How Are You Going To Make Money In 2008?


December 2007
Vol. 31 No.3


          A few days ago I got a letter from a person who wanted to borrow money in order to “survive” until things got better.  Conversely, I also heard from someone who is starting a new lease/sandwich business managing houses to replace the income he’s no longer able to make waiting for houses to go up.  Each of these represents two ends of the financial spectrum today for entrepreneurs. One is content to sit passively by waiting for some one else to improve his lot.  The other is trying to see how to best use his skills and experience to take advantage of the changing housing picture. How would you categorize your own position?

          When things are good and everybody is making money, everybody sees themselves as winners; and so they are.  But when times get tougher, it’s amazing to me how so many of those “meat-eating” entrepreneurs willing to take on the world to get ahead suddenly start mewing about how the government ought to do something so they won’t have to.  Of course I don’t include the readers of this esteemed journal among those.  I see my readers as opportunists who are ready, able, and willing to take advantage of the possibilities that are emerging; and who are even now setting their sails for the journey, which for many, is into uncharted waters.

          Let me give you some of the reasons why I think that 2008 is going to be a different kind of a year fraught with both change and opportunity:

1.    POLITICS:  There’s going to be a big shakeout among the Presidential
    candidates of both parties, and we’re going to have a much clearer vision of
    who is going to run the country and what their policies are.  You can bet
    there are going to be changes. We’re also going to have a say as to who wins.

2.    FEDERAL TAXES:  Let’s put things into perspective:  Today, 1% of the richest people in America pay 40% of all income taxes.  The top 5% pays 60% of all income taxes.  The bottom 50% shouldered only 3% of the income tax burden. The candidates have different policies for shifting the tax burden among the nation’s income taxpayers.  The Democrats want to continue to reduce taxes for those who pay very little taxes now and shift them to businesses. This makes for a warm and fuzzy feeling among people who will benefit very little, but it will drive more investment capital and jobs overseas, and increase the costs of living as the tax burden is passed on to consumers.  The Republicans want to reduce personal and corporate taxes for the 5% of wage earners at the deep end of the pool. Both of them seem to be forgetting about the 92% of the us who are paying 37% of all income taxes, and neither of them seems at all interested in reigning in government spending.
3.    STATE TAXES:  Most news stories and commentaries seem to be focused solely on federal taxes; but State and local taxes often control whether entrepreneurs live or die.  States use four tried and true methods of raising taxes:  State income taxes, State sales taxes, Penalties and Fees, and Ad Valorem property taxes.  The last is the most insidious; here’s why: Taxpayers can move into lower-taxed States to avoid State income taxes, Sales taxes, and fees; but not property taxes.  In Florida, they juggle these to reward stable, home-owning voters at the expense of non-owner-occupant owners such as landlords, businesses, and investors. If these are to survive, the must pass these costs on to their tenants, who are often among those who can least afford to pay.
4.    INSURANCE:  Hurricanes, Tornados, and Fires have taken a tremendous toll on insurance companies; so much so that federal lawmakers are being asked to let insurance companies increase rates on policies all across America to help them recoup their losses. Currently in Florida, even without additional increases, many private insurers have left the State and the others have raised rates.  On a $150,000 house, the combination of insurance rates and property taxes can consume the first $500 in rents each month, leaving very little for mortgage payments.  It’s much more critical in more expensive houses.
5.    FORECLOSURES AND BANKRUPTCIES:  If businessmen can’t pay their bills, they file bankruptcy.  If landlords can’t raise rents enough to pay their fixed costs plus their mortgage payments, they let their properties go back to the lenders.  So do owner-occupants. An emerging trend is for people to file Chapter 13 Bankruptcy.  This can allow them to stop foreclosure and to stretch out making up missing payments for 5 years so long as they make current payments on time. With Bankruptcies and Foreclosures setting new records every month, Lenders must raise interest rates to compensate for their losses.  When they can’t raise interest rates, they go out of business.  
6.    THE ECONOMY:  Because of the costs of the war combined with relatively low income taxes, the FED has been printing money at record levels.  This has caused the dollar to drop against all foreign currencies.  In world markets, oil and gold have set an all time record against the dollar; eclipsing that of the Carter era.  This means that, despite the assurances of a sound economy, the people who must deal in dollars are increasing their price to compensate for its falling purchasing power. More and more foreign money is buying stocks, driving up the price; and gaining more control over our companies. Chrysler is a great example of how well they do when they do this.                                                                   
7.    DEMOGRAPHICS: It seems that most news stories are focused on heavily populated areas on both coasts without much attention being paid to the heartland.  It’s emptying out.  I recently drove 7500 miles across America to see for myself what’s happening in the hinterlands.  My trip took me across the Northwest and Midwest. Mile after mile dotted with tiny hamlets sit largely vacant, and people are going to continue to leave for lack of opportunity.  So are people and jobs being driven out of the Northeast. When population and incomes are dropping, so will real estate prices; and they rarely recover. Where are all these jobs and people going?  To the Carolinas, Tennessee, Georgia, Florida, Mississippi, Texas, Arizona, and California.      


