Income for Life

Are you trying to time the bottom?

Posted by Rob Minton
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I've written on this blog before about signs of life in real estate markets around the country and about trying to "time the bottom" of the market in the Income for Life monthly newsletter. Unfortunately, I believe there are many investors who are waiting, trying to time the market, and are probably passing on good deals as a consequence.

Now, as always, I am not saying we are at the bottom of the national real estate market. Of course, there really is no "national" real estate market -- national statisics are just a conglomerate of various local markets, and individual markets are the ones that matter. But there is evidence in some markets that the bottom is approaching, or has even already arrived.

There are certain things to pay attention to in each market when you're trying to time the "bottom," which is really more a trough in a cycle. Those factors are new housing permits, mortage defaults, existing home sales, foreclosure sales and interest rates. According to Robert Campbell, an expert on real estate cycles, these are the factors to consider when evaluating whether a market is headed up or down.

Here's the thing about cycles: When things are going south, they keep going south but at a slower pace before they  turn around. For example, you might read that the number of housing starts in your area last month is down 10 percent from a year ago. But if it was 15 percent the month before, 17 percent the month before that and 20 percent the month before that, the rate at which they lagged last year's stats is slowing. These are numbers that don't always show up in news stories.

For example, the number of foreclosure sales in your area was probably up last month compared to the same month last year. But chances are, the number was higher the month before, and higher still the month before that. So the rate of foreclosure sales is slowing, even if the newspaper says they're "up," compared to last year.

With that in mind, pay attention to some recent numbers that could signal the market is about to take an upturn in your area. Housing starts nationally were up 1.5 percent in August from July, which means that in some markets, at least, builders are building homes again. If you're trying to time the market, you need to see if this is occurring in your area, because it is a sign things could be on the upturn.

Also pay attention to where prices are in your area. If they are on the rise, chances are you missed the "bottom," which is OK because A.) It's nearly impossible to time the exact "bottom;" and B.) Because most homes still represent fantastic pricing.

But here's something else to take note of regarding prices: Remember we said that the downward pace of data will slow before going back up? Well, a recent Forbes.com article, has a very interesting look at markets around the country where prices aren't necessarily going up, but the number of homes on the market that suffer price cuts is slowing.

For example, some of the markets hardest hit by the real estate bubble burst -- Las Vegas, Phoenix and Miami -- are showing fewer and fewer price reductions. According to the Forbes study, the percentage of homes with price reductions in these markets is down 24, 18 and 12 percent, respectively, since the beginning of the year.

Looking at price reductions can help you determine whether the first-time homebuyer tax credit, loosening credit, foreclosure prices, etc., have helped sales enough that sellers don't have to keep price-cutting their homes to sell them. Where I live -- Cleveland, Ohio -- for example, has had a flat level of price reductions. The percentage of homes on the market with reductions has largely gone unchanged over the past six months or so, indicating that sellers still must cut price to sell. This, of course, is usual information for determining whether real estate might soon appreciate, AND when you're negotiating the price on a home purchase.

So I continue to think now remains a great time to invest in real estate in most markets. And I also think that those of you sitting on the sidelines, waiting for the market bottom before getting into the game, might want to get those warm-ups off.

NOTE: I'd love to hear about what signs you've seen in your local market that either suggest a bottom is near, or a long way away, or even come and gone. Every market is different. What have you seen in your area? Leave a comment and let me know!

If at first you don't succeed ... good for you

Posted by Rob Minton
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No doubt, you've  heard or read the phrase "Success leaves clues." I've mentioned it before, I'm sure, that failure also leaves clues. I'm wondering if people are paying attention to those clues.

I read a statistic today that said during this current recession, the number of millionaires in the United States has dropped by 18 percent. That is a huge number.

I'm also fairly confident that those 18 percent will be just fine. In fact, they will regain millionaire status in a short time and will probably actually exceed what their net worths were heading into the recession. Why do I think that? Because people who achieve what must be achieved to attain millionaire status have something in common:

They learn from failure. As I said, "Failure leaves clues."

And so as our financial system as a whole (hopefully) takes some lessons away from this recession, so will the millionaires who have endured a few recent bumps. I don't know what all those lessons will be -- maybe more diversification, less speculation, lower-risk tolerances, etc . -- but the millionaire mindset will be "What has this taught me?" And they will use the knowledge re-make and then keep their millions.

Winston Churchill once issued one of my favorite quotes of all time: "Success is going from failure to failure without loss of enthusiasm." I think that if you can manage to view failures as lessons, then you have a much better chance of maintaining the enthusiasm that Churchill talked about.

