June 1983
Vol 5 No 9
Remember the house of mirrors? Some of them made you look fat, or thin. Or short. Or tall. They changed your shape, distorted your features. Clever design of illusions changed the way you perceived reality. Reality itself remained unchanged. Today we're being bombarded with conflicting economic signals which alter our perception of reality. The trick is to devine the true yellow brick road to riches in the midst of all the false images – and to avoid the pot holes once we've found it.
Suppose there were to be a total news blackout. No radio or TV, no newspapers, no newsletters (heaven forbid), no magazines. Nothing! How would you feel about YOUR world? Are you prospering? Do you feel safe? Do you enjoy some financial security? Are you over extended? Is you community prospering? Are you enjoying a strong local economy? Are you satisfied with community services? Growth? Educational standards? Do you see a positive trend for the future? Do you even know, based upon personal insight or observation outside the media? Or have you become another inhabitant of the house of mirrors in which half truth becomes common knowledge – and ultimately the foundation for serious business and investment decisions? To prosper, you must deal with the REAL world.
Common sense must play a large part in any investment decision. YOUR common sense! Investment advisers aren't going to be much help. Consider how few economists last year, at this time, predicted the rampant rise in the price of stocks? Which of your advisers told you to sell your California real estate in 1981? Did you get caught with $50 silver, $800 gold, or D Flawless diamonds at $62,000 per carat? Who told you to buy but forgot to tell you to sell? And who, later on, dismissed monstrous paper losses by telling you what a marvelous buying opportunity crashing prices represented?
Would you have been better off if you had listened to yourself – to your own reason – rather than relying on some soothsayer to predict the future for you? Every day the world becomes a little less predictable. You're going to need a lot of mental equipment and educational tools if you hope to finish ahead of the pack. Consider this:
Despite all efforts to cut expenditures, despite the biggest tax increases in history, despite an Administration which is the foresworn enemy of big government, our record setting deficits are STILL GROWING! The average family's share of the federal debt is OVER $700,000 including unfunded liabilities. Reagan's budget deficit is almost twice as high as Johnson's entire budget! There are only two ways to repay this debt: taxation or inflation – unless you consider plunder under act of war.
We're already seeing taxation at unprecedented levels from the top to bottom of government. The Alternate Minimum Tax is just the start. Watch for quick moves to close the escape hatches on Estate Taxes, capital gains, fast write offs. Heck, they're even taxing Social Security for some people. Americans are paying an average of about 44% of their gross incomes in taxes in 1983. And it still doesn't make a dent in the problem. Inflation is the only way out for government and for most Americans – and indeed for the entire world. I'm getting ready for a lot more of it. You should be too.
SFH continue to top my list of hedged investments for 1983! Why? First of all, like food and water, it is a basic survival need – shelter. It can be safely leveraged,
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so is more liquid than other real estate and is more accessible to a broader spectrum of users and investors. This makes it politically biased in favor of owners. And it's a “Big Ticket“ item. The little guy can't get into many investments because of lack of cash or credit. How many books have you seen written on creative financing in the gold or bond markets? Silver? Gems? SFH investment can be done without any cash at all – repeatedly – and without much risk using the techniques outlined in past letters. It's a proven hedge against inflation, a cash-flow producer during recession, and consistently provides more tax shelter benefits than most other forms of investment with fewer of the negatives.
BUT, WHAT ABOUT THE THRILL OF MANAGEMENT?
Owning rental houses is more akin to business than to investment! There are business risks as well as profits. There are business tax breaks. There are business opportunities to improve one's position with respect to cash flow and capital gains; and to capitalize on both inflation and recession. And day to day management can be reduced considerably using proven management techniques. But it requires more involvement than passive investment in securities or commodities – with considerably more benefits too. In addition to protecting assets, the SFH provides a viable way to PYRAMID a fortune for those who still haven't accrued sufficient investment assets. Like your kids and mine!
