January 1984
Vol 6 No. 4
HERE COMES 1984. . .WAS ORWELL RIGHT?
In 1949, an Englishman named Eric Blair wrote a book under the name of George Orwell. It was called 1984. It chronicled his version of the future 35 years hence. He envisioned a world divided into three kingdoms perpetually at war. All shortages in the economy were blamed on the war effort as were usurpation of individual freedom, private property rights and invasions of privacy. “Big Brother” was everywhere, watching everyone all the time. The family unit was destroyed as children reported their parents for the slightest “thought crimes” against the government. People lived in assigned quarters under government surveillance every waking moment. Orwell painted a bleak picture indeed.
It's easy to draw comparisons in our modern society. We too live under war or threat of war. Government deficit spending for both guns and butter has created a state of affairs in which we now plan on inflation in our business and investment strategies. We can lay the blame for much of our crime and social problems upon the break up of the family unit caused by both mom and pop being required to work just to make inflated ends meet. High rise public housing projects already deprive their residents of much of their privacy and freedom, holding low income families in what amounts to political fiefs. Somewhere along the line Americans have been conditioned to consider criticism of the country and its leadership as a form of unpatriotic behavior despite the examples of Thomas Paine and our founding fathers. But Orwell was wrong. Opportunity still abounds for the entrepreneur NOW.
AMERICANS ENJOY MORE FREEDOM THAN MOST PEOPLE.
Even in the “Western world”, there are few societies which permit someone to “work himself up the ladder”. We still pay less than most civilized people for housing, food, clothing. We enjoy more material comforts than anyone else and our standards of living, educational opportunities, medical care and financial security are the envy of most people in the world. Our challenge in this generation is to maintain our way of life while preserving American values and standards of family, God and Country.
Being an entrepreneur is one of the ways we can do this – making our own way by using our own skills, energy and intellect without becoming dependent upon government whim or policy. I won't try to predict events 35 years in the future as Orwell did, but my view of 1984 might be a little more optimistic for those willing to invest in their own future. This is an election year. Election politics, to the extent possible, will dominate in the coming months. For that reason I don't see any dramatic new tax legislation being enacted until 1985. Deficits will remain high and this will cause some inflation as well as some increases long term interest rates, but I don't want to overstate the case. Construction related industries employ more Americans than any other group. There will be incentives for builders and first time home buyers in the form of lower interest rates or guaranteed rents – or even direct subsidies.
We're already seeing some of this. Negotiable rate FHA financing. Guaranteed rents on multi-unit housing around military installations (H.R. 2972), upon approval by the Senate will authorize guarantees as long as 15 years on some 2900 units throughout the country. On the other hand, market rates for home mortgages will probably hover just out of reach for the average buyer. This will be caused by “crowding out”. Both government and commercial credit users will be seeking loans to finance deficit spending and economic recovery. The FED will try to do a balancing act to share available money between them and the housing industry. This will create both the high interest rates and inflation, but at moderate levels – unless their timing gets .a little off and they lose control. I don't think they will in 1984. 1985 will be a different matter! No mater who wins in the fail elections, Americans will start paving the piper in the next administration.
Construction is going to slow in the coming year. Apartments have been getting a lot of attention from limited partnerships because of tax shelter advantages. There's been. a building glut in them and in office buildings. There could be wide spread distress in some areas which would dry up future financing, but which would create some foreclosure sales. Forecasts of future housing shortages over the last half of this decade might make some of these a good investment, but the Sun Belt is vulnerable to over building. For myself, I still prefer SFH. Overall, rental housing will comprise about 20% of the market. Single family construction will account for about 50% of all building projects in 1984.
Today's first time home buyer market is peaking! Demographically, there will NEVER be more people between the ages of 19 – 29. 17 years from now, there will be almost 4 million LESS of them. Currently, there are more people OVER 65 than there are TEENAGERS. And the over-65's will increase by 8 million by the year 2000. But the biggest market will be in the 45 – 55 age bracket. These people in their top earning years will be buying homes. Condos represent the weak sister of housing, and they'll be even weaker for growing families. On the other hand, Phoenix, Dallas-Ft Worth, Atlanta, Washington, Tampa-St. Petersburg, Denver-Boulder, Austin, Riverside-San Bernardino have been leading new house construction this year. They'll continue strong, but overall, new construction will be flat for 1984.
TAXES ARE GOING TO IMPACT ON INVESTMENT DECISIONS MORE THAN EVER.
