April 1987
Vol 10 No 6
It's a transition year. The tax laws are in transition. That means there will be phase-ins of various portions of the tax increases and decreases, phase-outs of many of your deductions, phase-ins of different tax rates for corporations after July, brand new limits on what you can and can't do, plus a new Speaker of the House, Jim Wright, who as the Congressional Leader is already establishing a record as a CAN'T DO person. He's already announced for new and higher taxes which may be passed before this year is out.
But, that's not all! 1987 is shaping up as a year of POLITICAL transition too. Ronald Reagan finally admitted to what everyone already knew, but his evident weakness and the scurrying for cover among his loyal staff may have marked the end of any real effectiveness as President. Add to that a Congress controlled by Big Spenders with a long history of buying their jobs with tax payers' money who are already warming to the task. We're left with the President with the World's Record as a DEFICIT BUILDER and a Congress that can't say no. With elections less than 2 years away, potential candidates already are moving into position. Who's minding the store?
Let's talk ECONOMICS. Lenders are failing at 3 times the rate they did last year. FSLIC has $2Billion. They say they need $25Billion just to cover tottering S&Ls ALREADY ON THE TROUBLED LIST. Congress has voted to give $500,000,000 to the HOMELESS. In this record year of RECOVERY, we have people that the government has to house. What would happen to them if it were a year of RECESSION – or DEPRESSION? And we're talking about a new minimum wage that will guarantee millions of marginal workers don't get jobs. We're getting set for a whole raft of legislation designed to restrict international trade. The Economists are talking out of both sides of their mouths because they don't really know what's going to happen. Inflation? Sure – sometime. Recession? Maybe this year! STAGFLATION? You remember stagflation. We invented it about 13 years ago. That's where everything is going up, but YOUR income is going down, and layoffs are starting.
Let's end this on a cheerful note. You probably won't get the pension you've worked for. They're talking about a 'means test' for Social Security. That means that those who've worked and saved prudently will get less than those who've never produced a dime that they've saved for their old age. Corporate pensions? Take a look at all the debt being taken on by companies today. Look at balance sheets loaded with junk bonds. In the face of all the uncertainty, changing markets, foreign competition, BANKRUPTCIES are still on the increase. Oh, they'll put some corporate officers in jail, but how will that help YOUR pension if there's no money in the till?
More than ever, this is a year to put your house in order! This probably sounds like a broken record. I've been saying it for the past 6 months, but from the calls I've been getting, few people took this advice seriously. Why? I'm convinced they didn't know how.
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WANT TO MAKE A $MILLION? FIND A NEED AND FILL IT . . .
One of the latest small businesses sweeping the country is the PRIVATE MAIL ROOM. I've mentioned this before, but I'd like to tell you about a particular example that I've been watching for the past 18 months. First, the basics – finding the need. Some mail just won't wait for intra-city delivery. Some people need a place for messenger drop-offs. And small businesses need a physical address for licenses, credit card accounts, airline ticket deliveries. Many times people need Notary services, keys, stenographic services, a place to meet, checks to be cashed, money orders to be bought. stamps, package wrapping, computer services, a message center. Most of these potential customers can be converted into a tidy income IF the needed services don't cost too much. Voila – here's where opportunity meets preparation – some people call that LUCK.
The facility was an empty store-front in a small retail strip center located on a well lighted main thoroughfare with convenient access from all directions in the middle of the business district. It's important that this NOT be in a high crime area or where customers would feel uncomfortable about going after hours. The space measured about 16' by 45', carpeted with a small office and restroom carved out of the rear 6 feet. It was leased for $225 a month WITH UTILITIES, air and heat. Retail rentals were soft.
Initially, a counter was built about 20 feet from the front to divide the space front and back. And a battery of 240 mail boxes covered an area along about 12' of wall on the 'customer' side of the counter, with space to post mail, entered from behind the counter. Beneath the counter were a small safe, supplies, sale items. A peg-board display showed the variety of envelopes, mailing tubes, wrapped packages, and services with prices. On the counter sat a mail scale, key machine, Notary Sign, Money Order/Check Cashing fee rates. At the front of the customer side, near the window was a table and office chairs such as one might see in a reception area. There was also a bulletin board on which were business cards of people who had boxes and who wanted to offer their own services to those who might be seeking them. So far, not much up-front cost. Primarily USED EQUIPMENT.