Did you ever know the thrill of absolute accomplishment? Of building something? An item of furniture? A building? A company? A team? That's what the SFH management process can do for you too. Sure, it's a lot of work at first, but once you've learned how to control your tenants as well as your property-once your income has started to come in with predictable regularity – there's no feeling quite like it. And, believe it or not, it's possible to control a portfolio of dozens of houses with less effort than running a small office or of managing a small apartment complex. That's what I developed as Hands Off Management technique.
Of course, you can hire property managers, or co-venture with other investors who like to manage. It will cost you some money, but your investment will be totally passive. You've got to be extremely careful about WHO you choose and HOW you control the cash flow as well as the property. Remember, a portfolio of 10 – 15 houses in most areas of the country will consist of more assets than 75% of the companies listed in the yellow pages in that area. It's not a small business. It needs to be administered with care. In one instance we heard of recently, the so called manager was placing fraudulent mortgages on the properties, keeping the rents and failing to make payments. Now he's filed under Chapter 7 of the Bankruptcy laws and the property is in foreclosure. So whether you do the management yourself or hire others, you still need to KNOW HOW to manage your assets.
RENT CONTROLS AND TENANT RIGHTS THREATEN PROPERTY RIGHTS.
Jimmy Walker, old time mayor of New York said it right: “The voters get the politicians they deserve.“ When we elect those who promise rewards out of some other person's pocket, why should we be surprised when they promote rent controls, or tenant's rights at the expense of tax-payers? In Boulder, owners were sued for conspiring to fix rental rates. The state sought the right to roll back rental rates to 1977 levels plus assessing owners damages. In Oakland last year, a rent control referendum was narrowly defeated. In Berkley, they're beginning to impose rent controls on commercial buildings. In Santa Barbara, an ordinance would restrict the owner's right to evict a tenant. In Santa Monica, rent increases are restricted even upon re-rental to another tenant.
We aren't surprised to hear about rent controls in New York, Massachusetts, New Jersey – and of a corresponding shortage of housing caused by unwillingness of investors to build housing for tenants who will immediately assert their rights. And in California, inept populists have always been willing to spend investor's capital to stay in power – whether by means of direct taxation or theft in the form of stolen property rights. But now this infection is moving to FLORIDA!
In the past, Florida has flirted with rent controls. Miami Beach, Mobile Home Parks, some apartments – but now an ominous document has been promulgated by the city of Orlando based upon a New Jersey statute. This proposal would tie it all up in one single basket. Home owners and residential investors alike would be at the mercy of inspectors which the proposal itself deems unqualified and untrained. Tax paying citizens will have to have their properties inspected periodically by the city. Landlords will have to pay special deposits into city coffers against tenant repair complaints. The city will do the work (at typically extravagant governmental contract rates), then levy the owners for replacement funds. Landlords will need Occupancy Licenses. Inspectors will be authorized enforced entry into any residence whether owner occupied or rented, without any liability. Violations of the code will be criminal offenses rather than civil. But it gets better.
In The People's Republic of Orlando, when a tenant complains of a violation of this comprehensive code, ANY TERMINATION, EVICTION, OR RENTAL INCREASE WITHIN 120 DAYS WILL BE DEEMED REPRISAL and will be forbidden. Of course there are the usual limits on removing rental property from the market and selling it. You even have to allow older buildings to be removed rather than being demolished – it looks as if they anticipate an extreme housing shortage under this proposal. Of course, rehabilitation loans will be available – somehow the lenders are supposed to charge NO INTEREST. And to encourage a steady supply of vagrants and non-productive voters to help them maintain control, the city fathers have decided to opt for INCLUSIONARY ZONING whereby they'll S-T-R-E-T-C-H zoning ordinances to permit high density low income apartment projects to be plunked down into other wise single family residential neighborhoods. This way every precinct will have its own underclass, easily controlled by welfare payments and patronizing bureaucrats.
