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Jack Miller wrote the Commonwealth Letters from 1978 to 2009. We have all of them in the BLOG section of the website. Even though these letters were written a long time ago, they hold KEYS to successful investing for today and into the future. Most all of Jack Miller’s training is every green,. See this Commonwealth Letter from 1979 — tell me if it does not sound like it is written for today
Vol 1 No 11
OVER ONE HUNDRED TRUSTEES OF THE COMMONWEALTH TRUST attended the Miller/Schaub Graduate Seminar in Denver. The “average” attendee owned over then SFH’s with many holding several multiples of that number. Trust assets represented totaled over $43,000,000.00
The consensus of the Trustees was that the following events are eminent in our investment lives: 1) CONTINUING AND INCREASING GOVERNMENT HARASSMENT in the form of rent controls, taxation and restraints of property usage. 2) CONTINUING INFLATION AT EVEN HIGHER RATES punctuated with short periods of recession culminating in an eventual full scale depression at least two years down the road. 3) VERY EXPENSIVE OIL PRODUCTS which will continue to encourage long term southward migration and may have an immediate effect on “rural” properties where tenants would be forced to commute long distances.
During the estate planning discussion it was suggested that EACH REVIEW HIS/HER INSURANCE COVERAGE AND UPDATE POLICIES TO REFLECT CURRENT VALUES. Health insurance should be used as a hedge against disastrous illnesses. IN THE EVENT THAT YOU ARE NOW “UNINSURABLE” YOU MAY BE ABLE TO JOIN A GROUP LIKE THE “FARM BUREAU” AND STILL OBTAIN INSURANCE.
With regards to property insurance, it was suggested that all of the Trustees insure with the same company. In this way, we could command lower premiums and perhaps negotiate a special large deductible clause which could reduce premiums even further. IT IS ESTIMATED THAT THE TRUSTEES AS A GROUP PAID WELL OVER $1,000,000 IN FIRE COVERAGE ALONE LAST YEAR. We are checking the feasibility of such an undertaking and will communicate our findings in a later letter.
A BUYER’S MARKET HAS ENGULFED NEARLY THE ENTIRE COUNTRY. In the event you are still in a seller’s market, start planning for a reversal. Buying opportunities should be abundant by the end of summer when we anticipate interest rates peaking. Although several banks lowered their prime ¼ point to 11.5% in early June, it does not appear to be a trend. M1 made a record jump the 1st week in June which will keep the pressure on the Feds to keep credit tight.
AS CONSUMER DEBT REMAINS AT AN ALL TIME HIGH, WE OFTEN SEE PEOPLE BORROWING OUT THEIR HOUSE EQUITIES AND PAYING 18% plus costs on short term loans, i.e., payments of over $600 Pl on a $46,000 house. Once trapped this way, the next stop for this over anxious consumer will be our office, or the foreclosure sale. LINE UP COMMITMENTS FOR LARGE SUMS OF CASH NOW for the foreclosure opportunities which are sure to come.
OPTIMISTIC BUILDERS ARE STILL BANGING THEM TOGETHER, confident that they are right and all the other indicators are wrong. THESE NEW HOUSES WILL ENJOY TREMENDOUS APPRECIATION, even in slow times and should be targets for astute investors. Several Trustees have syndicated investors to acquire builders’ inventories when they are unable to sell and finance them later this year.
In the event you are still building, be positive that your bankers ARE WILLING AND ABLE to give you commitments for permanent financing. MANY BUILDERS AND DEVELOPERS WERE RUINED BY BANKERS WHO RENEGED on firm commitments during our last money crunch.
KEEP AN EYE ON THE POLITICAL SCENE, especially the Democratic side. Should Kennedy decide to run and draw strong support, leaving Jimmy as a lame duck, things may really get rough. Hopefully, Jimmy will be strong enough to compete, and will fuel the fires soon to get the economy looking good for the election.
THE GAS SHORTAGE IS REAL, meaning odd/even rationing and long lines in many Metropolitan areas. With luck the shortage will encourage deregulation in the oil industry which may mean short term high prices, but competition will prevail and maybe we will even have a “gas war” again someday.