This was augmented with a stand-up counter, work table, protective grill work over the windows, dead bolt door locks and locking bars, etc. but the whole shebang came to somewhere around $5000. And this was spent gradually as business picked up. That's about ½ of what an economy car might cost today. Of course, there would be another $3000 or so over the first year for rent and miscellaneous items, but these would be phased in gradually. One of the first items to buy might be a good copy machine. What about INCOME?
The boxes rent for $12 per month which is triple the cost of comparable Post Office boxes, but what the customer is buying is CONVENIENCE! Here's what he gets: He can check his mail by telephone without leaving his home. He can avoid long lines when he has to mail packages. He can have a physical address for UPS deliveries. And pickups. He lists his box number as 'Suite 101'. It makes his business seem more substantial. He can get a letter drafted on a Computer, reproduced, inserted and mailed using rented mail lists which can be put on labels by the computer. He can use the table and chairs for short meetings where privacy isn't important. He can shorten delivery times to hours.
The entrepreneur gets $12 X 240 = $2880/month from box rentals, and about that much again from services. These are continuously being expanded. Utility bills can now be paid at the private post office. Travel and entertainment tickets can be purchased. This facility has been sold once at a profit. The entrepreneur has moved on to start up another one using his whole family. There is very little that a young adult can't do, or a spouse who doesn't want to work in a structured, salaried environment. Or ANYONE WHO'S FED UP OR BURNT OUT IN A DEAD-END TOE that makes less doing something he/she doesn't like. Last but not least, how did our entrepreneur find customers? He mailed out a post card to small businesses in the yellow pages. That's how I found out about him!
ONCE UPON A TIME THE RENT WAS LATE . . . OR MISSING!
About now you're taking a hard look at the masthead where it says this is a letter for single family house investors. Let me see if I can connect what I've been writing about a new business and the economy to your primary interest – INCOME FROM RENTS. You're going to live and die by NET AFTER TAX CASH FLOW whether you like it or not. I've heard all the fancy financing schemes before – heck, I invented a lot of them. I've taken all the investment courses that tell me how to calculate the INTERNAL RATE OF RETURN, PRESENT VALUE OF FUTURE INCOME STREAMS AND REVERSIONS. I know how to evaluate a site and how to improve a property to increase its market appeal. But none of this will do me much good unless I can realize a net increase in my income and net worth with which to buy the lifestyle and future security that I'll need. And read as you will, with rare exceptions, thousands of gurus will be telling you when/where/how/why to BUY, but they lapse into silence when it comes to telling you how to MANAGE or to LIQUIDATE your equity in order to be able to SPEND the wealth that your real estate has piled up on paper.
There are only a limited number of ways to convert real estate into cash. You can harvest a crop, extract minerals, oil or gas, sell various rights or the fee, or rent the property. Then you'll be taxed according to the way the current tax law treats the profit you've made in order to arrive at your cash flow before financing. Next, you'll pay for any financing on the property. Only then will you know how much you have to spend or to put aside for future uses. But first of all, you've got to create the profits! For purposes of this letter, I'd like to concentrate on RENTS.
Which came first, the chicken or the egg? Neither. The rents came first. The RENTS ALWAYS COME FIRST! If you haven't arranged the terms of a property acquisition so that the rents you collect will pay operating expenses, taxes, financing and profits, you are going to be in trouble. Even if you did these properly, an economic slump, spiraling costs, politically inspired rent controls and/or regulation of rental housing, or failure of a major employer in the community could wipe you out. Read the papers and you'll see that EACH OF THESE IS HAPPENING SOMEWHERE IN THE USA EVERY DAY! Those who would acquire and retain a measure of financial security would do well to try to forecast where/when a reversal in fortunes could happen to them – then take appropriate action to offset it. In the past 2 years many Real Estate Advisors and their clients bit the proverbial dust because they failed to perceive the connection between Political, Economic, Tax matters and solvency.
In past letters we've discussed screening tenants to be certain they COULD and WOULD pay rents. Now we have to make sure that they CAN and WILL pay. That's what we use our private Post Office for. We've eliminated the tried and true 'it's in the mail' excuse. At the same time, we've also gotten rid of the 'float' that banks like to use to rob us of interest while they clear tenant's rent checks. The tenant can cash his check and buy a money order, put it into an envelope, put it directly into my mail box WITHOUT ANY MIDDLE MAN. This gives me spendable cash immediately. It gives the Tenant assurance that there won't be any mishaps between payment of rent and receipt by the Landlord. It provides a witness as to the time/amount of payment. Checks can neither BOUNCE or be LOST IN THE MAIL.