Here are some statistics: In an 8 hour day, the average American worked 104 minutes to pay Federal taxes, 56 minutes for State and Local taxes. That's 33.3% of each working day for taxes. Food took 67 minutes and housing took 94 minutes – almost the same amount of the worker's productivity as taxes took. Gradually, the tax burden is being shifted to the high income wage earner. People earning about $30,000-are paying over half of the total tax burden for the country. In 1984 the Alternate Minimum Tax bill is going to make believers of a lot of those who failed to plan for it.
Here's how it works. Once you've completed your usual tax computations, you add back in your “tax preference” items. There are several of these, but for SFH investors, the accelerated portion of ACRS in excess of straight-line and 60% of long term capital gains on which no tax was paid comprise the largest segment. You get a family deduction of $40,000 but must pay the greater of either your originally computed tax or the Alternate Minimum Tax. Effectively, this taxes those special preference items at 20%. Strategy: put off getting balloon payments in 1983. Structure sales so that they close in 1984. Don't use ACRS if you'll have to pay it back in the Alternate Minimum Tax formula. If you find that this year you'll have to pay the tax, then recompute some of your expenses from the past year and see if you can't add them to your basis to increase your ordinary tax so that it equals the Alternate Minimum Tax. At least you'll get an increased basis rather than just losing the tax payments. Run, do not walk, to your nearest advisor to get help NOW!
In 1985 we can look forward to even more excitement on the tax front as all those election-deferred tax bills net passed. Don't ignore this area of your investment planning. If you've paid independent contractors more than $600 in 1983 you must report that payment on Form 1099-MISC to the IRS including Name, Address, ID Number and amount paid. Don't ignore this. There are substantial penalties involved. Better start now to begin doing it. Don't forget your IRA account. You can deduct $2000 to place into an IRA.. You can employ your spouse for meaningful work, pay him/her exactly $2000, and deduct it on your books. He or she must count it as income, but can deduct it as a plan contribution, so that your family can get as much as $4000 in last minute deductions if the money is paid in 1983. Be sure it gets put into a self-directed plan that's worthwhile as an investment for you both.
You'll pay less taxes if you plan at least 1 year in advance. Estimate ways in which NEXT YEAR'S taxes will be DIFFERENT. Adjust your 1983 income accordingly and compute your tax bill under current law. At least you'll have a feel for whether or not you'll need tax shelter or have too much of it. Then you can start NOW to remedy any problems.
MANUFACTURED HOUSING CONTINUES TO GROW IN IMPORTANCE.
A few months ago on my trip to the Far East I noted the extreme shortage of SFH available at any price. Now Japan has announced robot-built manufactured housing. Sekisui House Co. offers 50 styles based upon a steel frame system. You order one just like you'd order a car with a choice of accessories and custom features. A computer designs your new home while you wait. You get working drawings within 60 minutes. In National House Industries' factory, 85 men produce 500 houses per month – one house every 24 minutes.
In the USA regional companies are springing up. Mill-Craft Housing Corp. in Waupaca, WI, Ryland Modular Homes in New Windsor, MD, CC Housing Corp of Algodones, NM, Helikon Design Corp of Cavetown, MD, PBS Building Systems of Anaheim, CA are already doing business. Builders are beginning to find wide acceptance of off-site construction methods. So is HUD. FHA Title II financing under FHA Section 203(b) and Section 245 graduated payment loans up to 30 years is available up to $90,000. Section 213, 234, 235, and 244 loans are also available for coops, condos, low income and co-insurance programs. Mobile Homes are included in these programs.
This may well be the wave of the future in SFH. If you want to read more, you can order “Three Step Economic Feasibility System for Manufactured Housing Subdivisions” from Meetings+Plus, P.O. Box 1981, Palm Springs, CA 92263. Bear in mind that about 37% of all new SFH in the USA in 1983 were built in factories. Even New York City is getting into the act. Benchmark Homes of Brookville, OH is studying the prospects for opening a factory right in the city and building on high density zoned land to ease the housing shortage.
IN THE POTPOURRI DEPARTMENT. . .
Fannie Mae is making loan commitments available to small builders and local builder associations for up to a year in advance. This may be terribly important in the event of a credit crunch which could dry up funds. For those of you who work with small builders or who speculate, it might be wise to try to join a builder pool who is lining up this financing. Current interest rates are for 12.75% fixed and 10.2 adjustable rate.
