September 1983
Vol 5 No 12
Nature has a way of selecting successful life forms. It changes the rules for survival. Those that can't adapt to the new environment perish! That's what happened to the dinosaurs. That's what will happen to SFH investors too if they don't change with the times. And times are changing faster than we realize. Perhaps, by looking at some of these emerging trends, we'll be able to better position ourselves to take advantage of the future. What are some of these changes?
The computer will rank with the “pill“ in changing the way we live. Over the next 10 years it will polarize Americans into two camps consisting of highly paid technically qualified craftsmen, entrepreneurs, and executives on the one hand; and much lower paid service-oriented employees, technically obsoleted engineers and displaced middle managers, and unemployables on the other. The middle class will be comprised to an unprecedented extent of bureaucrats at local, state and federal levels. And their pay will be extracted from producers by a combination of taxation and inflation which will be at record levels. Like Al Jolson used to say: “You ain't seen nothin' yet!”
Life will become much more competitive for most people. Education – THE RIGHT KIND OF REAL EDUCATION – will separate the winners from the losers. Currently, the 15 fastest growing career fields don't require a college degree! They're low-paid, easily staffed with minimum educational requirements. A high-school kid can monitor one of the new fail-safe computerized machines at $3.25 an hour just as well as a wage earner can. And who needs a middle management echelons when top management can get its operational data directly from its own computer terminals and is already doing just that.
Our emerging information-based society will be doing more and more work away from the plant. It's a lot cheaper to hire independent contractors to perform research, engineering, accounting, writing, bookkeeping and a myriad of other jobs than to employ on-site personnel with all their workmen's compensation, unemployment compensation, FICA, withholding taxes. And the new contractors are more and more working out of their homes, sending in their product via telephone modems connected to their in-house computers. As has already been seen in silicon valley around San Jose and Boston, these contractors are a short step from being entrepreneurs, fledgling millionaires who start their own firms.
The American tradition of upward mobility is already being changed. With less need for middle management, there's less room at the top. New companies aren't beefing up payrolls. Our children won't have nearly so bright an opportunity working for a big corporation as we had. Except for the entrepreneur, government employment will offer the biggest opportunity for most people – less opportunity for advancement in exchange for more job stability and reasonably high wages. But we'll all pay a price for this.
Along with more government will come more regulation, more interference with markets. A Central Industrial Management Policy is currently under consideration which is supposed to make the USA more competitive with foreign producers. At best, it will be comparable to the Post Office, reducing the quality of American production at higher cost. It will be directed more by political concerns than by profit, diverting funds to that block of voters able to exert the most pressure. But there's good news too.
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Entrepreneurs and investors should have a field day. Profits characteristically flow to the unregulated sectors of the market from the regulated. With little to gain in a traditional career, millions of talented people will have an incentive to take risks in an effort to reach the upper income strata. We'll see much more decentralization away from cities. People have already started moving back into smaller towns to escape high taxes, crime – and that growing bureaucracy. Americans will stop moving as often. As industry and government work become more permanent, the job quest will slow down too.
The search for “affordable housing“ will take some strange turns. Condos, town houses, zero-lot-line houses, off-site constructed housing and scaled down SFH will become a major market trend for empty nesters, singles, and city dwellers who can afford them. For those who can't, there will be traditional apartments plus various group-living arrangements. A major opportunity for this decade will be in retirement communities, out patient care facilities, convalescent centers as our population ages. And all these facilities will require entrepreneurs, investors, planners, financiers, managers, builders.
WE'RE USHERING IN A NEW ERA OF WINNERS. .
There will be more millionaires than ever before.- In high tech areas, we'll see the emergence of “gold-collar” workers – technicians with family incomes above $50,000 who have no management responsibilities. As computer competition heats up, new concepts will leap-frog the old. New companies will generate unheard of profits on the stock market and these profits will “ultimately turn to real estate for long term stability. For those with necessary skills, the stock market will offer dazzling opportunities. And the entrepreneur/investor who can offer shelter, marketing, creative concepts, financing will share these profits. The trick will be to keep them after paying taxes.
In this age of envy, it's harder to keep a million dollars than it is to make it! Everyone wants to get into your act – after all the risk and investment are passed. The solution is to maintain a low profile, but the problem with real estate is that ownership records enable anyone/everyone to identify the winners in each county. One solution to this dilemma is to hold property in another name. You can place it into a corporation with some truly advantageous results, but corporations can in themselves be highly visible. Or you can place your property into a Trust. A Trust is an alter–ego. You can hold your property in a Trustee's name and conceal your ownership from inquisitive eyes. And you can use a variety of Trusts to lower your tax bracket, escape Probate proceedings, defend against creditors, transfer property clandestinely to avoid Due-On-Sale problems, or form a syndicate to mortgage your property investments without any recourse or liability.
To illustrate, you might transfer income producing property into the name of your elderly parents, allocating them the income for 10 years in their lower tax bracket. As a part of the strategy, they might sell you some of their property on non-interest bearing loans to produce tax shelter for you. If they placed this property into a land trust, making you the beneficiary, you'd get the tax benefits and avoid probate too on their demise. In the meantime, no one would know that you actually controlled both of the properties. Before jumping into trusts, be sure to get good professional advice.
SYNDICATION WILL BE A MAJOR STRATEGY IN THE FACE OF A CREDIT CRUNCH!