What if you, as a baby, had completely given up trying to walk after falling the first couple of times? You'd never walk, right?

Instead, you kept getting up, time after time, until you were able to wobble around slowly at first, then eventually run. If you've watched a baby trying to walk, I think you've seen the enthusiasm from failure to failure that Churchill mentions. That baby never gives up, never loses his or her enthusiasm, despite "failure" after "failure."

So what happens to that persistence as we get older? Why are we, as children, more persistent, more determined than we are as adults?

You have to answer that question for yourself. I honestly think part of becoming a millionaire is never losin that drive you had as a child. Think about all the "failures" you have growing up -- when you're learning to walk, ride a bike, throw a ball, tie your shoes, whatever -- did you ever stop trying? Chances are you can now do all those things. Somehow, as a child, your ability to self-correct and your determination and persistence carried the day.

I think those who have the millionaire mindset as adults are the ones who never lose those quailities from childhood. If at first they don't suceed, they try and try again. It's why many millionaires have failed businesses, bad investments, even bankruptcies, in their pasts. They have these failures and they learn from them, they BENEFIT from them. Those failures enhance who they are, what they know, what they're prepared for going forward. The failures are part of their success.

Is it difficult for you to see it that way? It shouldn't be. 

Even a baby can do it.

Big decision looms for U.S. government, and for one economist

Posted by Rob Minton
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If you pay attention at all to the real estate market in the United States, you know why Nov. 30 is such an important day.

That's the day the current first-time home buyer tax credit is set to expire. For first-time buyers to earn the credit, worth 10-percent of the purchase price of their new home up to $8,000, they must close their transaction by Nov. 30.

Unless, that is, the federal government decides to extend the credit.

Now, I'm not an economist and am not going to pretend to know all the pros and cons of extending this credit. I am, however, a "common sense" kind of guy, and it's not hard to piece together some common sense when it comes to this credit:

1. The severely depressed housing market was/is probably the biggest factor that kept the economy in recession.

2. Everyone seemed to agree the housing problem needed to be fixed.

3. Since the tax credit was announced, inventories of unsold homes have gone down as home sales have risen for the past four months, and even prices seem to be stablilizing.

With such a big problem improving -- but not completely fixed yet -- and that improvement being attributed to the tax credit, it's easy to see the on-the-surface benefit of extending the credit.

I understand it costs money. But so did the hundreds of billions that went to Wall Street. And this benefit, which so far has cost about $15 billion, seems to be posting direct results. It's finally a benefit for the average consumer, who, like it or not, is going to be ultimately responsible for spending us out of this recession.

I admit, I am a member of the National Association of Realtors, which is strongly advocating the extension of the credit. Their interest, of course, is in the success of Realtors, who get paid when houses are selling. But I see the benefit extending way past real estate agents.

If it's helping improve property values, the number of home owners "underwater" in their mortages is theortecically going to decline. That would lead to fewer foreclosures, I firmly believe -- people are walking away from homes in droves largely because of their negative equity positions; pure math makes it the logical choice.

A restoration of equity would better for borrowers, better for banks. If the government really wants to stop foreclosures and help reduce banks loan defaults, prop up home values. Make refinancing easier by clearing the path for equity to be restored.

Is this manipulating the market, sure? But so was bailing out the auto industry and the banks. So was Cash for Clunkers. So at this point, does it matter? And the well-being of housing market, I think most of us will agree, is more vital to the nation's economic health than the automakers' well-being. If the government's going to have it's hands in everything anyway, put those hands to work where they're most needed.

Moody's chief economist Mark Zandi, who follows the real estate market, supports extending the credit. According to an Associated Press story, he said it's too early for our decision-makers in Washington to step away from the market, "the risk is too high."

So far, those policy-makers in Washington have largely been mum on the likelihood of an extension. Which brings me to Dean Baker, who has not been mum.

(This is the point in this post where I can choose to avoid controversy or dive right in. So, naturally, we'll dive right in)

Baker is the well-respected economist who founded the Center Economic and Policy Research, a Washington "think-tank," for lack of a better word. In 2002, he was one of the first to predict a disastrous burst of the housing bubble, an early-warning shot for which he deserves much credit.

He is completely against an extension of the tax credit now.

"It's really bad policy," Baker told the Associated Press. "You're throwing a lot of money, in my mind, in the garbage."

Baker would rather see the money go to unemployment, food stamps, and aid to state and local governments, according to the AP article.

Here's what you should know about the Center for Economic and Policy Research: It sounds all official, like a government agency, but really it's a lobbying tool for liberal causes. I don't mean it leans left; I mean it's practically falling over. Which is fine; I don't have a problem with that.