          Over a long and checkered career, I’ve learned to view change as both inevitable and desirable.  It clears out a lot of the deadwood and creates new opportunity for those who want to take advantage of it.  With my erstwhile competitors sitting around hoping someone will help them to survive, I’m tempted to go on the speaking circuit with a gloom and doom seminar so I can give even more people the incentive to quit trying to get ahead.  This would leave the field wide open for me.

          Before you get your knickers all twisted because of what I just said, I want to assure you that I’ll match story for story with anybody who thinks he or she has it particularly tough as an entrepreneur.  Over the years I’ve been through 6 housing slumps.  I’ve been financially wiped out twice and taken years to struggle back from the bottom.  And I’ve made more money during hard times than I ever made during good times simply because, with so many people sitting around wringing their hands, there was no competition.

          As a Broker, slowly twisting in the wind with lenders going out of business and nobody making loans to people who wanted to buy houses, I reasoned that, if a fairly good salesman like me couldn’t sell, there were a lot of people who couldn’t sell either.  I immediately stopped taking listings and started Optioning houses with short term Options.  During the housing recession of the early 1970s, I bought, Optioned, and sold over 500 houses and contracts.  I did this by going door to door and offering to take over payments in return for a Deed.  Sometimes I sold the house before I even bought it, and had the Seller convey it directly to my Buyer.  How did I find a Buyer in the slow market?  I wholesaled the house for between $500 and $1000 profit. Over a three year period, I sold 120 houses for $3000 each to one syndicator.  He packaged them in groups of 3 or 4 and sold them to partnerships looking for tax shelter.  Translated into today’s terms, that would amount to $5000 to $10,000 required to buy a $250,000 house with a $200,000 non-recourse loan on it regardless of credit score.  If you don’t think a house will sell this way where you live, run an ad on or on eBay, or in the newspaper and see what happens.

          There are six things a person can try to do everyday in the house business: Buy, Sell, List, Lease, Mortgage, or Option.  All of these require active effort on a consistent and continuing basis, and all of them make money for those who do them on a regular basis.  I’ve already mentioned buying and selling at wholesale. In general, a Broker who lists houses in a slow market is probably not using his time efficiently; he should be Optioning and flipping contracts with financing in place like I did.   

          Clearly the major opportunity that is looming in the future is for Buyers.  The reason that most people fail to reach their potential is that they are essentially pessimists. In any situation where the future is unknown, they see the danger far more clearly than the opportunity.  In today’s marketplace with all the negative news in the media of the impending housing debacle, the speculators and investors have almost all left the market.  They are sitting on the sidelines in a financial fetal position waiting for the market to be reborn.  That’s a mistake.

          Among predators, the Cheetah is a particular favorite of mine.  Although it is the fastest land animal, it only runs down its prey as a last resort.  Rather, it hides out in the tall grass waiting for a weak, tired straggler to come close; then, with little to lose, it pounces for the quick kill.  Today, there are more stragglers than a financial Cheetah can eat.  Sure, the market may go lower, but the opportunities will dry up just as soon as the public begins to believe the worst is over.  Then everyone will try to rush in at the same time just as they tried to all get out at the top with little success.  Being a year early to get in or out made people a lot more money than trying to time the peak and valley of the market.