Because all my rents are due the last day of each month prior to 5 PM, this concentrates all payments into a few short hours, so I can arrange to have all the money picked up and deposited into my operating bank account that same day. And I can start any evictions for non-payment of rent THAT SAME NIGHT. Running a COLLECTION AND EVICTION service is another of those little businesses that have a phenomenal return per hour worked. Why all this focus on cash-flow businesses? Because they not only help augment rent collections efforts, but PROVIDE ALTERNATE SOURCES OF CASH FLOW WHEN VACANCIES RISE during any economic slow down. And they can be excellent training grounds for the next generation. I ought to know. My C&E (Collection & Eviction) specialist is the daughter of a graduate of my management class who earns a tidy income while also attending college and working as a part time legal secretary. While you're studying economic trends, ask yourself where YOUR CHILDREN WILL WORK if things turn down. Maybe a family business might be a good idea!
WHEN IS A CONTRACT NOT A CONTRACT?
Every week or so someone sends me an entry in the 'TOUGHEST RENTAL CONTRACT' tourney. There are pages and pages of microscopic print which effectively remove all the civil rights of the poor soul who is on the other side of the table. There's no doubt at all of the power of the landlord or buyer – but there's usually a tiny flaw. A contract is only as good as the court in which it must be enforced. How far do you think you'd get with an iron-clad purchase or rental contract in Cambridge, Mass? Berkley, Calif?, Santa Monica (Hayden City), Calif., Washington, DC? Sometimes real estate people tend to forget that their monopoly board also contains a mandate: 'Go directly to jail, do not collect $200.'
The key to writing effective agreements lies in tempering one's enthusiasm so that the resulting document isn't UNCONSCIONABLE in the eyes of the Judge who must rule on it. But there's more. Your legally enforceable document must contain some fundamentals or it won't even qualify as a contract in any event. Let's look at these in more detail.
OFFER AND ACCEPTANCE: Someone has to make an offer. For real estate transactions, this has to be in writing. Not necessarily though for leases. It's usually determined by state law as to what constitutes a lease and what doesn't. A written offer. is best because it limits the areas of agreement so) they can't be expanded in any later disagreement. The offer must be accepted as written. Any modification on the part of the respondent has the effect of voiding the original offer and turning it into a counter offer made by the other party. This transmutation might continue from one party to the other as long as the terms are being negotiated. Once final acceptance has been reached by the offeree, this must be communicated in writing to the offeror. This is the beginning of a CONTRACT, but there's more:
CAPACITY of PARTIES: The person making the agreement must have the legal power to do so. He may be an owner, the legal representative of the owner or other party in interest. He must be a legal adult. Sane. With full mental faculties. With authority to bind a deal.
MEETING OF THE MINDS: All those tricky gobbledygook and 'gotcha' clauses in the fine print probably won't have any effect if your agreement is contested. If both parties don't fully comprehend what they're agreeing to, the Judge will probably throw it out. So, take the time to EXPLAIN what you've written and make sure the other party has his questions answered. On my Rental Agreement I get Tenants to initial complex clauses to signify comprehension.
CONSIDERATION: The amount of consideration is a judgement call, but it should probably relate to the value of the contract. You can close a transaction on a handshake or verbal agreement, but you can't enforce it without consideration. That could mean any action which either party may undertake or agree NOT to undertake in consideration of the other party's agreement to do or not do something. This is the basis for the agreement.
REALITY OF CONSENT: There can't be any material misrepresentation, fraud, duress, undue influence present or the agreement won't hold water. Ambiguity and mistakes can void it.
ILLEGALITY: You can't expect the court to uphold a contract for an illegal purpose, or one against the public good or where the rights of 3rd parties are jeopardized or one which requires performance which can't be done without violation of a statute.
These requirements are safeguarded by the courts for a good reason. There would be little commerce without the sanctity of contracts being sustained. Whether verbal or written, each party to a transaction must be able to rely upon the promises of the other for delivery of services or products at any future time or location. Ask yourself how much your Installment Notes, Options, Leases and Sales Agreements would be worth otherwise.
Keep this in mind when you're tempted to resort to fine print and ambiguity in an agreement with a tenant or a Seller/Buyer/Optionor – or when THEY'VE done it to YOU!
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