LOOK FOR ENTIRE NEIGHBORHOODS WHICH ARE FAR ENOUGH REMOVED FROM WHERE PEOPLE WORK AND SHOP, THAT A SHORTAGE OF GAS WILL MAKE PEOPLE PANIC AND SELL CHEAP. Maybe you can acquire these equities by using a prepaid lease in a closer in property as the down payment. As the only real problem with this property is transportation, solve it by either purchasing and operating a bus or van and making regular runs. Let one of your tenants drive it for the privilege of riding free. Another alternative may be to charter a city or school bus (use their gas) to make three runs a day. In this case you may be able to service other neighborhoods or neighbors in the area.
When most are crying the blues about the tight money situation, SEVERAL TRUST MEMBERS HAVE FOUND A BONANZA OF CASH BY SELLING MORTGAGES AT DISCOUNTS YIELDING 18% PLUS. Although this sounds expensive, think of 18% as an eight point premium, or $800 per $10,000, over market. Therefore, your deal must be $800 or multiples of $800 better than normal.
Take a $60,000 house with a $40,000 first against it that the seller is willing to take $14,500 for. We purchase it by taking over the first note, and giving the seller a second in the amount of $20,000 at 10% interest payable monthly for seven years. The seller then sells it to the paper investor whom we had lined up, for $14,500 cash. Perhaps you can negotiate a fee from the investor for finding the discounted note and pocket some cash at closing.
FAMILY SIZES CONTINUE TO SHRINK, to an average of 2.8 in 1979 from 3.14 in 1970. This is because of a lower birth and higher divorce rate. THIS FREE-ER LIFE STYLE TRANSLATES INTO A MORE MATERIALIST SELF-INDULGENT SOCIETY, WHICH WILL PRODUCE WELL HEALED RENTERS. Typical of our times, these people will want the benefits of ownership, i.e., appreciation and tax write offs for interest and taxes, without paying for them.
WE RECENTLY APPEALED TO THIS DESIRE in a young CPA, by selling him one-half interest in a condo apartment we owned for his agreement to make the mortgage PITI payments and may the maintenance fees for three years. At that time we will either sell or split the proceeds, which should be more than triple our original investment, OR sell our share to them on paper which we can sell at a discount to yield us an equal amount of cash.
THE EX-RENTER/PURCHASER GETS A NOTHING DOWN DEAL which will give him some tax advantages plus one-half of the appreciation. WE SOLVE A NEGATIVE CASH FLOW AND MANAGEMENT PROBLEM for three years and lock in a long term capital gain. This can be repeated many times I a desirable condo complex.
Have you priced a new or used gas guzzler lately? Do it and you will notice a sharp drop in price in the last 60 days. NEW CAR SALES WERE OFF 26% IN MID JUNE. Used car dealers especially are crying because of large inventories of big cars. LOCATE A PROGRESSIVE USED CAR DEALER and see whether he will sell you a bright and shiny slow mover, for a note secured by a second on a house. When one says “yes,” negotiate a price and terms on several of the units on his lot, and tell him that you will send down someone to pick one out.
NOW START CANVASSING SELLERS, OFFERING A LATE MODEL CAR FOR THEIR EQUITY at a price that makes you happy. The car would be especially appealing to sellers who must leave town quickly, divorcees who are stuck with high payments, and others who could get a quick loan against a car when they cannot borrow against their house equity. They can have their choice of cars which you will then purchase with a 2nd secured by the house you are acquiring. You have a no-cash-down deal at a price well below market value, and perhaps can negotiate a free car in the deal should you do enough business with the dealer.
The June edition of Money Magazine has an extensive article on condos, coops, and condo conversions, showing the increases in prices compared to houses in the recent past. (See May ’79 CWL) We agree that THE BEST ONES TO BUY ARE NEWER CONDO CONVERSIONS because they are made available to existing tenants at discounted prices. APPROACH THESE TENANTS and propose that they buy the apartment with owner occupied financing, after which you will then purchase the apartment from them on a contract for deed, and lease it back to them at a rent lower than their mortgage payment.
For example, a local developer converted a well located, solidly designed and constructed rental complex into condos. THE UNITS WERE TO RETAIL AT $46,000 AND WERE OFFERED TO THE EXISTING TENANTS AT $42,000, WITH 95% FINANCING AVAILABLE. The apartments were rented at $265 per month and the new payments PITI and maintenance would be over $475.00. We anticipated a rapid increase in prices and offered a tenant a three year lease back at the same rent, $265 per month, in the event they would purchase the unit on the terms offered and sell it back to us for $42,000 on a nothing down contract for deed. The tenant would put up approximately $3,000 in down payment and closing cost and would receive over the three year period $7,560 in rent credit. At the end of the 3 years, we would give the tenant the right to either continue or rent at market rents or have the first right to purchase at the then market price and terms, should we decide to sell. We would not enter into this arrangement unless we were confident that the property would be worth in excess of $60,000 at the end of three years. Note the advantageous tax posture of the investor, who in effect “expenses” his down payment by not collecting higher rents.
