Jackie Lange
Panama, Active 2 months, 4 weeks agoForum Replies Created
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Gary answers your questions about diversifying
A reader at this site recently asked two questions.
#1: Is it is a good idea to diversify real estate holdings overseas?#2: How do you find the best place to invest?
My last post at this site looked at
My last post at this site shared some thinking about the diversification.
I’m not sure there is ever a best place to invest, but Merri’s and my secret investing weapon for finding good places to invest has been a personal anchor of value.
See how that anchor helped me buy this manor house in the Cotswold.
This huge, old manor house, built over a century,beginning in the 1700s… had wonderful views and our next door neighbor was Princess Anne at Gatcomb Park. Buying it was a pretty big step for a middle class American from Rockwood Oregon, but I was able to do so due to my anchor of value.
Two years ago as part of our 50th year anniversary of global investing I was interviewed by Jackie on her investment webinar and she asked me this question:“There are a lot of real estate investors who have been successful buying, selling and holding real estate in their own backyards. A few have been successful investing in 2-3 markets in the USA.
But it is rare to find a successful real estate investor who has been investing in real estate all over the world.
And even more rare to find a real estate investor who has been successfully investing all over the world for FIFTY (50) years!You are that guy! What’s the secret?”
My secret to freedom has been to use an anchor of value that I developed to invest in American residential real estate. Though I created this anchor in the 1960s it has helped me invest in real estate, stocks, bonds and business around the world to this day.
The philosophy behind this strategy and tactics can be used to create your own anchor for investing in shares, bonds, currencies or commodities as well as real estate.
Let’s look at value first. The anchor helps me understand that I am investing for profit, not to be right.
Based on the “profit rather than pride” principle there are two (and only two) reasons why we invest in real estate. To rent for income or to resell the property for more than we had invested.
Based on this reasoning, there are three ways to spot value in residential property.
#1: The first way to spot value is based on how much NET income can the property generate after taxes, insurance, maintenance and management costs.
#2: The second method is based on relative comparables. Calculate how much similar properties in the area are selling for. Also find out how much similar properties in other areas are selling for.
#3: The third method is to calculate how much a property would cost to replace with new construction.
What is the anchor?We can build an understanding of residential value by understanding the monthly mortgage payment or rent a buyer or renter can pay. In the USA, for example, the typical bank limit on monthly mortgage payments is about 28 percent of gross monthly income. Banks generally will let a borrower devote up to 28 percent of their household income in a mortgage payment and expenses (including taxes, insurance and HOA dues).
If there are many families in an area who earn an average of $4,000 a month, then this will be a good market for rentals at $1,000 a month.
This simple formula provides a basis from which all dependable value can be measured. This is the science of the valuation.Using this approach, years ago, Merri and I have been able to spot dozens of contrasts, distortions & trends in real estate value, everywhere.
An added factor to add into the mix is appeal. You could call appeal the art of the valuation.Sometimes an investment can be a really good value, but a hard sell. The best investments are underpinned by appealing good value products and services.
Investing in what you know (and enjoy) helps you understand appeal and makes it easier to mesh the art and the science of valuation.
For example, Merri’s and my background have a lot in common. Merri’s formative years were in Georgia and mine in Oregon. There were many differences between these states. Yet as baby boomers we have much in common. We saw the same shows on TV, Howdy Doody, the Cisco Kid, Ed Sullivan, Gunsmoke. Roy Rogers, etc. We read the same books in school such as the Bridge over San Luis Rey, the Red Badge of Courage. We saw the same movies, heard the same radio , listened to the same Golden Oldies, read the same news, the same magazines, so it is not surprising that our tastes are pretty much the same.
The fact we are NOT special gives us the ability to understand appeal. There are 60 million baby boomers who have that same background. This gives us confidence that if we like a house, others will like it as well. This gives us good judgement (from an investing point of view) when it comes to appeal.
