October 1987
Vol 10 No 12
When Walt Kelly’s Pogo comic strip originated that remark, I doubt that he was talking about the American tax payer, but he may have been. He may also have included those who rely on credit and leverage to an excessive degree. Or those who rent property that isn’t maintained to meet local requirements. Even those who invest in mortgages or short term notes might have been in his thoughts along with depositors in foreign banks. Speculators in the bond, stock and commodity markets may eventually join this throng. All of them share a common trait – the ability to shoot themselves in the foot even though they are aiming at much more lofty goals. Hopefully, this issue will make things better.
Let‘s talk taxes. TRA-86 is anti leverage! It‘s anti credit too. It places a burden on those who buy or sell on terms for tax advantages rather than economic benefits. It removes incentive for capitalists to invest in apartments and rental condominiums. It distorts the markets by creating shortages which in turn cause prices to rise – all of which eventually leads to political intervention. We bring it on ourselves. It’s a vicious cycle. We pay income, sales, real estate taxes, user/impact fees, etc. Then we feel justified in getting as much of our taxes back as we can by using government services, loan guarantees, subsidies, facilities under a variety of programs. This causes government to expand. It hires more employees, occupies more buildings, creates more regulations and enforcement mechanisms. All of these require more money.
Government has four basic options when it comes to raising money. It can tax, borrow, inflate and/or plunder. It usually does all four. The one thing it can’t do is to produce, so when we demand more government services, we’re going to pay more taxes, pay higher interest costs, lose purchasing power or lose some of our freedom. Virtually all of our investment alternatives are affected to a certain extent by the government‘s choice of methods used to raise operating money. The trick is to anticipate their strategies and to adjust our own activities to minimize the damage. A year ago we devoted 3 or 4 letters to strategies to deal with the 1987 act. These included buying and selling properties so as to nail down the benefits under the old tax act. This year we‘re confronted with the changes which take place in 1988. It‘s up to each of us to look ahead to see what we need to do. It will depend upon our individual situation and our outlook for the future.
Knowing and understanding how the tax act affects you personally is one thing. But there are other hazards too. What’s going to happen to interest rates? Inflation? Property and Landlord rights? All of these will influence the buying/selling decisions you’ll have to make over the next year. When it comes to predicting the future, your guess is as good as anyone‘s. Here‘s what I think is plausible:
1. Interest rates will stay about the same for mortgages until inflation drives them up. The tax windfall being collected by ,the states and Treasury Department will fund many of the programs formerly funded with borrowed money. Foreign money is still coming in.
2. Politically, more federal tax increases seem unlikely until after the 1988 elections, but they‘re already considering moves to increase estate taxes, deny tax free exchanges and limit business operating expenses. Look for a lot of discussion, but not much action before 1989.
3.Inflation has already started back up. House prices are jumping in some areas. Don’t look for anything dramatic right away, but I think we’ve seen the bottom in SFH prices.
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The best tool for dealing with an uncertain future is INFORMATION. The more you understand the causes and consequences of events, the more you can influence them. Keep on reading.
HERE ARE SOME THINGS TO SEND OFF FOR . .
Buy Treasury Bills, Notes, Bonds without a fee directly from the Treasury. Write Bureau of Public Debt, Washington, DC 20239. Maybe if you lend the government money, it will be able to pay someone else their interest – just like Brazil – out of tax revenues.
Or, write Offshore Banking News, 301 Plymouth Drive, N.E., Dalton, GA 30720 for a little booklet ‘Offshore Banking Is Not Evil’. This will offer some alternatives to T-Bills.
The Department of Natural Resources, 3900 Commonwealth Boulevard, Tallahassee, Florida, 32399 offers properties for bid that have been taken under the RICO Act. Get on the list.
If you’ve paid off a HUD loan in the past decade or so, you may have a refund coming for surplus FHA insurance premiums. Mine are averaging almost $1000. Write to HUD, Room 2239 451 Seventh St., SW, Washington, DC 20410, ATTN: Distributive Service Shares Branch. Request form 2042. It’s fairly simple to do, and a bonanza may await. It’s your money.
Metropolitan Mortgage & Securities Co.,Inc. of W. 929 Sprague Avenue, Spokane, WA 99204 is looking for real estate contracts, mortgages or deeds of trust in any position up to 40 years of amortization. They even pay for referrals. Write them for their proposals. Their program and their forms contain several pretty good concepts for ‘paper’ people.