The future promises either high interest rates and tight credit, or inflation of prices which will ultimately lead to prohibitive costs of income property. Already, the national average price for a new single family home has climbed from about $81,000 to $89,000 in the face of lowered interest rates. Payments for 80% financing at 14% on $81,000 were $767.80/mo for 30 years. On the new price of $89,000 at 12.5% they're $759.89. The message seems clear. Lower interest release pent up demand which drives prices to the point at which payments are too high for consumers, driving them out of the market. What can we do to cope with rising prices and rising interest rates which currently prevail?
Here's where the syndicator will dominate. Let's look at two examples. Assume that government and commerce will compete for available money, holding interest rates at high levels. That will generate a buyer's market for those with cash. Suppose 10 small investors banded together and paid $10,000 each into a syndicate. The $100,000 might then he used to buy a house worth $125,000 for all cash. They'd get this bargain because of their cash buying power. Rented for $800 per month in inflation-indexed dollars, each of the small investors would receive $80 per month completely sheltered from taxes. They'd get this without any risk of loss or liability for any debt for the remainder of their lives. Their cash flow would represent 9.6% return today, comparable to any tax-free bond but much better. While continuing inflation would drive DOWN the value of their bond, it drives UP the value of their house. And during periods of deflation, they'd typically be able to increase their cash on cash return by raising rents.
Syndication works admirably well with much larger projects. Off-site constructed housing will be coming into its own in this decade. It will be the primary source of low cost housing for those just starting their lives, or those just winding their's down. Putting together a mobile home subdivision can be an extremely profitable venture, but it's expensive. Borrowing necessary funds deprives most of these projects of any feasibility at today's interest rates, however using investor funds makes all the difference in the world. As in the example above, safe, secure, sheltered cash flows result from equity financing via an investment syndicate, however in a mobile home subdivision, the percentage of yield can be in the high twenties. And the profit to the syndicator much greater!
COMMUNICATING YOUR CREATIVE CONCEPTS IS THE KEY TO ATTRACTING PROFIT!
Some of the brightest minds and most innovative ideas are lost on the other parties to a transaction. Not only must buyer and seller understand, but so must all the other “third party influences”, such as bankers, lawyers, accountants, brothers-in-law, etc. The key to communicating your concepts may lie in being able to diagram the benefits so that each can understand in his or her own way, and be motivated to complete transactions. Hence, the plot thickens. Now one must understand where each of those other party's “hot buttons” are, and be able to incorporate them into the plan for all to see and comprehend.
Start with the individual needs of each party as you've been able to elicit them from each person. If you haven't identified the decision-maker's needs, you're just wasting your time. Consider which financial structure will meet tax-shelter, cash-flow, growth, management requirements. Above all, realize that there will be unspoken security needs which must be collateralized. Then draw a “T“ bar graph. On each side of the graph list the benefits each party is getting and giving up respectively. You might draw one graph to portray cash-flow, another for tax shelter, another for leverage, another to contrast underlying risk and security. The actual diagramming of these benefits enables you to communicate in an orderly manner to each person at a fundamental level he can understand.
COMPUTERIZED MANAGEMENT IS HERE TODAY. . .HERE TO STAY!
Whether we like it or not, unless we learn to use the new computer tools, we're going to all become “computer illiterates“. And property management lends itself to the computer era admirably. Starting with just the basics – knowing when your insurance is due, writing payment checks, recording rents received, balancing your books – these can save you hours of tedious time. But think of being that syndicator with several groups of 10 investors – how much easier to generate computer reports for each of them to show operating profits and tax liabilities. And what about maintenance? Wouldn't it be nice to be able to generate standard cost data based on averages which the computer could accumulate over a period of time. Furthermore, with wear-out data, you could schedule preventative maintenance and avoid emergency overtime expenses on air conditioners, pumps, roofs, etc. You'd be able to compare one property against another, one manager against another, average yields against your financial objectives. The world of tommorrow? No! Computer programs are available right now, and computer camps are growing across the nation to teach us how to use these tools. With the fall out of prices and exploding software markets, there's no excuse for not tightening up management and cash flows to make your properties, or those you manage for other people, perform at peak efficiency.
MARKETING METHODS ARE UNDERGOING CHANGE . . .
Creative Financing was born in the Exchange Markets – not stock exchange; real estate exchange. Only recently have techniques developed over the past 25 years been applied to SFH transactions. Now another golden-oldy, AUCTIONEERING, is becoming an important marketing technique for homes and condos. In the Sydney, Australia newspaper, some 90% of residential sales employ auctioneering to produce customers. Here at home, a major home builder sold out a complete tract of houses using auctions. Results showed auctioneering to be a viable selling technique when compared to the costs of conventional marketing methods. I've reported before that foreclosure and bankruptcy sales in my area have been generating prices near the retail levels for desirable properties.
Let's take a closer look at auction marketing to see how it works best. The key lies in assembling motivated, qualified buyers who will compete with each other to buy a property. That level of competition is what makes it all work, and recent art auctions in New York and London have demonstrated that this technique can generate top prices. Of course, a top auctioneering firm will have done it's ground work to understand the market and to promote the auction to that market. It will have rounded up financing and will have assembled a team to conduct the auction at the site. This isn't easy, but look at the rewards: one firm quoted me $500 basic charge plus 10% of the gross price for a small rental house. Some firms are conducting several auctions per week on major properties, with commensurate fees. So there's gold in them thar hills for the auctioneer.
But look at the seller's side. The auction process establishes true market value on the date of sale, provided a competitive crowd is bidding. It liquidates real estate quickly and efficiently, giving the seller cash rather than soft “paper“ terms. When used in conjunction with Exchanging, it provides the ultimate owner with cash, hence, expands the market. And auctions can be used to establish true value for purposes of establishing tax basis, exchange value, or market value. Auctions are a valuable “new“ tool.
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
