August 1984
Vol 7 No 11
CONSIDER THE PLATYPUS . . .
How like the small investor he is. In the scheme of things, the Platypus is sort of on the sidelines of life. He's different. He has a bill like a duck, a tail like a heaver, a fur coat like an otter, lays eggs like a tortoise and spends his life searching for the means to survive. You might say that he has a narrowly defined peer group, but so has the small investor. And like the Platypus, the small investor also is without many peers in his environment. He too spends his life trying to survive within a limited range of opportunities. Also, like the Platypus, his demise occurs when he's no longer able to glean enough income or nourishment to support his activities. Platypi must consume their own weight in food each day to provide the energy to continue their search the next day. And the small investor must earn his income from his capital or he'll begin to consume capital. When it's all gone, so will he be. Exit the Platypus!
In this issue, let's see if we can find ways for you to avoid the fate of the Platypus. In the Portfolio Strategies seminar series just concluded, the class considered a wide range of economic scenarios and the most advantageous investment vehicle for each. Some 22 types of investments were examined in the light of 8 ominous economic portents. There were 3 classes in 3 different parts of the country yet the attendees came up with remarkably similar conclusions independent of one another. And in the top 3 investment choices CASH OR HIGHLY LIQUID INVESTMENT were a consistent choice of all our investors.
The key to having CASH is to earn it, save it, have it earned for you by your investments, employees or benefactors. Somewhere among those sources there had to be INCOME which exceeded OUTGO which was employed by someone to generate more INCOME. In contrast to the Platypus who consumes all his income, the small investor must somehow find ways to consume only a part of his income, and to reinvest the remainder at a yield which exceeds the inflation rate plus the tax rate. Oddly enough, some responsible investment advisers are actually counseling people to invest in enterprises which actually consume capital during their investment lifetime in anticipation of large gains later. We need to consider that approach too. It might make sense, under certain situations.
THERE'S NO SUCH THING AS A FREE LUNCH . . .
Search your memory. Isn't it true that what starts out being a free lunch can swiftly degenerate into a sales pitch – or worse yet – a trap? So it is with investment! Avoid the get-rich-quick schemes. No one who actually owned a gold mine would sell you a map to it. You'll earn your cash flow the old fashioned ways: selling, leasing, kiting “paper“in one form or another using discounting techniques and buying adroitly plus that old standby, borrowing. And, if you do your job right, you'll not only survive; you'll have some capital left over to enable you to be a benefactor to someone else. In the meantime, hopefully, you'll be able to achieve and sustain a measure of freedom with cash.
The easiest way to jump-start your cash flow is by selling something. Whether you make a profit or merely reclaim part of your invested capital, it's still spendable to the extent that it is cash or near-cash. Aside from dollars, that means you can take listed stocks or bonds, discounted Notes, mortgages, trust deeds that have a ready market, cars, planes, boats, gold coins, investment grade diamonds, rare stamps, even other real estate that's more marketable than your own. But the caveat here is YOU HAVE TO KNOW WHAT YOU' RE DOING any time you accept non-cash items on a sale of your property. I'm back at my old pitch again: KNOWLEDGE IS THE REAL KEY TO WEALTH – property is merely a vehicle!
Copyright © Sunjon Trust All Rights Reserved, www.CashFlowDepot.com. 
(888) 282-1882
Quotation not permitted. Material may not be reproduced in whole or part in any form whatsoever.
(888) 282-1882 Why sell when you're taking a loss? Over 30 years as an investor has taught me that its usually less expensive to get rid of losing propositions as early as possible. Emotionally, that's hard to do. Each of us would like to think we were invincible but we're not. We all make investment mistakes. The sooner we can recapture our cash and move on to more profitable ventures, the more that cash will earn and the less the mistake will cost. One group of luminaries, each one of which was an astute investor, joined in on a venture to develop building lots 7 years ago. They continued to throw good money after bad in hopes that this would turn profitable. It didn't. So instead of losing just their original investment, they also lost the interest on the money, plus the payments, and taxes and the interest each would have earned. Had they sold out at a loss 7 years ago, they would have been much better off even at distress auction prices.
An auction is one way to convert equity to cash quickly. Properly conducted, it needn't automatically mean that you'd be selling at wholesale. Think back to auctions you've attended. Didn't you ever pay too much? It can happen when you sell too. You can use the organized real estate industry. A good broker using the advantages of multiple listing services can usually find a buyer at market prices and terms for a fee. And you might negotiate with him to pay that fee with other property rather than with cash! In this way, you'd effectively be selling HIM one more piece of property for the cash you'd be saving.
