forecasters we have read see GOLD CONTINUING TO INCREASE IN VALUE AGAINST THE DOLLAR, stocks continuing to retreat, and interest rates continuing to climb for the next 6 months. For those who have invested in SFH this past year, your year was bright indeed. YOUR AVERAGE $45,000 HOUSE INCREASED IN VALUE BY ABOUT $6750.00. IT WILL INCREASE BY EVEN MORE IN 1979!
Bear in mind that economic forecasting is composed of 90% sorcery and 10% science. IRAN, RUSSIA, CHINA, OPEC, EEC, MEXICO, AND OLD MAN WEATHER ALL HAVE THE POWER TO CHANGE EVERYONE’S PREDICTIONS. Combined with the efforts of the Carter Administration to stave off political threats, both within and without the Democratic party, the whole year can turn topsy-turvy. The best course is to keep one ear to the ground and one foot in the stirrup. For myself I PREFER SFH, LOCATED IN THE SUN BELT, GOLD, AND MAYBE SOME 90-DAY “T”-BILLS FOR 1979. By staying relatively liquid, you will be able to take advantage of many high yield, short term opportunities. Look for discount buy-back situations where you should be able to command returns of over 30% in less than a year.
A couple of good books were reviewed this past month. Dr. Gary North’s “HOW YOU CAN PROFIT FROM THE COMING PRICE CONTROLS” (American Bureau of Economic Research, Durhan, N.C.) and Howard Ruff’s new book: “HOW TO PROSPER DURING THE COMING BAD YEARS” (Quadrangle/The New York Times Book Co., Inc., Three Park Ave., New York, N.Y. 10016) These books will give you a look at some of the downside risks we might be running in the next few years. A word to the wise ….
We’ve come across some interesting demographics concerning regional per capita income levels. Once costs of living have been offset against income to arrive at NET an unexpected picture emerges. Nevada ranks #1. Maine is last: COSTS OF HOUSING, FOOD, ENERGY, AND HEALTH CARE WHICH ARE RISING AT TWICE THE RATE OF NON-NECESSITIES HAS MADE THE NORTH EAST AND NEW ENGLAND FARE POORLY WHILE THE SOUTH SHOWS THE MOST DRAMATIC GAIN. The West and the South continue to lead in growth projections with the mid-West and North East lagging behind. FLORIDA, ARIZONA, NEVADA, COLORADO, AND ALASKA WILL BE THE FASTEST GROWING STATES OVER THE NEXT 20 YEARS. NEW YORK, PENNSYLVANIA, OHIO, AND ILLINOIS WILL BRING UP THE REAR. For the long term SFH investor, it pays to buy houses where they will be needed for the long term, and to BE WARY OF BUYING IN AREAS WITH NET POPULATION LOSSES. Take a look and see how your area is faring in terms of growth.
CommonWealth Trustees Jay Turner and Pete Fortunato teach a bang-up course on PAPER (write to them at 15 Derry Square, Salem, Mass. 01970). One of their insights deals with LOAN KONSTANTS. Normally we consider this the monthly payment of principal and interest on a loan. As the interest component of a payment decreases; the principal portion increases maintaining the payment constant – hence KONSTANT. But wait a minute, what about the ratio of payment to the remaining loan balance? WITH A DECREASING LOAN BALANCE, THE PAYMENT STEADILY BECOMES A HIGHER PERCENTAGE OF THE AMOUNT OWED.
Let’s see how we can apply this. Suppose you are paying $400.00 per month on a loan which was originally $40,000, but which now has a balance of $23,500. Several options are open to you. For example, you can refinance the loan by borrowing enough to completely pay it off and begin again to pay off the new loan. YOUR NEW PAYMENTS MIGHT BE $260.00 PER MONTH WHEN FINANCE CHARGES ARE ADDED IN, BUT YOUR PAYMENTS WILL HAVE BEEN REDUCED BY $140.00
Of course, since you alone know of your plans to refinance the loan, you might try to get the original note holder to discount it to you for cash. In the event you only had to pay him $20,000, you need to borrow only that amount. In THIS WAY YOU REDUCE YOU PAYMENTS AND THE AMOUNT OWED IN ONE STROKE. As an alternative, because your new loan represents a much small percentage of the property’s value than the original loan, you might get the lender to agree to S-T-R-E-T-C-H out the term of the loan, reducing payments further; or if you prefer, you can borrow more than you need to gain liquidity and purchase other paper at discount to offset the higher payments. THE AMOUNT OF DISCOUNT YOU OBTAIN ON THE ADDITIONAL PAPER SERVES TO REDUCE THE EFFECTIVE PRICE OF WHAT YOU ARE BUYING WHILE PROVIDING SAFETY IN THE FORM OF CASH-FLOW TO YOU.
