Thursday, July 4, 2013

Academic, Bureaucrat or Capitalist?

The famous Robert Kiyosaki recently published a superb book, "Why A Students Work for C Students (and B Students Work for the Government)." In it, he writes that the super-smart "A" students in school go on to become "academics" - the lawyers, doctors, professors, engineers and so forth. The "C" students - not always the most book-smart but often those who excel at sports, music or other creative endeavors, or are busy working at their part-time job - become the "capitalists" who open their own businesses or start buying rental properties. The "B" students go on to become members of the great government bureaucracy - from teachers and firefighters to folks who work at the EPA, DOD or DMV. Kiyosaki says that the A students go on to work for the C students; the business owner always has to hire a lawyer, for example.

This is certainly a simplification of the way life really is, and it tends to put vast populations of individuals into boxes. But it also has many truths, which I have seen played out time after time. Kiyosaki encourages the A and B students to become C students, and also encourages people to turn from "employee" to "investor."

Now that I have had time to really digest this book - again, it is an excellent book and I think everyone should read it - I realize that the path to being a "capitalist" and/or "investor" is not for everyone. Indeed, if our entire society went in this direction, it would be a disaster. We need a diverse population of A, B and C students to be a successful society that operates effectively.   

The key message of the book that I believe to be the most important is this: Our children are not presented the diverse choices that are available to them for the future. They continue to be taught to go to school, get good grades, get a good job at a big company with good benefits, sock money into the 401K and retire. But that is but one path. The world is changing. While this model may work for many, there are so many other choices out there. It takes financial education to know what the choices are and how they can be achieved.

When it comes to the simple fact of knowing that a person needs financial education - not just academic knowledge - there are people that "get it," and those that don't.  The ones that get it - who take the time to continue their learning and pass it on to the next generation - will be able to move from employee to investor, and set their children up to at least know that there are many choices available for his or her future. The rest - the majority - will stay where they are, and their children will follow the same path. This is not all bad. We need A and B students, they do honorable and worthy work, and we should not judge their choices any more than they should judge those of the C student.

Just know that the C student will have the edge. Take it for what it's worth.

Monday, May 13, 2013

Staying Safe in the Running of the Bulls

I read a great article this morning comparing today's bull run to the infamous fire of 1942 at the Cocoanut Grove nightclub. You can read it here:

Just yesterday I was just having a friendly Mothers Day discussion with my mom on the markets...she was saying, "I don't know why you keep saying that the market's going to crash, as far as I can tell it's going to keep going up and up." And I said that while it certainly could, the facts remain that there's nothing fundamental supporting the bull run, it's all due to the fed's QE, The Bernack is probably leaving, who knows what will happen, and so forth. Thankfully she has sell stops in place on her long positions, so she can keep enjoying the ride up without worrying too much (except for the overnight gap risk, and I'd love to have a discussion on this another day).

Back to the article posted above, I noticed how the writer laments the lack of choices people believe they have in a market like this, due to the low interest rates that the banks are paying on FDIC-insured investments. One thing he didn't mention is buying real estate secured notes. I truly believe that this is a great place to park money. Of course, like anything else you need to be smart about buying these. But there are some excellent opportunities for people to make a decent return in something secured by something real.

Something real? What do I mean by that? Isn't a CD at a bank something real? What people don't understand is that when you put money into a bank, the money's no longer's the bank's. You hold an IOU and the bank has to pay you. While this hasn't been a problem in our recent past, it is fraught with problems if the Congress gets its way and passes a bill which would make products of the shadow banking industry (everything in the banking swap casino that most of us don't really know about) insured by the FDIC, just like your bank deposit...and even worse, the swaps would have priority consideration for payback over your bank deposit. So while your bank deposit would be insured by the FDIC, you'd be in line behind the entire shadow banking industry, waiting for an underfunded FDIC to pay you back. Anyone smell a new TARP on the horizon? Yes I know it is insane, but if you don't know by now that Washington is Wall Street's prison bride, you haven't been paying attention. 

So here we are. Stocks are running up like there's no tomorrow. Just be sure that you can get out when the gettin's good. Enjoy the ride and manage the risk. And give serious consideration to other vehicles such as secured notes, so when the crash happens you don't really care because you're well protected. There are good choices out there. Get yourself educated and enjoy your life.