Our strategy is to buy houses that appeal to us which have a reasonable potential to return a decent income (and likely appreciate) based on rent in the $1000 a month range.
For example, we recently looked at a nice house just offered and with access to a wonderful lake, 2 bedroom, 2 bathroom, in very good shape with an asking price of $169,000. The house fit the $1,000 profile and because it had a very nice guest cottage as well, meant we could likely charge $1,200 a month rent. Merri and I looked the place over and felt just fine offering $140,000, knowing we could go up to $145,000.
How did we come to such a price?
The math worked like this. The house will rent for $1,200 a month. The rental market is strong and at this price it will rent quickly. That creates an income of $14,400 a year. Our target ratio of price to rent is 10%. We want a 10% cash flow, so $14,400 a year rent justifies a $14,400 price.
First, the area where we are buying is in a bit of a bubble. Prices have started to rise beyond a reasonable expectation of return. We did not think the house would rent for $1,300 or $1,400 a month so we were not willing to rise to the $169,000 price.We did not get that house. In fact this was the fifth house in a row on which we were outbid. Because faith is vital to successful investing, we need to stick to our strategy, and our strategy is based around that 10% cash flow. That percentage is sufficient to give us a reasonable return on our investment.
Just because everyone else is paying too much for houses, does not mean we should make this error as well.
Anchors of value help us remain logical so we don’t invest in trends that are turning into bubbles. Anchors of value help us avoid giving back profits because we stayed in a trend for too long.
For example, my real estate anchor of value first created in Portland, Oregon in the 1960s helped me successfully understand good real estate trends in Hong Kong, Fiji and London, then the Isle of Man, Naples Florida, Dominican Republic and Ecuador and eventually led Merri and me to invest in Smalltown USA in Ashe county North Carolina and Mount Dora, Florida.
Real estate has always been in our blood. I do not know why but by the age 21, I had already built a $2,000 windfall into seven duplexes and a house on 14th Ave (mortgaged then to the hilt) in the small town of Gresham, Oregon. I could have continued to buy, sell and rent real estate in Oregon but the wanderlust bug bit me and when I was offered a job to sell mutual funds in Hong Kong. I began to travel throughout Asia.
Owning those duplexes and that house left me with an anchor of value. I understood rents (at that time the 1960s) from $125 in Smalltown USA to $250 a month in cities.
When I arrived in Hong Kong in 1968 real estate rentals were about the same as in downtown Portland.
Fear had created good value in Hong Kong. In 1968 there were communist riots and bombs being set off in the streets. The first day I arrived a motorcycle policeman had his leg blown off by a terrorist bomb. The Chinese army was massed on the border and there were continual talks about an invasion. Hong Kong businessmen were fleeing. Real estate was literally being given away.
Life went on. We all figured out the fastest route to the British and American war ships in the harbor for a quick exit in case the Chinese decided to invade. We watched out for boxes in the street that could be bombs. Then we just got busy with life, working and earning so we could pay our rent.
I rented a huge apartment on Shouson Hill Road overlooking the ocean and the village of Aberdeen. The owner wanted to sell this block of apartments but I had no money or experience then. He was so desperate that he made a deal. Instead of paying him $250 a month rent I invested $250 into mutual funds for him.Then in 1970 the company I worked for sent me to London to spend a year at its headquarters developing a European sales training program. I rented a nice house near Golders Green tube station on Finchley Road. The rent was the equivalent of $250 a month.
In 1971 I was moved to work in San Francisco and I purchased a home in Petaluma, California.I bought this house below in Petaluma California for $33,000 and assumed a 5% GI mortgage. Payments were about $175 a month.
In 1972 I returned and worked in Hong Kong for another four years.
The early 1970s was a time of serious inflation. During that time I watched the prices and rents of real estate at the duplexes in Gresham, the house in Petaluma, and especially in Hong Kong rise… a lot!
In 1976, when I moved from Hong Kong back to London and noticed that London real estate was priced about the same as it had been in 1970. This puzzled me. Why had London property prices remained flat despite inflation?