Robert Bruss, syndicated columnist, informs us that under FNMA announcement 83-04 to its servicing lenders, mortgage due-on-sale clauses held by FNMA are NOT TO BE ENFORCED if FNMA committed to buy the mortgage prior to November 10, 1980. Bob's Real Estate Mail Bag, P.O. Box 6710, San Francisco, CA 94101 offers several authoritative books for real estate investors. Drop him a line for particulars and look for his columns in your paper.
If you're looking for a refuge, send for “Digest of Smalltown, USA”. You get 41 towns listed on 44 pages for $6. Send to Woods Creek Press, P.O. Box 339-RP, Ridgecrest, CA 93555.
Glidden paints has announced GLID-WALL. Its a paint on wall covering which hides cracks, holes, deteriorated surfaces while improving insulation and vapor barrier protection. Ask about it at your local Glidden paint store. Give it to your tenants.
We've talked about getting “spreads” in SFH that you lease, then sub-lease to tenants. Now, national corporations are beginning to do the same thing to improve their P&L statements. With leases which are not indexed, but with decades left to run, INDEXED subleases are guaranteeing years of profits which some times EXCEED normal corporate cash flows. We've heard from a few subscribers who're just now starting to explore cash flows available from “sandwich lease” positions, but these long term corporate leases prove that good financial concepts work on big as well as small deals. What are YOU doing to get into the act?
MILLER/SCHAUB ARE BREAKING UP THE ACT!
The seminar described as the “top seminar in the country” by no less than Robert Allen is no more! More accurately, it has divided into two parts. In August of 1976 John Schaub and I started telling people about single family house investments – long before SFH were in vogue. Since then some 10,000 people have attended our seminar. Several of them have gone on to greater glory – Robert Allen is a case in point – as writers, promoters, investors and producers of seminars. Hundreds are now active SFH investors who have been able to achieve financial freedom derived from income producing rental properties. We count among our graduates some of the most talented and gifted people in the country as well as those thousands who found a measure of financial independence and freedom as entrepreneurs.
As time passed, we learned new techniques, and the seminar changed. Our original 21 page booklet grew to over 300 pages – then gave birth to other seminars. In 1978 I wrote the Option Primer, and offered a course on Option techniques. That same year, we started publishing The CommonWealth Letters for our graduates and new subscribers. In 1981 I wrote the Cash-Flow Management Almanac which later divided into two courses known as “Hands-Off Management” and “Portfolio Strategies”. In 1983 John Schaub inaugurated his “Grad Course” which contained more sophisticated legal and tax strategy, as well as selling techniques which showed how to convert equities into high yield paper. We've discovered that we've outgrown our seminar – and it's outgrown us..
There's no practical way to include all the information you need to become and to remain a successful single family rental house investor in a single seminar. And there's no way John and I can teach as many joint seminars as it would require to give you all the tools you'll need in the coming years. Things are changing so swiftly that the need to expand the material to keep up with the times is constant. We've agreed to each take some of the aspects of SFH investing and to specialize more on these. This way, instead of being forced to rush over too much material, we'll be wile to present it more meaningfully. But there's a negative factor too. Now those who want to learn the Miller/Schaub methods will be required to attend at least one seminar conducted by each of us. Neither of us will teach the entire technique.
For the new student, it might appear that the cost will be double. That's not so! John and I are going to cross-fertilize our classes. Anyone attending either class will be able to attend the other one absolutely without cost for tuition if you PRE-REGISTER two new students. This policy goes into effect as of this letter for graduates of my Options, Management or Portfolio courses and for the Miller/Schaub “Making it Big on Little Deals” course. To make it simple, if you attended any course in which Jack Miller or John Schaub or both of us – and no one else – were teaching, you can attend any other course taught only by us under the above policy. This way you'll be able to get twice as much for your money!
As it stands now, I'll be emphasizing more detail in ways to get seller's to carry financing, negotiation, selection, generation of cash flow through rents, tenant controls, canvassing techniques, preventative maintenance and eviction techniques to make your SFH investment as passive as humanly possible while retaining all the benefits. 1'11 probably touch on some ways to work with distressed lenders, trustees in bankruptcy and owners too. This will all be done under the course called HANDS-OFF MANAGEMENT.
The course John Schaub teachers will expand the portion on buying and selling of “mortgage paper” and with creative ways to convert equity to high yielding contracts as well as up-dated material dealing with acquisition techniques, legal aspects of transactions and other elements of our original course. He'll still call it “FORTUNE BUILDING FUNDAMENTALS”.
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