Thursday, March 28, 2013

Big Fat Liars

I'm sitting here a few days before Easter, biting the head off of a marshmallow Peep, thinking of Chicken Little and our current financial situation, waiting for the sky to fall...or not.

As we all know, the sky hasn't fallen yet. The fiscal cliff can was kicked down the road. Sequestration happened and life amazingly went on. The stock bubble keeps inflating. Real estate inventories are tightening. Greece is still in the Eurozone, the rest of the 'zone PIGS (Portugal, Italy, Greece and Spain) are wallowing, and Germany is left to pour on the slop. Sebelius admitted this week that Obamacare will raise insurance premiums. The latest debt ceiling crisis has been averted until May, and when that comes we wouldn't be fools for betting on another can-kick to carry us through August. And there's a new securitization kid on the block, this one the REO-to-rental scheme.

If all of this hurts your head, you're not alone. There's one common element linking all of these events together. What is it? Simple. LIES.

Seems we are dealing with a bunch of pathological liars running the world. Sure, they'll come clean once in a while when it suits their purpose (Sebelius had to come clean because insurers are ready to announce 2014 premium increases), but otherwise lying is a comfortable way to operate (REO-to-rental securitization - really?).

How does one deal with a pathological liar? If it's a spouse, get a divorce. If it's a co-worker or neighbor, avoid them. If it's a friend or lover, stop being a pathetic codependent and dump them. But what if it's your bank? Your government? Your broker? Can you avoid, divorce or dump these ingrained entities?

Sure you can, up to a point. Self-direct your investments into things you understand. Take the time to learn about Obamacare and position yourself for the best outcome. Employ a good CPA and take the steps to keep every dime in your pocket that you legally can.

There's one common element linking all of these events together. What is it? EDUCATION. Don't let it hurt your head.

Like Oprah tells us, when dealing with pathological liars it's up to you to 'take your power.' Or like the Who said, "We Won't Get Fooled Again." Get your risk management in place for whatever lies ahead.

And to all the big fat liars out there, just remember. Karma's a bitch.

Friday, December 14, 2012

Saving Your IRA from the Dreaded Cliff

Last month, I published an article about opening a SDIRA to beat the fiscal cliff. It's here, if you'd like to read it.

Now it's mid-December, and I am hearing from people wondering if it's too late to open a SDIRA in 2012 and move everything into it before the world ends on January 1, 2013.  I believe that your chances of completing all the activities to form a SDIRA with checkbook control and then transferring your financial-product IRA's assets into the new one are slim. A SDIRA must be properly formed, and then a custodian-to-custodian transfer must take place so the funds are not taxed. This takes time, and the custodial transfer can take weeks.

Given this, what is one to do? Here are a few suggestions:

1) Go ahead and start the process of setting up a SDIRA. You'll need it eventually, even after the cliff does whatever it's going to do.

2) Understand that there is nothing wrong with cashing out of your long-term positions now (and taking the tax hit on non-IRA assets in 2012 while you know what the tax rates are).

3) Understand that there is nothing wrong with having a pile of cash sitting around earning nothing for a few weeks while the market gyrates around as you wait for your SDIRA to be set up.

4) Accept the fact that you don't know what the market's going to do. Nobody does. Accept the fact that Congress doesn't know what it's going to do about the cliff.

5) If you decide to stay in the market and ride out the cliff, be sure you have an exit strategy in case things go wrong. Remember, most brokers are great at riding a rising tide, but few know how to react in a falling market.

Take this free advice for what it's worth - free advice. I'm not a professional broker or financial planner. I'm just someone who got caught in the last market free fall, and finally understood that nobody cared more about my money than me.

Screening Tenants and Getting Commitments

One of the most important - and frustrating - things about being a buy-and-hold residential real estate investor is in finding good tenants for your properties. Please note, I am not speaking about answering late-night calls about clogged toilets or chasing down rent checks; this is about the initial process for screening people and securing commitments.

At least one component of this has gotten much simpler, thanks to the credit reporting agency TransUnion. Those folks have come up with a product for landlords and tenants alike called the "Smart Move" application. Check it out at In this elegant application, the landlord sets screening parameters for the type of tenant he wants to attract into the property; once he finds a prospective tenant, the application invites the prospect to apply for the rental. The prospect inputs his contact info, social security number and so forth, and the computer screens the info. In the end, the landlord gets a go or no-go decision based on the prospect's credit score and arrest record.