I don't have a problem with Dean Baker being opposed to the tax credit extension, either, really. He's a proponent of affordable housing, and it would seem that an extension of the credit would help property values creep up further. I don't have a problem with his believing higher property values hurt the less forturnate in our country. I don't have a problem with his desire to see money go toward unemployment and hunger, which are huge issues for many in this country.

I DO sort of have a problem with one little thing. According to the AP article mentioned above, guess who is one of the expected 400,000 or so who have, or will, take advantage of the tax credit?

Dean Baker.

Which is fine, he's entitled to it. But here's the thing about tax credits: You don't have to take them.

If Dean Baker really is one of the buyers entitled to his $8,000 but thinks by giving him this credit his government is "throwing it in the garbage," then he shouldn't claim the credit when he does his 2009 taxes. I really think it's that simple.

Take it out of the garbage, Mr. Baker, and give it back to your government. Put your money where your mouth is.

As congress and the administration have a big decision to make regarding the extension of this tax credit, so, apparently, does one well-known economist.

Adding insult to injury

Posted by Rob Minton
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One of the tastes that will forever be left in the mouths of the people who lived during this "Great Recession" here in the United States is that of greediness of the nation's financial institutions. Deserved or not, banks will be looked at as the money-hungry culprits behind the real estate collapse and subsequent meltdown of the entire economy.

And now one of the nation's leading mortgage lenders has even more egg on their face.

In case you haven't heard, Wells Fargo recently fired one of its executives for allegedly holding parties in a $12 million home in Malibu, Calif., that was owned by the bank. The bank took possession of the home after the home owners, who had been victims of Bernie Madoff's Ponzi scheme, could no longer pay the mortgage.

It's almost unbelievable, isn't it? A bank that has accepted $25 billion in government bailout funds, which already was catching heat for planning lavish company parties in Vegas, has a senior vice president hosting lavish parties at a bank-owned home that had been given up by victims of Madoff who could no longer afford it.

According to neighbors in Malibu, Cheronda Guyton used the 3,800-square-foot home on the weekends to entertain, including one event during which guests arrived by yacht. If that's not a symbol of over-indulgence, I don't know what is.

Think about it from the home owners' perspective. You've been wiped out by a crook to the point where you have to give up your home to the bank. Then a senior vice president at that bank is hosting parties in YOUR house, at least one of which that included a yacht. Ouch.

This whole incident reveals the perception that many U.S. citizens will have of banks for a long time: that they're greedy, dishonest corporations that put the average homeowner on the street while their own executives are out enjoying the good life.

I understand that banks have to foreclose on homes. I understand that for the sake of our whole financial system, they had to accept federal bailout money. I understand that they will still run their companies as they see fit.

But when hundreds of thousands of people across the country have to worry about losing their homes, these banks have got to do a better job of not rubbing it in.

Are you on defense or offense?

Posted by Rob Minton
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I just came across an Income for Life newsletter from January of this year. In it, I wrote an article called "All-Out War for Financial Independence," which outlined how we can use the time-tested tactics of Sun Tzu's military masterpiece, "The Art of War," in our own battles for financial independence.

One of Sun Tzu's sayings sticks out at me as I glance again at the article:

"Security against defeat implies defense tactics; ability to defeat the enemy means taking the offensive."

I wonder, as the year has played out since January, how many wealth-builders have been on the offensive. My guess is that more people have been using defensive tactics during this recession in the United States.

While I believe SOME defensive tactics are necessary -- cutting expenses to increase savings, for example -- nobody is going to win the war for financial independence by only being on the defensive. If you hole up in your bunker, head covered until the bombs stop falling, what will happen? You'll crawl out when you feel safe again and the world around you will be crumbled. Congrats, you survived. Are you any better off?

Let's look at it another way, with the financial crisis in mind. You are worried that you're going to lose your job, and you're convinced you need to do something to protect your income. So you take a second job -- for $10 an hour at the local big-box retailer, which is kind enough to let you work part-time on nights and weekends.

This is a defensive strategy. Are you protecting income? Sure, in the short-term.  But in the long-term, what are you going to gain? Trading nights and weekends for $10 an hour is not my idea of long-term benefit.

What if instead of taking that $10-an-hour job, you invested the time into starting your own "side" business? As I have written a million times before, some of the great businesses of our time were born in the roughest of economic times. Couldn't you invest the nights and weekends into yourself, starting a side business with long-term potential, rather than giving that time away for $10 an hour?

Become a real estate investor, or a consultant, an affiliate marketer, a property manager -- heck, start a dog-walking service -- and you will be taking the OFFENSIVE in your war for financial independence.