On investigation, I learned that there had been a huge real estate crash in 1970 continued to distort and dampen real estate prices six years later despite the rampant global inflation. The British pound had also collapsed dropping 35% versus the U.S. dollar from 2.4 dollars per pound to a new all time low of 1.52 dollars per pound and at one point hit a low of one dollar per pound. To my way of thinking, London houses, which I thought were already very cheap by world standards, just became 35% cheaper.
I could not resist and began property shopping and eventually bought a five bedroom house in Bedford Park in West London. I made a 10,000 pound down payment and took a 25,000 pound loan to meet the 35,000 pound asking price.
First, I was right. London property had been under priced. I was able to sell the house four years later for 115,000 Pounds. I made a profit of 80,000 pounds. But the currency change helped enormously too. The pound had risen to over 2.2 dollars per pound. My 80,000 pound profit was now worth $215,000.
I was willing to make this purchase because I could rely on a mental anchor of value… a residential property that a working person could rent in the $250 a month range. I was investing in what I knew and was comfortable with.
Manx real estate came next. In the 1980s I had an offshore corporate formation business and noticed that Isle of Man overseas companies were as good as Jersey and Guernsey structures, but cost less than half. This led me to believe that the Isle of Man would increase in popularity as a financial center. While visiting, Merri and I discovered that a long depression had forced over 2,000 properties onto the Island real estate market (population was only 60,000). We began taking real estate buying tours to the Isle of Man because rents and house prices were so low. Some delegates purchased remodeled beach front condos for $12,000.
Then while conducting a seminar in Florida, we saw that real estate in Naples, Florida was much less expensive than on the East Coast of Florida. Rents in Miami and Ft. Lauderdale seemed really high to us, but Naples prices were much lower. Merri had been living in Naples for some time and found a wonderful old large house just off the beach. We bought it for a song (compared to the price we sold it for!)
Naples prices skyrocketed while we were living there and in 1995 we visited Ecuador. Merri and I saw Ecuadorian beach front lots that would cost two million dollars in Naples that were selling for $5,000. We saw we could buy a house on Ecuador’s beach for a price that we understood and were comfortable with.
By 2009 Ecuador prices has skyrocketed and Florida real estate faltered. We began selling out our Ecuador real estate and buying again in Florida.
In Florida we saw great rental value. We also wanted to live closer to our children and grandchildren. We knew that studies had shown that 80% of adults 45 and older believe it is important to live near their children and grandchildren. Those 60 million people, just like us, were thinking differently about where they would buy and/or rent a home.We selected Mt. Dora as a small town to buy rental real estate for numerous reasons, but the first feature was its proximity to our daughter and grandson.
I can look back through this 50 year travel and real estate adventure and see that my decisions and investments have all been linked to that original anchor of value.
We live in a turbulent world and can expect rapid change, hidden agendas, huge shifts in communication. When we are caught in the currents of such rapid shifts, our anchors of value can help us remain steady and secure.
Gary
just in case you missed it,
Anthomy asked
Jackie, so nice to see you on here again….I hope you’re thriving still and I look forward to more content as well as re-engaging in so much that I’ve yet to explore and put to use. In our environment of everybody being an expert, all of a sudden, the volume of noise is and shiny objects is overwhelming…..I have a curiosity…many investors who have apparently met with some success seem to be nostalgic for the policies of our former leader in chief…albeit the discord engendered notwithstanding…i wonder if you have someone who could come on and offer a context to illuminate if in fact things were better business wise, how they were…and how to reconcile that with the grift and graft and fascist, authoritarian posturing with attendant loss of personal freedoms and suppression of rights that so egregiously mitigated a cooperative discourse between such polarized elements in our culture…If in fact business was greater, at what cost? Anyway….just a thought….I want to have a better understanding of the nature of the two beasts as I go forward….Gary Scott’s response
Anthony, thanks for this is an interesting question, but to try and put perspective on whether the left or right in politics is better for business throws us into the exact quagmire that politicians desire.