As condos become more popular and more in demand, THE TREND OF CONVERSION OF GOOD RENTAL APARTMENTS INTO CONDOS CONTINUES TO GATHER MOMENTUM AND PUBLICITY. TENANTS ARE DEMANDING THEIR “RIGHTS” and the elected officials are listening. In Washington, D.C., a 90 day moratorium was called on the issuance of permits for conversions and the trend is sure to spread to other “renter oriented” communities. SHOULD YOU RUN UP AGAINST THIS OR OTHER ORDINANCES WHICH THREATEN TO RESTRICT YOUR RIGHTS TO SELL OFF UNDIVIDED INTEREST IN YOUR PROPERTY, SELL A “LEASE HOLD” INTEREST instead of a “fee” interest. For example, instead of suffering through all the Governmental red tape and legal expense it takes to convert a rental complex to condos, sell each prospective “owner” THE RIGHT TO LEASE. Offer to lease a $50,000 apartment for ten years at $400 per month plus taxes, insurance and maintenance for an upfront $3,000 payment.
THE TENANT BENEFITS BY LOCKING IN HIS RENT FOR TEN YEARS with the exception of taxes, insurance and maintenance which he would have had to pay had he bought it. He can now sell his “lease hold interest” to another user five years down the road when rents have doubled and take the profit as capital gain.
THE OWNER OF THE BUILDING HAS LOCKED IN MANAGEMENT FREE TENANTS FOR 10 YEARS. Recouped much of his capital investment, and will benefit by any appreciation the property will enjoy, PLUS retain tax benefits. This can be done with one apartment at a time, taking advantage of any rent increase which occurs and avoiding vacancy problems.
OUR “DEAR JOHN” LETTER THIS MONTH ASKS ABOUT HOW I WORK WITH ATTORNEYS. The cardinal rule in hiring an attorney is that YOU NEVER COME OUT AHEAD BY PAYING BARGAIN PRICES. ‘The attorney who will work cheap knows what he’s worth and will cost you a fortune in the long run. Secondly, AVOID A LAWYER WHO STRUCTURES INSTRUMENTS THAT ENCOURAGE LITIGATION. Only the attorneys end up winners in court. Here are two approaches which may work for you.
Jimmy Napier is from a small town and controls his attorney population by HAVING EACH AND EVERY ONE OF THEM (THERE AREN’T MANY) DO WORK FOR HIM ON A REGULAR BASIS. This way they are all “Jimmy’s attorneys” and you can’t hire an attorney in Jimmy’s county to bring an action against him. Try bringing in an out of town attorney to a small town and see how successful you will be.
Being from a larger town, I cannot afford to keep some 2000 attorneys on the take, so WE PICK ON ONE YOUNG BRIGHT ATTORNEY. WE SEND HIM TO SEMINARS AND INVITE HIM IN ON DEALS HE CAN AFFORD, to show him our methods of operation. In return, I demand prompt service (a novelty in the law business) and get access to an information loop which gives us first hand information on estates, bankruptcies and other profitable opportunities generally reserved for the legal trade.
In case you think that we have had a couple of good years, look at these statistics in a country which is strongly socialist. The medium new house in England increased in price 26% in the past 12 months.
Small loan companies will be excellent sources of opportunity in the coming 9 months. Generally, they are hard to deal with when trying to buy defaulted loans because they can profit by foreclosing and reselling. Now they will probably be deluged by bad loans secured by 2nd’s on houses, most of which they will be pleased to sell at discounts or for another note which you will guarantee.
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Wow, thanks for the easier access to the letters! 🙂
Thanks for this MONSTER resource.
Jack was ahead of his time, not because he was so smart (he was), but because he loved what he did and spent all his time thinking and DOING year after year after year.
You can’t beat the man who lives and breathes the stuff.
Those of us that knew him are SO GRATEFUL for his help, advice, attitude and challenges.
These letters, read carefully and repeatedly, will give anyone a Master-Class in the business.
No one since or before has delivered as much as Jack.
Thank you for making these available,
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