The EXCHANGE market place is also an effective way to sell property for non-cash currency. As a mental conditioner, think of what a dollar really is. It's a promissory note representing the full faith and credit of the USA (albeit that it's printed by the FED under questionable authority). Hence, it is a surrogate for all the goods and services produced by all of us. Except for being a medium of exchange, it has little value! When you can accept something convertible to dollars in exchange for your property you've widened your market to include others who wish to sell. In this market place then, you'll 'find both sellers and buyers who use property, cash and credit. If you can maneuver your equity through this market, you may find ways to acquire cash while remaining leveraged.
Here's an example: once upon a time I owned a large free and clear property. I wanted to liquidate my equity so that I could hold dollars against future opportunities. But I also wanted to stay fully invested in leveraged real estate. I exchanged my house tax free under Section 1031 for an undivided .5 interest in 10 others which were leveraged to the point at which income just equaled outgo. The other party used my house to secure a large loan. He then loaned me half of the cash in return for my leasing the property at a rental sufficient to make the payments on the new loan. I effectively “sold“ my own house via this exchange and still had the use of it plus cash plus tax benefits and rents from the property I received. My overall after tax cash flow was over $100 per month, and my assets were safely leveraged out at many times the value of my original house. I had over $30,000 in cash too. Sufficient to support me for a full year's riotous living.
Certainly this was a complex transaction. It required that all parties be able to comprehend its structure and benefits. But it made sense because everyone got what he wanted. In effect, I traded my management ability in the lease back, and my negotiating and marketing skills in the leases, plus my F&C property for income, cash and property by co-venturing with one person who could get a large loan but who was willing to give up some tax benefits to avoid the payments. Only the Exchange market could have produced a transaction like this. You may notice that this year I'm offering several seminars which feature Exchanging. If you've missed those in Anaheim, Reno, Orlando and Seattle; you'll get a couple more chances in Boston, Los Angeles and Hawaii in the Autumn.
BUYING INCOME IS THE SUREST WAY TO RAISE CASH. . .
Think it over. What produces income? An operating business? Cash flow rents? Leasehold interests (sandwiches)? Interest hearing accounts, mortgages, notes, trust deeds, contracts? Stocks and bonds? Which would for you? How much cash does this type of investment require? We've got to start somewhere so let's say that you're currently broke, but that you do have several properties with marketable equities valued at $100,000 net after selling expense. We can look at the alternatives one at a time.
1) Operating businesses can often be purchased by using a mortgage secured by your real estate. Naturally, you'd better know something about the business you'd be going into. And since the objective is to acquire cash flow, that aspect had better be verified. I don't ask my barber if I need a haircut, and I don't take a seller's word as to whether or not an investment produces after tax income. Neither should you! Art Hamel, renown for his Business Opportunities seminars, will accept your real property as collateral so that his clients can purchase leveraged businesses. And he can guarantee a passive income from the business for you who don't know much about an operating business. Write to him at: 1777 Saratoga Avenue, St. 107, San Jose, CA 95129
2) Cash flow rents and leasehold income are part and parcel of the same thing. You either own a property which you MANAGE to produce cash flow, or you lease a property and then sub-lease it to produce cash flow. Or you can BUY a leasehold estate for years – as many as 199 years is common in England – then generate cash flow from your sub-lease. Naturally, this requires the ability to manage property, or to select competent people to do it for you. This is the focus of my EASY STREET, Hands Off Management course. And you could merely be a middleman tenant too. Let me recite a parable for you.
In England last summer I stayed overnight at an Inn between London and Winchester. It had been built in 1508. It had been cleared of debt in 1520 and had been leased ever since for cash flow. Currently a major brewery had a master lease which extended for another 67 years. They had in turn sub-leased the sleeping quarters and hotel operation to the Inn keeper who rented out the rooms for his profit. They'd leased the restaurant to a restauranteur who earned his profit from serving meals to guests. The brewery firm retained the lease on the bar which served their products on an exclusive basis. Indirectly they all paid rent to the owners on a percentage lease which reflected the value of their respective businesses. His cash flow income was indexed to any inflation through his leases. It had been totally passive for 400 years.