Worried about your savings? Veribanc, Inc, P.O. Box 2963, Woburn, MA 01888 rates both banks and thrift institutions. According to them, even the most recent FSLIC bail-out is woefully inadequate when one considers that the 251 institutions with NEGATIVE NET WORTH are still losing $9.7 BILLION per year. 655 more banks will join this group if earnings trends continue – and this doesn’t include the overburden of foreign, real estate and agricultural loans yet to be discounted. Send them a #10 SASE for their list of foreign banks to which US banks lend money. Ask for their brochure too. Is YOUR bank on the list?
Command Productions, Custom House, POB 2223, San Francisco, CA 94126 has a special report on the 20 Largest US commercial banks as well as the SOUNDEST US Banks. They also sell a rating service. It only takes one bank failure to wipe out your savings. I know.
REVERSE ANNUITY LOANS are being tested. They’re being offered by private lenders in a dozen states to elderly retirees with limited incomes and high home equities. We’ve been supporters of this program for almost 10 years – its a boon to those who can qualify. If you’d like more information on the current program, write American Association of Retired Persons, Home Equity Information Center, 1909 K St. NW, Washington, DC 20049.
Want to participate in Florida‘s petition for a Constitutional amendment to repeal the 5% sales tax? Write to Doug Smith, 3131 S. Tamiami Tr., Ste 204, Sarasota, FL 34239
Janet White, Dir. of Public Relations, Landauer Associates, Inc. 335 Madison Avenue, New York, NY 10017 has a 30 page report covering 43 cities in 12 countries on three continents with information as to rents, trends, standard lease language, etc. Free.
Gary Halbert, 7515 Greenville Ave. Ste 903, Dallas, TX 75231 – Toll free 1(800) 3483601 if offering three 90 minute tapes for $5. They’re entitled: ‘Don‘t Get Killed in Commodities‘, ‘Financial Chaos in 1987‘, and ‘Commodities, The Next Bull Market’.
If you’re able to use any of the above information, whether in picking a bank, saving a commission or switching an investment, it should repay your subscription price many times over to The CommonWealth Letters. But it only works if you act on advice given.
LANDLORDS VS. TENANTS – THE SAGA CONTINUES . . .
In Ft Lauderdale a mother with two daughters would move in under a fake name, pay one month‘s rent. Run up utility bills as high at $1200. Remain until the owner‘s eviction proceedings finally had them removed, then repeat the process with a new owner. They were finally apprehended and tried, not because of fraud against the landlord, but because of fraud against the power company – a criminal matter. Wish we had those rights.
One frustrated manager in St. Petersburg, exasperated with a tenant who refused to move out, finally had him charged with theft of water from the account she was paying for in order to get local enforcement officers to protect her property rights. Maybe it could work for you too. For years we‘ve tried to work out a mutual security pact with the garbage, water, electric and telephone companies so they’d inform us when their bills weren’t being paid, and we could do the same when rents were delinquent. So far no dice. Everyone is fearful of suits for revealing the names of those who rip them off. In our rental contract we have this language – hopefully to minimize any such eventuality:
‘The tenant hereby specifically authorizes the owner to inform local credit agencies as to his/her/their performance under the terms of this contract, and further, to make inquiries into, and to provide reports pertaining to credit performance and rental payments at any time in the future in consideration of the owner’s willingness to rent the premises herein described.‘
Check on the feasibility of similar language in your own area. It intimidates the tenants. Cities, confronted with shortages of rental housing brought on by restrictive ordinances and the new tax laws are producing some interesting ordinances. In Chicago a tenant ‘bill of rights‘ allows residents to deduct up to $200 or 25% of the monthly rent to perform repairs they think the owner should make. And they can also reduce the rent by a ‘reasonable amount‘ determined by the tenant that reflects the reduced value of the rental. Late charges, damage deposits, landlord rights are also spelled out in the rules. A court challenge has been mounted, thus far with limited effect. It covers 7 or more units.
In Santa Monica (Where else?), you have to get permission to go out of the rental business and subsequently to tear down vacant rental properties. Los Angeles‘ Rent Stabilization Ordinance requires that tenants who are displaced when a unit is taken off the market – even to be occupied by the owner – be given $2000 to $5000 to help them to relocate. It was approved 13 – 1 by the city council. But even tenant payola doesn‘t always work. In San Francisco, an artist was awarded $260,000. in a case where, after she had accepted $1,005. and signed a ‘buy-out‘ agreement with her landlord, she sued because the payment she‘d accepted and the agreement were contrary to the applicable rent law even though they were specifically authorized by the Civil Code. Her lawyer won.