          There’s a very practical reason why you should be buying houses in a range just below the median price now.  First of all, with few competing cash buyers, you’ll likely be able to buy with private financing or by using seller financing.  Remember, mortgaging is among those things that anybody can do any day, whether buying or selling.  If a Seller has to carry back the financing in the form of a second mortgage or a mortgage that wraps around the existing financing, there’s an opportunity for a person with cash to buy the loan at a discount that will produce high yields in comparison to money market funds, bank interest, or bonds.  How do I know?  A few months ago a sale fell through on a free and clear property because at the last minute the bank reneged on the loan.  We completed the sale by carrying back the financing, then selling the loan to an investor at a discount.  

          To make this work, the first mortgage Note we created to make the deal was for a relatively short term with a relatively high interest rate.  We discounted it to yield 12%.  This cut our profit down by about $15,000 more than the costs of getting a conventional loan; but more importantly, it enabled us to sell the home and to get our investment cashed out plus enough to make it all worthwhile.

          Today, it makes a lot of sense to take a shorter profit and get to cash, because tomorrow that cash is going to allow you to buy more houses at very deep discounts simply because there will be so few cash buyers in the market.  The equity profit you give up today will give you staying power and cash to buy with tomorrow.  


          Taking title to property subject to existing loans, and using low cost seller financing for the balance was the real key to my being able to accumulate enough positive cash flow houses to be able to retire early on rents. Structuring financing so that a house produces positive cash flow is the key to being able to build a large buy and hold portfolio, and it opens up another profit opportunity; buying and selling privately held Notes at discount.  
          I’ve left the Leasing and Optioning that were included among the things you can do every day to the last because they have the most potential for cash flow and profit.  A lease can capture income and an Option can capture gain.  Ordinarily, when the public perception is that prices are going up, it is very difficult to obtain a long term lease and Option; but when the public perception is that prices are going down while expenses are going to continue to rise, this creates a very fertile arena for negotiating both leases and Options.  Let’s differentiate between the various players in this market.  We’ll start with lease opportunities.

          I began managing property over 50 years ago and I am a good manager, but I’ve found other things to do that will make me more money.  Consequently, I’ve farmed out my management to several experienced landlords who pay me 90% of the net rents they collect.  They pay for repairs and deduct these from what they send me.  Although I think I could do a better management job, I’m completely happy with this arrangement.  So are they!  They keep 10% of the rents they collect without any risk or need to pay any of my expenses.  This extra monthly cash is quite welcome today.

          There are hundreds of thousands of owners, builders, speculators, and investors who are desperate to find managers for their properties, and are willing to make a similar arrangement.  It’s important to understand that the person who master leases a house doesn’t have to make payments, so can set rents to fair market values that will attract the best tenants without regard to negative cash flow.  When an owner is coughing up $2000 a month in negative cash flow, being able to cut this in half with rental income from a master lease is going to be a big help.

          Even HUD is willing to make a deal.  In the aftermath of the last real estate recession, HUD began paying one manager $39 per house to keep an eye on 400 vacant foreclosed houses.  When they needed repairs, he got a 6% over-ride on the costs.  If you add that up, even without repairs, he was making almost $16,000 per month cash flow.  

          What about Options?  The same desperate owner who will master lease a house to you will give you an Option to buy it; often with seller financing terms. Depending upon the amount of equity there is over the loan balance, the Option can be structured to take all the upside appreciation, or to divide it with the owner.  If the owner is also an occupant who can’t make his payments, there would be no management at all, so the Option might be bought with monthly payments to help the owner survive.  Typically, the house in trouble will be above the median price in the area, say $300,000.  If it had a $200,000 mortgage, it would make no sense at all as a rental, but might be optioned for $500 per month; all of which would count against the purchase price.  

          Suppose today the house is valued at 20% less than it would have sold for last year.  Your $6000 per year would represent only 2% of that value. If the house returned to that value in a couple of years, you could afford to share any increase in value 50/50 with the owner.  If in 2 years the price went back to $360,000, the yield on the Option would be 500%.  You can afford to be generous.  Wouldn’t this be an ideal use for all those idle Roth IRA funds you’ve got stashed away?

          Bottom Line:  By mining all the adverse news for opportunity rather than lamenting the passage of the good old days, those who continue to ply their trade in the market are going to not only make money today, but be poised to make even more when the market does come back. 

Oh yeah; if you need help check out the training at

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