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The CashFlowDepot weekly confernce call is Tuesday, October 13th

OUR NEW NUMBER is

* 1-218-862-7200
* Access Code: 890338

With this Conference Call service, I will be able to MUTE everyone so we don’t have problems with background noise

If you want to ask a question or make a comment during the call – you will need to press 5* to RAISE YOUR HAND.
I will be monitoring the call and can unmute your line if you raise your hand.

The conference call starts at:
8 pm Eastern
7 pm Central
6 pm Mountain
5 pm Pacific

This Tuesday, I will go over some of the economic reports I’ve read recently.
Then, together, we can share ideas about where the opportunities are.

The answer may surprise you!

Here are some Q & A which Jack shared at CashFlowDepot which apply to today’s economy

What is the reason for inflation?

Answer:
Inflation is caused by an increase in the amount of the money supply without a corresponding increase in the amount of goods or services in any economic system. The amount of money in use, or the monetary base is regulated by the Government which controls it through the banking system. When a Government is allowed to expand the money supply at will, without guaranteeing it with assets such as gold or silver, the temptation to produce more money than can be redeemed is overwhelming. Richard Nixon, Lyndon Johnson, Jimmy Carter all did this.

When you elect public officials based on the PROMISES they make for more ‘free’ services with lower taxes you will eventually have inflation. Who’s really to blame for inflation. We all are. Here’s a test. Try to name just one Senator, Congressman or President who you or your friends elected because he ran on a platform of increased taxes, reduced services, massive cut backs in industry and unemployment? See what I mean? We all cause inflation.

Question:
What would happen to our real estate in a depression?

Right after the war a fellow named Sewell Avery ran Montgomery Ward which at that time was neck and neck with Sears Roebuck competing for the front rank of retailers in America. He believed we were due for a recession, so adopted a defensive stance. Conversely, the managers of Sears bet on a boom in retailing and leveraged themselves to the hilt to gear up for it. We got the boom, not the depression. This allowed Sears to gain a lead never to be overcome by Wards. Avery’s feared recession came along 20 years too late after he was dead.

An alert, aggressive Investor usually finds a way to overcome his problems. Obviously, having some liquid assets at your finger tips would be good, if you could actually predict when a depression would occur. On the other hand, one can plainly see that if ALL your assets were liquid (i.e., cash, bonds, stock. etc.), you would be inviting another kind or risk. Suppose we had a runaway inflation, say 30% next year; these financial assets could be devalued to the extent that you might lose as much purchasing power as you would have lost if you owned highly leveraged properties and we had a depression.

The key is to bet a little on both horses by having some houses free and clear and some leveraged to the hilt. You’ll lose a little profit on the free and clear houses if inflation hits, but a house that doubles in value still yields 100%. On the other hand, if deep recession hits, you’ll lose your leveraged houses, but keep those that are free and clear IF you avoid pledging all your assets or signing personally with full recourse on loans. Of course your wits and energy will be your best defense no matter what happens.

Life would be simpler if we all had a crystal ball to foretell the exact moment to shift assets from one type of investment into another, but we don’t – no one does! An informed inquiring mind, a healthy dose of skepticism, mixed with the ability to bet on one’s own perceptions is the real key to security.

Question:
Say I own 50 single family homes approximately 60% leveraged with about $1,000,000 in equity. If we were to have a repeat of 1992 and 1993 with massive layoffs and foreclosures, what could I do to protect my investment?

Answer:
First of all, I assume your portfolio consists of the right kind of single family houses. That is, decent housing in a decent neighborhood for decent people who are mainly employed because of their command of skills needed in the community. They will be the last fired and the first hired in most instances. Your tenants will be earning dual incomes and possibly have adult or working children who can help with the finances.

You will have to be flexible in working with these people, and you can expect your rents to sag, but you will probably survive. You might protect your investment by pre-paying your principle payments a year, and getting credit for a year’s advance payment, thus if you fail to make regular payments when the recession strikes, you will still be ahead on the Mortgagee’s books.

Or you might sell some of your more risky investment houses and use the cash to protect the better, higher equity, houses. You are right in starting to look for remedies now while you have time.

Question:
This all sounds good, but what happens if we have another great depression like the thirties?

Answer:
This sounds like a question a person would ask who has yet to begin an investment program, or one who has never known the defeat of being absolutely broke. We have found that the rich who inherit their wealth without effort and those on regular salaries are most nervous about a depression. The person who experienced a period of life where he had little or no assets, little or no income, and had to live by his wits, is less afraid of reaching that stage again because he has the confidence that he could again regain his present position in life. In short, he’s better prepared with survival skills.