Even the Congress is getting into the act. S.558 and HR 1158 – the Fair Housing Amendments of 1987 – if passed, would outlaw ‘adult’ housing and make children and the handicapped a protected class. This confers additional liability on owners for acts of third parties. Alcoholics and Drug Abusers are defined as ‘handicapped’ under the bill, hence, they’re also a protected class. Write your Senator/Representative on these.
Effective July 1st, under Kansas law, tenants can face up to 5 years in prison for abandoning a house, apartment or motel/hotel owing back rent. But the owners will have to prove INTENT to commit fraud from the time they initially rented the property. Who can say how much this will add to the burden of the local criminal courts – and landlords.
Knowledge of the Landlord/Tenant laws, health and safety ordinances, licensing requirements in each area in which you own rental property is crucial to your well-being. If you have any sort of club or organization, use of meeting time to study and find ways to deal with applicable regulations might be much more rewarding than listening to speakers.
IF THEY HAND YOU LEMONS, MAKE LEMONADE . . .
Before you judge a change of events too harshly, ask yourself whether or not it is the change itself rather than the effects of the change that upset you. Once we’ve got our estate building program on track, none of us likes to be forced into making changes. So we resist the change rather than looking for the new opportunities created by it.
The new tax act is a case in point. The sequence of events started with real estate getting a lot of bad press. This scared investment money out of the market for new construction as well as existing tax shelters. Some of that money ran to the stock market which experienced record advances. New companies were formed to buy up distressed tax shelter interests at deep discounts. Master Limited Partnerships sprang up to buy income properties free and clear. With a slow down in construction, rents began to rise along with the prices of well located rental properties. Single family houses emerged from the new tax act as a premium real estate investment. Prices began to rise in many areas. The need for management services mushroomed, giving entrepreneurs the opportunity to start up new service companies which do everything from rent-up to evictions for cash up-front fees.
Lenders with heavy real estate loan portfolios are becoming quite reasonable. They too have been affected by the new tax act which limits their deductions for bad loans. On the one hand, this affords an opportunity to those who’d like to buy real estate owned (REO) property from lenders under favorable prices and terms. On the other hand, you have to be careful to buy only in desirable areas into which population is moving and where rental demand in relationship to housing is growing. Beware of low-income rental property or neighborhoods served by marginal schools. These won’t do as well as middle class areas.
As has been pointed out, there are few good investments in an environment in which your property rights are being plundered by rent control/stabilization boards; local property taxes and assessments biased against landlords; or where courts won‘t enforce your rights as a property owner against tenants. Don’t be lulled by terrific bargains only to find that you have no rights on your own property. Do your homework so you’ll know the problems as well as the opportunities before you make the plunge.
Check the demographics! Households are rising FASTER THAN THE GENERAL POPULATION. Fewer people with higher incomes per residence will pay higher rents for smaller but nicer houses. Curb appeal – landscaping/maintenance/amenities – will play an important part. The South is seeing this now, but it’s spreading to all areas as more affluent people move in as tenants. Alaska, Nevada, Arizona, Texas and Florida lead the pack. Ohio, Michigan, Iowa, District of Columbia and West Virginia bring up the rear. Growth is inverse to taxes. Given a choice, businesses, jobs, populations grow faster in lower taxed areas as a rule.
California is still leading absolute population growth with Los Angeles, Alameda, San Bernardino, Riverside, Orange, Sacramento, Santa Clara counties growing fastest. In Florida its Palm Beach, Dade, Hillsborough, Broward and Orange counties and in Texas; Bexar, Harris, Dallas, Tarrant and Travis counties. Georgia‘s Gwinnett, Virginia‘s Fairfax, Nevada’s Clark and Arizona‘s Maricopa are forging ahead. People bring opportunity! Shelter is a survival need which they‘ll either buy or rent. That bodes well for sales and rentals as well as for all those who provide products or services to residents. It’s going to be a bountiful season for those who can adapt – whether to changes in taxes, credit, inflation or demographics.
Copyright Sunjon Trust All Rights Reserved
Quotation not permitted. Material may not be reproduced in whole or in part in any form whatsoever.
1-888-282-1882 www.CashFlowDepot.com