During period of high interest and limited funds, lenders are often “loaned out.” They’d like to make new loans, but don’t have the reserves. Suppose in the above example you approached a lender with whom you had several loans and made this proposition: IN EXCHANGE FOR RE-WRITING YOUR NOTE AND MORTGAGE TO CREATE A LOAN IN THE MAXIMUM AMOUNT ON A LOW-BALANCE-LOAN PROPERTY, YOU AGREE TO PAY POINTS PLUS THE HIGH INTEREST AND FURTHER AGREE TO USE THE LOAN PROCEEDS TO COMPLETELY RETIRE SOME OF THE OTHER LOANS YOU MIGHT HAVE ON HIS BOOKS. This way, he up-grades his loan portfolio to today’s high rates, eliminates some low interest, unprofitable loans, and reduces loan servicing. On the other hand, you pay off some loans to free your property, and place all of the indebtedness on a single property, reducing your exposure to risk. Plus you INCREASE YOUR NET CASH FLOWS from the free & clear properties AND THIS WAS ALL DONE WITHOUT TAKING ANY MONEY OUT OF THE BANK.
BY KNOWING HOW TO LOOK AT FINANCING, AND HOW TO DETECT POTENTIAL FOR PROFIT, WE CAN START REAPING THE FORTUNES THAT BANKERS HAVE BEEN MAKING. First of all, “paper” (any sort of mortgage/note or Trust Deed) can be made to yield anything the market demands in spite of usury laws PROVIDED IT IS OBTAINED AFTER IT AHS BEEN ORIGINATED by a third party. BUYING PAPER AT A DISCOUNTED PRICE BELOW ITS FACE VALUE INCREASES ITS YIELD. Thus if you bought a $5,000 mortgage bearing 10% interest for $2500 (50%), and were paid $500.00 per year, your interest yield would be 20% on your investment, not the original 10%.
So far, so good. Now suppose you wanted to further increase your yield: you can do this by RE-DISCOUNTING your paper. To the average depositor a secure 10% yield is difficult to obtain. By selling a ½ interest in your note to someone else for $2,000, you would be giving him or her a 20% discount off face value ($5,000 x 80% = $4,000 x ½ = $2,000.) Each year you would each take half of the $500.00 payment. HIS YIELD WOULD BE 12 ½% WHILE YOURS WOULD SOAR TO 50% BECAUSE WHILE HE PAID $2,000 FOR HIS HALF; YOU ONLY PAID $500. For yours. By taking a little time to think about “paper” you can see how it can be used as a cash-flow generator, an interest hedge, and a safety valve. Discounting and re-discounting of paper make an attractive alternative in times when SFH prices and interest rates are too high to make investment in SFH attractive.
In the Short Burst department, we have come across several items of interest. THEY’VE FINALLY RATED DOGS IN ORDER OF DEGREE OF VICIOUSNESS. The 8 dogs that bite the most people in order of their degree of anti-social behavior are: German Shephard, Chow, Poodle, Italian Bulldog, Fox Terrier, Crossed Chow, Airedale Terrier, Pekingese. I would like to add Mongrels to this list. Seriously, this information might be of use in screening tenants, or setting pet fees, or negotiating for liability insurance premiums.
We have seen several tax advisories which warn about having clauses in leases which eliminate all risk from ownership. In one case, the tenant was required to restore the property to “as good as new” condition upon lease expiration. THE IRS DENIED THE OWNER HIS DEPRECIATION on the basis that, since his property was being restored, it was not depreciating.
We see steadily increasing occupancy rates everywhere. With these come increases in rents, and following closely behind, the first trial balloons on rent controls. Al Lowry, writing in the Creative Real Estate magazine, provides some insights on how RENT CONTROLS WERE BEATEN BACK AT THE POLLS IN SANTA MONICA THROUGH A MASSIVE PR CAMPAIGN ENLISTING ALL SEGMENTS OF THE COMMUNITY. Rent control has never been an intelligent response to shortage of housing. The obvious answer is more housing, but as long as politicians are elected on the basis of promises rather than solutions, we can expect to keep looking back over our shoulders at the spectre of rent controls.