I am not suggesting that those of you who are well off donate your assets to charity so you may join that largest of all majorities, the poor. I am merely making the observation that being broke can be a TEMPORARY condition as long as the person who becomes broke does not become content with his lot. Even if you are of the opinion that a depression is eminent, what have you to lose by trying some new investments now, if the final result is that we will all be broke once again? Nothing ventured, nothing gained.

Question:
When you are certain that the economy is going to collapse, what action should you take?

Answer:
First get your personal situation under control. It’s a lot easier to be brilliant and make your fortune when you have a dry, quiet place to live and a full stomach. Second on the list would be to contact those who you know have unlimited sources of capital and share your views with them. In the event you are wrong, you will have years to rebuild your reputation, and in the event you are right, you will have proven yourself to be an accurate forecaster. You will have their confidence for future investment. There will be many fortunes made by those who can recognize and capitalize on opportunities in bad times.

Next, if possible, TAKE THE MONEY AND RUN! Get liquid so that you may take advantage of the many negative cash flow opportunities which will present themselves. Realize your strengths and limitations, so you do not become just another loser, lost among the crowds or huddled masses. For those just starting to build assets, a depression is the best place to start. There will always be more sellers than buyers and prices will be at rock bottom. I went into Houston at the absolute bottom of the real estate crash there in 1987 and bought apartments at less than $1000 each for cash. Houses were going for as little as $5000 cash. It’s only when you are cashing out that a high price has any true meaning. As long as you are still buying, pray for low prices.

Question:
In the event that houses for some reason unforeseen at present, became a bad investment, what would be your second choices?

Answer:
Houses have nearly all the investment benefits available anywhere today! Rapid appreciation, cash flow, tax shelter and easy available financing. To replace the single family house in an investment portfolio would probably take a variety of properties. Since I don’t know what you expect to happen to ruin the house market, let’s just pretend there were no houses.

The major advantage in a house is the appreciation which is untaxed until sold. We can realize similar appreciation in well located developed land, but will have to endure substantial negative cash flow while we hold because we would have to use leverage to maximize the return on our invested capital. By investing in discounted paper, we could get maximum cash flow on our invested dollar, which could offset the negative cash-flow on the land.

I’ve invested for many years in pine tree forests. These sell at very high prices during periods when housing is on the rise, but when nobody is building, nobody is buying lumber. Still, my trees keep right on growing in size – and hence increasing my equity through actual growth rather than by means of financial appreciation. If I run short of cash, I can sell a few to pay property taxes. No management, no maintenance, no muss, no fuss. They’re not bad.

With land, there’s always the possibility that we could erect a low cost structure such as a bill board or grain storage warehouse which would have very limited life on the land which we could lease out to recapture our investment in the building, at a high rate because of its short, useful life. Buy why bother. Today we can accomplish all of our objectives by owning a single house.

Question:
I keep reading about the deep depression that will strike sometime in the next few years. Like California’s big earthquake, everyone seems to agree that it is coming, but no one can offer any specific actions we should take to prepare for it. What do you recommend?

Answer:
It’s always prudent to get some liquidity into reserve assets! Either you are going to be a passive or an active participant in any economic upheaval. If you are passive, and the dollar is still used as currency by us, money will protect you against uncertainty. If you are active, you will want to take advantage of all the distress sale activity that depression brings on.

Remember, there were always plenty of people attending those RTC foreclosure sales who had the money to bid on cheap property. They became overnight millionaires, and so can the active investor. How do you get liquid? Borrow as much as possible on non-recourse loans! First use institutional loans then private party loans. If you’ll agree to share opportunities, you’ll find there will be no shortage of people interested in profiting from any downturn.

Once your property is mortgaged to the hilt, sell options on it, or sell it with no cash down and retain the option to buy it back later. Exchange it into personal property (cars/boats, gems, etc.), and sell/borrow against it. Keep at it until you feel you have enough money to brave the storm. If you are really worried, buy junk silver coins and store your cash in a safe place just in case the currency collapses. Or open an off shore bank account denominated in a currency such as the pound, yen or franc. Keep about one-third of your net worth liquid, one-third free and clear, and the balance mortgaged to the hilt. That way, if you lose less desirable mortgaged property, there is little loss.