The cost for this is relatively low, around $30.00 per incident. The landlord can choose to have the prospect pay this fee if desired. I like this, because then only serious people will spend the time and money. One of the beauties of the system is that the tenant's social security number is not revealed to the landlord. I like this security feature, and so do prospective tenants.

By the way, I do not get paid by TransUnion for promoting this product; I simply think it's pretty nifty and want to save others some headaches.

So, let's assume that you want to rent to this prospect. How do you get him to commit to you without wasting your time and tying up your property while he keeps looking for something better or cheaper? Money! I'll write more about this subject in another post.

Friday, October 5, 2012

Are the Best Barginas Gone?

An article in USA Today this week discussed the recent rise in home prices. The story cites CoreLogic, a major real estate market researcher, saying that prices rose 4.6% in August from a year ago. Other reports on housing prices are in line with this report. And in my own research, I have seen a slight increase in prices as well.  Does this mean that the days of real estate bargains are coming to an end?

I don't think so. I believe we are seeing an artificial tightening of supply, which serves to edge prices up. This is caused by many things:
  • Extremely low interest rates allow the people who are able to borrow money to buy.
  • The enormous shadow inventory - those homes that the banks own but haven't put out on the market yet - hasn't flooded the market but is being released in barely a trickle.
  • The rental market continues to be robust, so more and more people are renting out their homes rather than trying to sell them on the cheap.
  • An important Presidential election is close by, and a bump up in real estate prices helps the economy look better (again, think of that shadow inventory and ask yourself why those properties are being released so sparingly).
What this means for regular folks who want to get into real estate investing is that it's harder to find great deals today than it was, say, a year ago.  And while it's more difficult, it's not impossible if you have the right education, professional connections, and preparation.  I have written many posts on this very subject, such as this one:

That's all good stuff, but one important attribute of the successful real estate investor that's not covered in this article is patience. A buyer must be patient and wait for the best deals. A good real estate deal is kind of like waiting on a bus . . . if you miss one, don't worry because there will be another one along soon. It pays to patiently wait for and diligently pursue only those deals that will pay you over time. This is true whether you're thinking about buying a property just because you have money burning a hole in your pocket, or whether you're thinking about approving a questionable tenant just to get someone into your rental property.

So if you see a screaming deal that you really want because you know it'll work out, then by all means go for it. But if you feel like you've been looking at deal after deal after deal but they just don't seem all that great, you're not alone. Just be patient. Because those hidden gems, those great bargains that we used to just pick up off the sidewalks, are still out there. They're just harder to find now.

And be patient to see what the overall market is going to want to do. Are we at the bottom? Is it heading up or will it head lower next year? Nobody knows. But if you are properly prepared and fully educated, you can ride the wave no matter how it goes.

Contact me if you would like to discuss this or any other post. Happy hunting!

Monday, August 27, 2012

Getting Back in the Game

I recently published a new story about being prepared to take advantage of real estate deals at the end of the year. You can read it here:

While it's great to snag a year-end bargain, you still need to be sure that the property will rapidly flow cash for the investment to make sense. Alternately, you need to be sure that you have the financial depth to wait out a slow period. I like buying rental properties at the beach, and the seasonal aspect of the business is ever present in planning for a purchase. The HOA fees, taxes, insurance and basic utilities must be paid whether there's anyone in the rental unit or not. These expenses can add up quickly and turn what you thought was a bargain into a white elephant.

This may or may not be a factor in the area where you want to invest. The main thing is that you need to do your research, know what you're getting into, and be prepared for the worst. If the worst happens, then you know you can ride it out. And if the outcome is good or better, that will take care of itself.

Donald Trump said it best:

"There are a lot of ups and downs, but you can ride them out if you’re prepared for them.
Learning to expect problems saved me from a lot of wasted energy, and it will save you from unexpected surprises. It’s like Wall Street, it’s like life. The ups and downs are inevitable, so simply try to be prepared from them.

Sometimes I’ll ask myself why I want to take on some new, big challenge. A substantial loss is always a possibility. Can I handle it if it doesn’t go well? Will I be asking myself later, Why did I ever do that? What was I thinking? I’m actually a very cautious person, which is different from being a pessimistic person. Call it positive thinking with a lot of reality checks."

Have a great day, everyone!