As is normal with the totalitarian liberal movements, this proposed ordinance has probably gone too far. Before it sets presented for enactment, it's up to property owners in Orlando to get media attention – and fast! We've discussed the value of owner NETWORKS before. This is precisely the time they should be called on to direct mail to voters, buy TV time, knock on doors, introduce this debate into the agenda of every civic and service organization in the city. They should inform everyone as to the dangers of this populist approach. Perhaps a few choice photographs of beautiful down town Newark or South Bronx would show them how successful this approach has been elsewhere.
Of course tenant strategies would be different. In fact, perhaps I'll move to Orlando and rent a nice house. Every 120 days I'll complain about something. The city will rush out and repair it, and I can't be evicted for 4 more months. At that time, I'll complain about something else and get another 4 months ad nauseum. And I'll never be lonely because Orlando will be a magnet for the lowest common denominator of the 50 states.
ENTREPRENEURIAL ENERGY AND CREATIVITY CAN USUALLY WIN THE DAY
Think about it for a moment. Anytime the law gives the tenant the advantage, that's the time to become one. The lease option strategy might solve Orlando's investor problems under the new ordinance. Then he'd become the tenant with all those rights. Or, failing in that, suppose the tenant became the owner for a short time. Then HE'd have to pay all those fees and endure all that anti-tax payer bias from city hall. Over the past 7 years I've read hundreds of similar proposals. They all share a common flaw which can usually be offset by a simple expedient – having the tenant lose his status under the law by becoming some sort of owner.
IN THE POTPOURRI DEPARTMENT:
Jack Easton, a long time supporter from Culver City, CA has sent us a couple of signs to bluff the tenants. Printed in large block print, easily readable from the street, one says NOTICE – THESE PREMISES CLOSED TO ENTRY! Unauthorized Entry Prohibited by Law. Another one says OFFICIAL NOTICE TO DESTROY WEEDS & REMOVE RUBBISH, REFUSE & DIRT! They carry appropriate references to the criminal code (it's still against the law to trespass and litter in most places). A recalcitrant tenant returning to the property who sees the 'sign complete with official looking signatures and detailed penalties for infractions has additional motivation to comply, cleaning up the property or removing himself as required.
Start now to do your tax planning for 1983 and 1984. The new Alternate Minimum Tax will be vicious. It will probably pay to pay some income taxes, to stop using ACRS, to plan profit taking more carefully, and to rely less on tax credits. Now, more than ever, you'll need the services of a competent professional tax strategist. Don't get caught next April. It's going to be very rough on some people.
Tax relief legislation is on the way for those who pay off their mortgages at a discount. Senate bill S-1147 would merely reduce the buyer's basis appropriately rather than taxing the discount as ordinary income as it is now. This is retroactive to 1954. There's a new free booklet from Federal Trade Commission, Washington, D.C. 20580, titled; “Mortgage Money Guide, Creative Financing for Home Buyers” Try it, you'll like it.
Uncle Sam is now consuming 25% of the Gross National Product and 50% of all credit in the USA. With the recovery still not moving enough to help corporate profits, businesses have stayed out of the credit markets just as consumers have stayed out of the retail markets. Once they all line up at the credit window, there won't be enough to go around. Take advantage of today's interest rates to refinance those balloons or to sell. Congress will have to raise the debt ceiling to $1,388,000,000,000. to get us through the summer to September. Just think, they almost impeached Eisenhower for $100 Billion budget!
Reverse Annuity Mortgages are spreading to other states. The RAM program is in operation in Sonoma, Napa, San Mateo, Alameda, San Diego counties in California. Michigan, Maine, Illinois, Pennsylvania, Arizona are all making serious studies of equity conversion programs oriented toward providing income and homes for the aging. Write the Senate Special Committee on Aging, G-233 Dirksen Bldg, Washington, D.C. 20510 for their staff information paper, Turning Home Equity Into Income for Older Homeowners.
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