Your more desirable property can be protected with your cash until it is time to start again- but bear in mind that if all those predictions are wrong, you will need to reinvest to keep pace with inflation. These are many safe harbors in a hurricane, but it takes a good captain to reach them in time. Don’t forget to invest in your family and yourself , you may be all you’ve got some day!

Question:
What should one do to protect oneself against a possible depression of the economy as far as single family homes are concerned?

Answer:
In a depression, people don’t move out into caves and fields. They continue to live in houses and to pay rent. The problem is that they don’t pay as much rent as often because they don’t have jobs. At the same time that thousands of people are not paying rent, millions won’t be paying mortgage payments. The banks will take a few houses initially through foreclosure suits, then they will become overloaded and will probably do what they did in the 80’s in Texas; just stop foreclosing and wait for the government to intervene. In the meantime, the owners will be able to barter living shelter for maintenance services, paint jobs, medical care, groceries, etc.

In a true barter economy where nobody will accept worthless dollars, shelter will command as much priority as it does in a cash economy once the owners learn to be creative. The best defense is to arrange your mortgage payments to be well below the amounts of rent you expect by refinancing loans now to stretch out payments at lower interest rates, or to leverage your property beyond the point the bank would want it back, or make it free and clear.

You could just sell out cheap and retain a remainder interest or an Option to repurchase the property at a profit to the person who buys from you. Doing this would enable you to effectively share out the debt during hard times, and come back into ownership once times get better. Incidentally, these techniques also offer you a leverage opportunity just in case the depression converts to a booming inflation. In either case you will win. Remember, the big losers in any kind of economic upheaval are the unthinking savers, not the thinking investors.

Question:
In the event of a depression, how insistent do you think the banks will be in collecting the full principal and interest due them, and do you think they may settle for whatever cash they can get rather than foreclosure?

Answer:
In studying historical behavior of banks during other periods of recent recession and depression, most banks will foreclose on several properties at the beginning of the recessionary period but then realize that the effect on their loan reserves in addition to the management of these properties is more than they want to handle. After the debacle of the late 80s where so many bankers were fired, jailed and/or driven out of the profession because of huge inventories of foreclosed properties, its doubtful that this will reoccur. They will look for alternatives which will make them look solvent. At this point, they may decide to make an “adjustment” with the present owner to continue to occupy or manage the property rather than to take on those management responsibilities themselves.

Several times in our past history banks have given owners moratoriums on both principal and interest, and/or taken over the management of the properties for the owners, giving the property back to the owners after the economy has adjusted itself. Of course, an enterprising Investor with an in-place management team might obtain an Option from the Lender to purchase the houses at a future date in return for his providing management services or leasing foreclosed houses at marginal rents during the depression.

Question:
Right now, the banking system and government debt financing are in a precarious state. United States banking and financial institutions are more vulnerable to the public and to foreign depositors than in almost any other time in history. What would be the effect on a single family house portfolio if the government should turn to confiscatory taxation to put a lid on inflation and restore fiscal integrity to the Banks? Would there be a major housing crash?

Answer:
I don’t think single family housing will ever be a target of the government for the following reasons: Housing in this country is widely held by a majority of the citizenry. When Government attacks the homeowner, it takes on a formidable foe. Look at California’s taxpayer revolt which generated Proposition 13. That’s what happens and the Government knows it! It is a lot easier to pick on larger properties such as industrial, commercial, multi-family residential, where ownership is more narrowly held, often by non-voting corporations rather than by irate citizenry. The key to a housing crash will be REGIONAL problems (such as a mass exodus from the inner city, high tax states, cold climates, etc.), caused by Government policy as happened in the energy belt. Indeed, in a real crunch, the Government has traditionally stepped in and PROTECTED the home owner.

Question:
Every time I read a magazine or turn on television, I hear conflicting stories of inflation and/or impending depression. What can I do to protect my portfolio in a way which will hedge both inflation and deflation?

Answer:
The future poses problems to every generation and to every age. No one can be certain of the course things will take. However, a defensive stance may be adopted. Consider the effect of refinancing part of your portfolio and using the proceeds to pay off the other part.

If today you owned 20 houses all valued at $100,000 with $40,000 mortgages, you would wind up with about 5 free and clear, and with 10 mortgaged to the hilt through refinancing or sale. Your relative leverage is about the same, so your inflation hedge would be maintained. At the same time, your mortgaged property would not be attractive to a lender and would be safe from foreclosure in the event of depression, while your free and clear houses would still be capable of providing some form of income, even with reduced rents. This is only one of the many ways the mind can device to be prudent during turbulent times. Think about it and you’ll find others.