The correct answer is that the political system, especially at this stage of America’s economic cycle, has little to do with the economy and any government is dangerous.
My publications for the past 50 years have worked on the principle that regardless of the government’s position (left or right) they should be avoided as much as possible.
The first book I wrote in the 1970s was entitled “Passport to International Profit” and looked at how governments take advantage of what I call the “Soil Defense Syndrome”.
One chapter in that book described the “Concept Conversion Trick” and how it creates the soil defense syndrome.
The book said: “The Concept Conversion Trick begins when people agree on a good concept for working and living together. The people go to work and if the concept is good they will create a paradise. The government gives them a flag and a song. Then the government pulls the trick. The government convinces the people that the flag and song are important. Then while the people are busy watching the flag and singing the song, the government replaces the original concept with a set of ever increasing written rules and regulations administered by bureaucrats and backed up by a police force.
“This trick trades people’s individual freedoms for a shiver up the spine when the song is played and the piece of cloth is waved.
“The Concept Conversion Trick turns spirit into matter.
“Like trading love for a beautiful plastic doll. When the trick has been pulled and the dust settles, the people realize too late what has happened. Anyone who steps out of line is called unpatriotic or even criminal. He is swatted down by the bureaucracy or police force, crushed with overwhelming power or made an example of so others will tow the mark ‘for the good of society’. All this is done in the name of public interest.”
If this writing sounds prophetic having been written over 50 years ago, it was not.
Any simple review of any previous great society shows this trick and evolution. Like the Roman Empire , things may get better for a while, then worse and then better again. In the long term, as societies age, they lose their original vibrancy and life. The left and the right fuss and argue but all take, take, take from our wealth and freedom.
Should we be surprised? Does not every single thing in this universal existence develop in the same way, vibrant and flexible while young and growing thicker and more brittle with age?
The world is as we should expect.
If there is a problem it’s not the economy, the politics or the changes around the world. The difficulty lies in our thoughts and beliefs when they are not in tune with reality.
Maybe the pandemic has moved things along a little faster and sent the current down cycle a little deeper than than we would expect, but the downturn should be expected. We could be surprised by the severity and speed of decline caused by COVID-19, but our 2017 report “Live Anywhere – Earn Everywhere” looked at the risk of how America would respond to a viral infection. History provides us clues to the fact that current events are normal when looked at in the long term norm.
Long term thinking is what we need. When we cannot understand what’s happening right in front of us, we have to rise above the day to day obstacles and gain a broader historical perspective.
Nothing that’s happening now is new in the bigger picture.Nature works in bell shaped curves and human beings (surprise-surprise) are part of nature. Our actions, our societies, successes and failures are controlled by this reality too.
So, let’s get on a positive note. Material affluence in human society has been rising for millennia. However this increase comes in waves with up and down cycles.
Over the past decades, mankind has moved thru seven industrial eras since the 1750s.
These eras are best described by Joseph Schumpeter, on how innovation creates industrial revolutions altering the way we live, work, earn and keep money. He described five great economic eras that began in the late 1700s:
Era #1: 1785-1845-fueled by water power-60 years. Textiles and iron works were the backbone of growth industries.
Era #2: 1845-1900-fueled by steam-55 years. Railways and steel provided the main growth in this era.
Era #3: 1900-1950-fueled by the internal engine-50 years. Electricity and chemicals provided the major growth.
Era #4: 1950-1990-fueled by electronics-40 years. Petrochemicals and aviation were the innovations which became mainstream in this period.
Era #5: 1990-current-fueled by digital networks- 30 years+ ? Software and new media create the growth elements in this era.Each era greatly empowered massive new numbers of individuals, an empowerment that led to entire new social and economic classes. The working middle-class was born. This empowerment allowed the working class to rise from feudal subservient positions to positions of economic and hence political influence. Even in terrible global recession of the 1930s, people were far better off materially than a century before.
