March 1992
Vol 15 No 5
I’ve been trying to understand the care and feeding of money for most of my life. I’ve been in the work force with a Social Security card since I was 12. I’ve been a saver since my 4th birthday when I was given a nickel and a quarter. (Spent the nickel and saved the quarter.) I’ve been an entrepreneur since I was 9.
I used to collect soft drink and milk bottles to return for deposits. Then I expanded. I delivered two paper routes at 11, was in a dance band at 14, owned a share of a master-leased dance hall at 16, had a piece of a Pawn Shop at 18, was buying and selling currencies overseas at 19, ice cream Czar at 20, bought 5 lots and built my first house at 22. I built, bought, rented and sold houses in Japan. (I was a Yen millionaire at 28 at 360 Yen to the Dollar.) And used the proceeds to buy 2nd Mortgages by mail in Washington D.C. Later, I began financing, buying, selling and renting single family houses in earnest. Most of this time, I held down salaried jobs including 20 years in the U.S. Air Force.
Despite going broke and having to start over a couple of times; working, earning, saving and investing eventually paid off. I retired when I was 37, and again when I was 45 and again when I was 55. I’ve finally given up and come to the conclusion that working is the best form of recreation if you can work at things you really enjoy. And it’s also the second best way to invest. In my opinion, Real Estate offers the best investment opportunities for active people who want to control their own financial destinies and to continue to influence the outcome of their investments. But, first, let’s get a few concepts about Real Estate sorted out.
REAL ESTATE DOESN’T BEHAVE LIKE A COMMODITY IN AN ORGANIZED EXCHANGE MARKET!
As an active investor, a person can’t afford the luxury of being ‘loyal’ to one or another specific investment vehicle merely because of being more familiar with them. He/she must keep him/herself informed as to as many investment alternatives as possible in order to achieve the diversification that prudence commands in unstable times. You who have attended my Portfolio Strategies seminars have had an opportunity to weigh the comparative advantages of a combination of stocks, bonds, mortgages, options, metals, and real estate – domestic as well as foreign – in the context of a broad array of economic and political scenarios both optimistic and pessimistic.
In any particular situation, certain investment alternatives perform better or with more safety than others. So, to determine which the better investment is, we need to focus on the attributes of a particular vehicle. Here’s where the pundits usually fail with real estate. They treat it as if it were a single commodity when in fact it is the most varied of all investment vehicles. You can have voting and non-voting common, preferred, lettered stocks; subordinated and un-subordinated debentures; convertible and non-convertible bonds; put and call options and warrants, futures contracts and mutual funds which contain mixes of these. The vast majority of these are traded in an orderly worldwide market in which there’s instantaneous communication of price fluctuations on the order of fractions of a penny.
Contrast this to the real estate marketplace. First of all, it’s never going to be orderly or organized. There are no institutions that use computers and programmed trading parameters to buy or sell real estate. NOBODY really knows the price of ANY REAL ESTATE in any market because of the uncertainties associated with mortgage balances, closing costs, tax free exchanges, leases, the estate being transferred, condition of title, covenants, restrictions, easements, rights, liens, encumbrances and encroachments, rights of tenants, zoning, etc.
That just scratches the surface. Think of all the kinds of real estate there are. Land can be raw, agricultural with row crops, fish farms, or timber. It can be developmental, improved or un-improved, rural, urban, currency, leased or un-leased, with or without mineral, air, water, developmental rights which can be leased/sold or not leased/sold with the land. It can be priced based upon its frontage and site on highways, railroad spurs, air and other ports, navigable waterways, corners, water or golf courses or parks or for extraction of sand, clay, oil, gas, gold, silver, copper and other minerals. We’ve only been talking about land. What about buildings?
Adding various structures to land can really complicate accurate forecasting. Improvements might be residential such as single family and zero lot-line homes, or duplexes, apartments, townhouses and condos, time shares, co-ops. Residential uses begin to merge with commercial uses in the form of RV and Mobile Home Parks, Bed & Breakfasts, hotels, motels, daycare centers, nursing homes, hospices, hospitals, single family house office conversions. Then there are the more obvious commercial applications which range from mini-warehouses to high-rise world trade centers; oil refineries to gas stations; mom & pop shops to hyper-malls.