Question:
How do you feel about investing in gold and silver as a hedge against inflation?

Answer:
As a hedge against inflation, gold and silver both seem to keep pace, with gold possibly being more stable. However, most investors are not satisfied with merely keeping up with inflation, they want to keep ahead of it! Both of these metals (and they probably should not be grouped together as they have quite different market records) have similar benefits. Their primary appeal is that people seem to favor precious metals whenever the economy or competence of the government is uncertain.

Metals have been a favorite in countries where real estate has been risky because of government regulation or government instability. However, in our country, small income properties have so many advantages over precious metals that we do not consider these as investments but rather protection against periods when the currency, as we know it today, loses a high percentage of its value. At that point in time, if you have invested in gold and silver and can find someone else who will take it for his real estate you will no doubt make some very attractive buys.

Question:
What areas are the best bets for long term investing in houses and why?

Answer:
When I asked that same question recently to one of the country’s largest and most successful investors he answered “New York City, Buffalo, Cleveland”. I cut him off thinking that he misunderstood my question and he replied that in the next five years we will see tremendous opportunities in these areas which will certainly turn around before the end of the century.

When most of us think long term, it means the next five years. I think when you narrow your investment medium to houses and small land parcels, and are not trying to catch dips in the cycles that areas go through, the sun belt has to be the best area to invest in. One reason why is our long term outlook for energy. Although it is unlikely that we will be unable to purchase the fuel we need, it is bound to become very expensive. When this commodity begins to command too much of the family budget, people will move south, family connections or not! We favor those areas with plenty of natural drinking water and away from major metropolitan areas that may be a target for mahem.

Question:
How can you work with banks and other lending institutions in periods when they are repossessing a lot of property?

Answer:
Banks are in the business of lending money not managing property. When their staff has to adapt to the position of overseeing the operation of a real estate portfolio, especially one of empty houses, they are not only inept, but frustrated. They will be crying out for someone with a track record to take the property off of their hands to give them cash flow, they can thus, repay their depositors who will most certainly be in need of their savings and checking account funds.

The Pro operator should try to arrange with the bank to manage their property for a percentage of the profits over the amount of the original mortgage that the bank NOW HAS INVESTED! Be cautioned to reduce such an arrangement to an iron clad option so that the bank will not reconsider its position in better times.

Another strategy for those who are in stronger cash positions would be to offer to purchase defaulted loans from banks at discounts. Then choose carefully the mortgages you purchase, looking for those secured by properties which you turn around quickly. Now you can repeat this performance over and over again.

One of my newsletter subscribers has discovered that government bureaucrats are little different from bankers when it comes to managing property. He has been earning over $200,000 per year for the past 5 years overseeing some 400 empty HUD houses in government inventory. It seems clear that being able to manage will earn a comfortable income in a downturn.

To Your Extreme Success

Jackie Lange

p.s. If you miss the conference call, the recording will be available on CashFlowDepot.com on Wednesday afternoon.

[Greg Christiansen]

Greg Christiansen

Jackie,

I wanted to speak up during the call, but I didn’t get the chance. It was an OUTSTANDING call fyi. Here’s a situation I have been contemplating and the call tonight made me think even more about it:

The bank I have my accounts with and have done business in the past with has a few properties (really, they have done pretty well considering–they aren’t being crippled like a lot of the banks have with bad paper). One is a VERY nice double wide in a park that has 1-2 vacancies in 180 lots. And they are building more lots. One of the top school districts in the area and the lot rent is only $300. Great park.

Last month they wanted $20k for this mobile. Last week they dropped to $15k. I talked to the banker yesterday. She really wants me to make an offer and told me she is considering winterizing it as we are starting to see freezing temps at night.

My choices:
1) Buy the home and try do a Lonnie deal (which are reserved for singlewides normally). This could be tough as we are headed into winter.
2) Offer to buy it contingent upon me finding a buyer. I guess this would be an option type contract. There is less risk in this than choice 1
3) Get a HBS contract signed with the bank and split the sales price. If this isn’t a cash offer though, I don’t know how we would do this.
4) Wait it out. I don’t see this going anywhere. Especially in the winter. I am wondering what that will do with the relationship between the bank and the park manager/owner, which apparently is already frayed.

Solutions?