Much of the world’s population became much richer in each era, but these advances were accompanied by turmoil caused by periods when the old order had not let go and the new order had not taken hold. Many forces came into play and there were struggles for dominance to establish order.
We are in one of these turbulent periods now where social networking has become a dominant force, but has not gained full dominance.
We can see these forces if we examine the last three reserve currency nations that rose to become the leading global power and then saw their dominance fall.
From the 1500s to the mid 1750s, the Netherlands was the leading power. In the mid 1700s the British Empire took the lead and was not passed as the supreme power until around 1900 when the USA surged ahead until about 1950.
In the Dutch era, Amsterdam was the world’s financial center and the Dutch guilder became the world’s reserve currency. London and the British pound took over these roles as Britain rose. Then the US dollar became the world’s reserve currency in 1944 and was as good as gold (or silver) until Richard Nixon reneged on the American currency promise.
Each nation rose and has fallen because nature runs in a bell shaped curve and within every success lies the seeds of decline.
Growing wealth and power have generally come from a (or many) new innovation that helps one or two countries become a leading power in the world. Then the hubris of success takes over, the power declines and some new technology creates a new leading power.
This change does not spell disaster. There can be decline, but affluence can remain. The Days of Dutch glory are long gone, but I have spent a lot of time in the Netherlands (I maintained an office and worked from there for years). I promise you, Holland is still a really great place to live.
The UK’s dominance has been in decline for over a century. I lived in England for more than a decade and am there often. English life can be absolutely superb!The trick is to ignore as much as you can the hype from the politicians whether they are liberal or conservative. They all want your money!
Find and live in a pocket of affluence and do something that is of value to others and that makes you happy.
Gary, I have never bought a boarding house so I cannot give you any advice on this one. I wonder if you can research if the landlord has had to evict people in the past. Are there restrictions about who can live there — like drug tests?
Is a boarding house the best use for the property? Would it cash flow better if it had a different use or is it only zoned for a boarding house?
Idea #2 sounds good but you should definitely run it by your self-directed IRA company to make sure it passes their approval.
The problem with #2 is that Title companies are notorious for overlooking an option even if it’s recorded. They don’t understand it so they pretend that it does not exist.A total buy out of his shares would be much safer. You don’t want to run into problems down the road.
Each of my rentals was owned in a separate Land Trust. The title was in the name of the Land Trust.
The Land Trust documents are not recorded anywhere.The Beneficiary of the land trust (could be LLC) is not public knowledge anywhere.
You could even take it one step further and have your land trust originate in a different state.
When you talk to your tenants, tell them you are just the property manager. Never suggest that you are the owner.
You should not own all your properties in one LLC. That puts all properties/cashflow at risk.
We have a lot of training and come books about Land Trusts here at CashFlowDepot
Whatever you think it will cost, DOUBLE it! That’s the only way to protect yourself. It’s really not a good time to jump into a big project.
Remember 2008! Everything was going great. Prices were going up and up. Many thought it would last forever. Then overnight, the bubble POPPED big time. That’s coming again.
Here’s an example of a $200,000 fully furnished house for sale near Boquete Panama (where I live). In Panama, it is typical for a house to be sold completely furnished – even pots, pans, dishes, sheets, towels, all appliances, and furniture. Ready to RENT!
Notice NO PROPERTY TAXES until 2033!
Insurance would be about $250 a year.
Prices have been coming down in some areas in Panama. And they just passed a new rule that tourists can only stay 90 days so that will kill the snowbird traffic for airbnb’s and cause prices to go down even more.
I’ve been able to get zero interest seller financing for some of my tour clients.
There are still deals but they are rarely listed with a real estate company. TAxi driver’s know where the motivated sellers are.
The political climate is stable. Not the division like the US. The economy is making a come back after being shut down for a year.
Here’s a good report that was written by a trusted friend, Bob Adams