Let’s not overlook resort properties which can start with a condo time share marina berth and end up with the Taj Mahal casino on the beach at Atlantic City. And what about all the industrial properties – land and improvements – which represent all the manufacturing and storage facilities in the country? There’s a point here:
There must be 500 newsletters that detail and forecast the workings and outcomes of investments in the orderly security and commodity markets. There are no newsletters that cover the same scope in real estate markets. Market mavins who blithely predict real estate crashes and booms probably couldn’t even name just the few real estate investment alternatives that are listed in the above paragraphs.
And we haven’t even touched on variables in financing such as institutional and private fixed and variable rate mortgages, contracts, Deeds of Trust, wraps, blanket mortgages, securitized mortgages, REMICS, REITs, discounted paper, tax certificates, wrapped leases and Options, Used Licenses, or the effects of tax credits and write-offs.
Financial writers run grave risks of steering their readers wrong when they make predictions in a market that doesn’t react to signals the way stock/bond/commodity markets do. Real estate isn’t like other investment choices because we all NEED it.
MOST REAL ESTATE IN THE MARKET IS ESSENTIAL TO SURVIVAL . . .
Many businesses could be (and are) run from the backs of trucks or in flea markets or out of basements and garages – but these still involve real estate in one form or another. Everyone depends upon real estate for basic shelter, heat, food, clothing, water. We have no other alternatives. Thus, ownership and the power to control and to tax the use of real estate lie at the bottom of wars and political ideologies. You may have heard of the French and Indian War, American Revolution, War of 1812, Mexican War, Civil War, Spanish American War, World Wars I and II, Korea, Vietnam. Take away the real estate motives and there’s no war. How often have you heard of a war fought over pork belly futures or a convertible preferred stock?
When experts try to forecast what ‘real estate’ is going to do, they are bound to fail because of the vastness and diversity within the market itself. It has been estimated that privately owned real estate is worth $9 trillion in American. That’s just a tad more than in the stock, bond and commodity markets rolled up into a ball. Only a fraction of this real estate is for sale, and only about half of it has any debt on it at all. Certainly, availability of mortgage credit can have great effect on the MARKETABILITY of real estate. It can cause swings in market activity and prices and create distressed sales in some sectors. However, unlike the securities markets where programmed trading can collapse the market, sales in a single sector or in a localized area don’t really affect the geographically dispersed real estate market. At the same time that New England is on the ropes, Washington State is doing just fine.
Nor should the current financial woes of commercial real estate lenders be cause for alarm among single family house investors. The fact that lenders loaned money secured by real estate based upon inflated appraisals doesn’t mean the real estate was ever worth the amount of the loan. Today’s market might merely represent a return to reality. When government distorts the market by controlling the liquidation of $billions in property held by RTC, FDIC, SBA, HUD, and the VA, that shouldn’t be taken as evidence that real estate is all washed up. On the contrary, it should be bullish for real estate. Less supply to meet the growing demand which will become stronger.
INCREASING FAMILY FORMATION, POPULATION AND PER CAPITA INCOME DRIVE UP VALUES . . .
A home is one of the first major purchases made by people after they form a family. As people earn more, they typically move up into more sumptuous quarters. When there’s a social, political, and economic environment that’s conducive to growth in business, more people move in, creating more demand. As entrepreneurs begin to meet this demand, invariably, property prices rise. Under normal circumstances, eager lenders supply credit to both entrepreneurs and consumers who use it to improve their circumstances. As surplus profits are accumulated, people become more affluent. The process continues until government either restricts the supply of credit – and/or opportunity – or taxes away the spending power of the population.
Like the little girl with the curl, when things are good, they’re very very good. Southern California until about 1990, Washington state, Hawaii for most of the past 7 years, Texas on and off up until 1985 or so, Florida in the 70s, Washington DC area most of the time, Massachusetts’s Silicon Valley until 4 years ago. And when they’re bad, they’re horrid. Los Angeles and parts of Orange County, parts of Florida, the energy belt, New England are beleaguered by rising taxes, a falling tax base and ever increasing levels of social spending which is being reflected in property values.
Once government starts ham-handing the economy trying to balance the seesaw, it over-controls and things go out of kilter in some markets for a while, but sooner or later the pendulum swings the other way and the opposite effect influences things. In the 70s it was inflation. In the 80s it was credit. In the 90s it will be world trade that wags the tail, and we’re uniquely positioned to cash in on it. That will bring real estate back into its own with a bang as real incomes start to rise and real recovery begins to restore purchasing power to home buyers.