Here’s some “note language” sent us by Jay Turner, Salem, Mass. “By acceptance of this note, the holder agrees that the makers, endorsers, guarantors, or other parties to this note MAY SUBSTITUTE SAID COLLATERAL WITH OTHER COLLATERAL WHICH IN THE OPINION OF THE MAKERS, ENDORSERS, GUARANTORS OR SAID OTHER PARTIES, HAS EQUAL VALUE to the collateral pledged herewith” Check with your own Attorney to see if this will hold up in your area before using.
Judy Burrell from Lakeland, Florida sent us this formula: She offered to purchase a F&C house SUBJECT TO OBTAINING AN 80% LOAN AND SUBJECT TO THE OWNER’S AGREEING TO LENDING HER $15,000 OF THE LOAN PROCEEDS at 9%, interest-only (which yielded the cash flow the sellers really needed). Since the only alternative to the Seller was a lower-yielding CD, this offer was accepted. JUDY USED THE $15,000 LOAN BACK TO FUND HER DOWN PAYMENT WITH THE 80% LENDER, AND SECURED IT WITH A SECOND MORTGAGE ON ANOTHER PROPERTY. Who says you have to have cash to become an investor in SFH.
We keep stumbling upon SCHEMES TO BUY BUILDER’S MODELS for them to lease back. One company we’ve heard about in Virginia forms a syndicate which pays the builder 100% of his base price plus 85% of his options (air conditioning) and 50% of his decorator items (special wall paper). THE BUILDER PAYS ALL CLOSING COSTS INCLUDING BROKERAGE FEES and then leases back the buildings for a one year period at 1% per month of the base price. The lease is cancellable at any time by the builder who in the meantime is responsible for all maintenance, taxes, insurance, etc.
Marty Morris of Tucson, Arizona has mailed us a copy of Senate Bill 1412 which requires that AN AFFIDAVIT OF VALUE BE APPENDED TO CERTIFY THE PRICE. It must be signed by both Buyer and Seller of their agents. It became effective on December 31, 1978. From now on, to find out how much someone paid for their property, just look it up in the public records and read the cost. Like a lot of other States, Arizona is tightening its regulatory controls.
Inflation? Don’t knock it! According to the Social Security Administration, if you live long enough (i.e. 2050) THE AVERAGE AMERICAN WILL BE EARNING $656,000. A YEAR. RETIRING WITH A SOCIAL SECURITY CHECK OF $259,000. BREAD WILL COST $37.50, A $55,000 HOME WILL SELL FOR $3,410,000. Shocking? You bet, especially when you take into account that these figures are based on a 4% annual increase in the CPI. IT’S SCARY TO THINK THAT THESE GOVERNMENT AGENCIES ARE COMPUTING NEEDS BASED ON 4% RATHER THAN THE 10% WE HAVE TODAY!
Ken Kisner, Garden City, Kansas tells us of a Dentist who was attempting to write down his office building over 20 years. The IRS wanted to use 50 years. THEY COMPROMISED AND AGREED TO 50 YEARS ON THE OUTSIDE SHELL WHILE ALLOWING 10 YEARS ON THE INTERIOR (which the nature of the clinic required to be reconfigured from time to time). THE NET DEPRECIATION EXCEEDED THE ORIGINAL AMOUNT which would have been acquired under the 20 year life that the Dentist had requested. With the new tax law’s 10% investment credit for rehabilitation of 20 year old commercial buildings added to a 10 year write off of interior improvements, this could be a lucrative precedent for those with a need to rehab.
Rudi Timpte, Kirkwood, MO sent us a solicitation offer which had been sent to him. A COMPANY IN NORFOLK, VA, IS OFFERING TO TEACH INVESTORS HOW TO LOCATE DISTRESSED PROPERTY USING COURTHOUSE RECORDS. THE COST IS $7500. PLUS $6,000 PER YEAR FOR 5 YEARS. They only sell the package to one person in each county, so it is offered as an exclusive franchise. It’s really a good presentation, but what they offer can be obtained by anyone either by attending the Fortune Seminars course, or by taking the time to go down to the Court House and asking the clerk to look up distressed properties. They are correct about one thing though: there’s a lot of money to be made in distressed properties for those who want it.
SORRY ‘BOUT THAT. We hear some of our Christmas Edition (Letter #5) got lost in the mail. If you failed to receive your Gold Letter for January, let us know and we’ll send you another.
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