O.K., O.K., you don't have a 400 year old hotel. But you can use the lesson to find ways to capture cash flows from your management ability and rents. And don't forget that cash flow rents can be obtained from the use of money as well as property. Only in that case we call it interest. Can you see the similarity of getting a spread on a lease and getting a spread on paper? In this world of tax deductions and inflation, one is about as efficient as the other. Suppose, in the above illustration, the hotel had been sold on a 400 year “interest only“ note indexed to inflation. And the brewer had wrapped it and sold the restaurant and Inn separately with a 2% spread over his costs. Wouldn't his return and cash flow have been comparable? Welcome to “paper“.
3) The important thing to remember about promises of future income is that people often break their promises – especially where money is concerned! When a tenant fails to pay rent, you can evict. When a borrower fails to pay, T u must foreclose his security. So the first rule of lending is to deal only with borrowers who have a record of always paying their bills IN GOOD TIMES AND BAD! Too often, lenders focus on QUANTITY of cash flow rather on QUALITY and DURABILITY. All three must be considered. Under current loose bankruptcy laws and public opinion, dead beats who fail to pay their debts still find wide social acceptance. This jeopardizes all “paper”. It has cost me thousands of dollars over the past 3 years. Here's how to avoid losing your money on “paper”.
Check out the borrower's credit history and sources of income needed to repay the debt. Use local credit bureaus, personal and banking references. If you're satisfied, then check out the security for your loan. Last month we sketched a scenario in which the junior lien holders were wiped out. Get into first position if possible via a 1st Trust Deed and Note. Or have the title to the security put into your name or into a title holding trust with a collateral assignment to you in the event of default. Don't lend on any collateral you wouldn't like to own in the event of default! Make certain that the value represented as security is sufficient to repay your loan as well as your anxiety, legal costs, lost opportunity, etc. Use YOUR appraiser, not the borrowers! And charge a rate of interest which provides an indexed yield in cash which reflects current market rates plus risk plus inflation plus loss of future opportunity and illiquidity.
Be especially careful about underlying loan provisions in any kind of all-inclusive trust deed, wrap-around mortgage, installment sale contract. I almost lost $100,000 because of a FICTITIOUS TRUST DEED which had been placed of record in the public records. It took away many of my rights of foreclosure. No one knew of its existence until I tried to foreclose. The borrower had failed to pay an underlying balloon note, and had placed my note in default. I had to make arrangements to pay off his balloon to protect myself. That can happen to you. And the due-on-sale laws make it even more risky. Check it out!
Whenever you're selling property and receiving “collectables“ you're likely going to pay CASH taxes on the transaction. You might avoid that by holding them as contingent collateral and carrying back a mortgage on the property being sold. But if you accept them as payment, it might be prudent to sell them immediately into the market and to make your financial arrangement contingent upon your receiving a specified amount of cash with the balance to be carried back in the form of a mortgage or trust deed. This way you'll have the money to pay your taxes when they fall due. And you won't be buying a pig in a poke. Many a fair damsel and brave knight have fallen because of “appraised gem stones“! When confronted with more exotic articles, Parke Bernet Galleries of New York (212) 472-3400 can be extremely helpful in helping to establish potential auction values. Good luck!
IN THE POTPOURRI DEPARTMENT. . . MORE SUBSCRIBER BENEFITS COMING YOUR WAY!
Alex Herbage has offered free copies of the MAYFLOWER DIGEST to you subscribers who request them from BLACK HORSE HOUSE, LEIGH ROAD, EASTLEIGH, HAMPSHIRE S05 4YT, UNITED KINGDOM. Put 41C on your envelope. Alex also edits the Imac Economic and Financial Review, a savvy analysis of world economic conditions. Ask about that too. As organizer of the INTERNATIONAL NEWSLETTER ASSOCIATION of which I am a founding member, he's leading the fight for publishing freedom currently being threatened by a law suit filed by the SEC against Christopher Lowe's fine Lowe Investment and Financial Letter. In our recent Portfolio Strategies seminar, we considered possible political threats to our investment survival. Suppression of the free press is the first step on the road to tyranny. Drop Alex a line to get your Mayflower Digest and a report on progress of this test case.
Under Florida's RICO Act, the state can take title to real property which it then sells on sealed bids. If you'd like to buy this property contact Gerald W. Ivester, RICO Coordinator, Division of State Lands, Bureau of State Land Management, Tallahassee, FL. He'll add your name to the bidder's list and notify you of impending sales. No charge.
Copyright © Sunjon Trust All Rights Reserved, www.CashFlowDepot.com. (888) 282-1882
Quotation not permitted. Material may not be reproduced in whole or part in any form whatsoever.