Demographically speaking, political power is shifting away from the more conservative areas into the more progressive South and Southwest. We’ll see a lessening of governmental restrictions and liberalization of trade with Mexico and Canada. As a major trading block, we’ll be able to compete quite effectively with both the Pacific Rim and the European Economic Community trading blocks. Remember, those alliances are essentially among nations that were at war with each other a few decades ago. They don’t quite trust each other, so won’t be as effective as our North American trading block. What’s more, they’ll have to spend their hoards of Dollars buying our products.
From any standpoint we’ll have advantages in developing trade with Latin America’s emerging economic powers. Mexico, Chile, Brazil and Argentina will lead the way in buying our products and technical know-how and providing low cost labor. In just a few short years, we’ll see our economy start to move spurred on by new levels of productivity from the companies that will emerge lean and mean from the recession. And, we’ll begin to see the benefits of the quiet modernization that’s been taking place all over the industrial heartland.
Old, obsolete plants are being shut down, replaced with new facilities new capital equipment and computerized processes. ‘Just in time’ inventory management, disciplined and better trained work forces and more competitive management are being put in place. America is re-learning how to compete in both production and marketing. We’ll also see baby boomers coming into their prime earning years. Corporations will take over the responsibilities of preparing young people for the job markets from the defunct school systems. Rising employment and incomes will start to drive the housing markets. Both used and new housing will benefit, but there’s much more.
Every new house sale will generate jobs, rising incomes and profits in lumber, copper, glass insulation, plumbing, heating, air conditioning, furniture, finance, construction, land development, brokerage, energy, appliance, concrete, carpet, rubber, and steel industries. The local and state tax base will also expand. In the year 2000, a lot of people who share this vision today will be sitting pretty.
WHAT’S OUR BIGGEST PROBLEM IN SHARING IN THIS CORNUCOPIA? PROCRASTINATION!
We’ve got a fantastic opportunity for the next couple of years or so until things really start turning around. Government’s continued thrashing around prior to the election virtually assures a volatile market where both buying at distressed prices and selling into new low interest rate loans will be the way to make money. I see no way that we’ll avoid a period of really wild inflation. It’s the only way a bankrupt government can generate economic growth for the short term. So Options and fixed-rate low interest rate loans are going to create fortunes for those who’ve gotten themselves into position during the next few quarters. Then, we should begin to see the coming of the millennium as the American economy recovers and prosperity returns to the middle class wage earner. But you’ll miss out if you don’t get started.
PROCRASTINATION
I hesitate to make a list
Of all the countless deals I’ve missed;
Bonanzas that were in my grip
I watched through my fingers slip;
The windfalls which I should have bought
Were lost because I over-though;
I thought of this, I thought of that,
I could have sworn I smelled a rat.
And while I thought things over twice
Another grabbed them at the price.
It seems I always hesitate,
Then make up my mind much too late.
A very calculus man am I
And that is why I never buy.
How Nassau and Suffolk grew!
North Jersey! Staten Island too!
When others culled those sprawling farms
And welcomed deals with open arms –
A corner here, ten acres there,
Compounding values year by year.
I chose to think and as I thought,
They bought the deals I should have bought.
The golden chances I had then
Are lost and will not come again.
Today I cannot be enticed
For everything’s so overpriced.
The deals of yesteryear are dead;
The market’s soft – and so’s my head.
Last night I had a fearful dream
I know I wakened with a scream;
Some Indians approached my bed
For trinkets on the barrelhead
(In dollar bills worth twenty-four
And nothing less and nothing more)
They’d sell Manahattan Isle to me,
The most I’d go was twenty-three.
The native scowled: “Not on a bat!”
And sold to Peter Minuit.
At times a teardrop drowns my eye
For deals I had but did not buy;
And now life’s saddest words I pen –
“if only I’d invested then!”
Joseph M. Bonacci
St. Petersburg
I recently missed an opportunity to triple my money in just a few weeks in a speculative stock. I KNEW I should invest, but I DIDN’T ACT on this knowledge. The organized securities markets are full of sophisticated traders whose knowledge is buttressed by super computer programs which make their trades for them, sometimes automatically. I can’t compete with them. But real estate is more ponderous. There’s time to weigh the factors, locate opportunity without competition and structure a deal. Soon, properties are going to start to move in many areas. Don’t be left at the gate.
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