Same with investing. Did you cash out when your retirement plan took a nosedive last fall, hoping to cut your losses? If you did, and kept your money out of play, you lost out on the securities market bounce this spring. Defensive move. After the market tanked, had you put money INTO the markets, buying quality stocks at bargain prices, you'd be better off now than those who cashed out. That's going on the offensive. 

The Income for Life position on financial independence is this:

You cannot achieve financial independence playing defense. You must play offense, taking advantage of excellent investing opportunities as they present themselves.

I have done this in 2009 in my own business. It's been hard work. It's required effort and taking some chances. But I know that going on the offensive, rather than holing up in my bunker with my head covered, hoping for and waiting for the bombs to stop dropping, is going to ultimately help me win the war in the long run. 

Every situation is different

Posted by Rob Minton
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During this recession in the United States, there has been a lot of talk of homeowners "walking away" from their properties, letting the bank foreclose and take their homes. Judging by the high foreclosure rates, especially in areas where home prices have dropped dramatically, it's safe to assume that many "underwater" homeowners are using this strategy.

It's also, obviously, a question real estate investors face. And one many are asking for advice on. Unfortunately, there is no clear answer. Each and every situation is different.

There's an outstanding article on the Wall Street Journal's website, "The Reluctant Landlords," which details the choices homeowners make regarding "walking away" from homes vs. renting them out and holding onto them. It's a very interesting article, and I highly recommend reading it.

I think you will see, after reading the article, that every situation is unique. I can't tell you "keep your home and rent it." I can't tell you "sell your home for less than what you owe." I can't tell you "walk away." In certain individual instances, each practice probably makes sense.

But the key is "individual instances." There are all kinds of factors you must analyze before making a decision about your own situation. Among the things to consider:

1. Is your home's value likely going to go up in the near future? One year, two years? Or will it continue to drop?

2. How much negative equity do you have? Are you 50 percent underwater or just 10 percent?

3. What is your tolerance for negative monthly cash flow? One homeowner turned landlord in the WSJ article pays a $2,000-per-month shortfall -- the difference between rent he receives and his mortgage payment. Can you do this? For how long? In two years, when you've paid $48,000, can you re-capture it by selling the property? (See No. 1)

4. How important to you is your credit score? A short sale or foreclosure is going to hurt it -- but is your tolerance for that hit to your credit worth it in a negative monthly cash flow situation, or to escape negative equity you believe won't turn positive any time soon?

5. If you have mulitple properties, can you walk away from the bad assets without those banks or the IRS coming after your good assets?

6. If you're trying to decide to keep your primary residence and convert it to a rental, do you have what it takes to be a landlord?

For some of these questions, it's largely math. Negative cash flow multiplied by x number of months compared to your expected equity recapture in the same time frame. For example, let's say you owe $100,000 on a house that is now worth only $80,000.

If it's going to take two years to get back to your break-even point of $100,000 in the home's value, and your negative cash flow is $200 per month, it's going to cost you $9,600 to recapture that equity. Less than half. Are you willing to pay, and can you afford to pay, $10,000 to protect your credit score and/or not come up with the $20,000 cash it would cost you to sell the house now?

For some people, they would be willing to do that. For others, maybe not. There's no hard-and-fast answer to the question of whether it's right to walk away -- it depends on YOUR individual situation and YOUR tolerance for certain factors. You have to analyze your situation and ask yourself important questions.

What's scary is the thought that many people probably have not given these questions much thought. How many people out there let their homes go when they probably didn't have to? How many are holding onto homes they probably shouldn't be?

No question, in these difficult times we face difficult decisions. But difficult decisions are made a little easier when you have more information. So the only hard-and-fast answer I can give to "What should I do?" is gather all the information you can possibly put together and analyze YOUR situation.

Remember to protect yourself

Posted by Rob Minton
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Throughout this economic downturn, when home prices are as low as they've been in forever, real estate investments remain a fantastic opportunity.

As lower prices translate into cash flow in areas that previously could not generate positive cash flow, there are sure to be beginning real estate investors. My hope is that these beginning investors have someone to turn to for guidance when it comes to their new real estate acquisitions.

For example, I just read a Forbes.com article on avoiding litigious tenants. There's a great reminder in the article, one that I have always tried to drive home with Income for Life member investors.

The article advises:

"Before becoming a landlord, it's important to get a grip on the fact that a rental home is a small business. Legally, it's similar to setting up restaurant or opening a flower shop. If an accident or a crime occurs on the premises, it's you the victims will go after."

Owning rental properties IS running a small business. There is just no other way to look at it. And, like the article suggests, you must set this business up properly. Yes, a rental property is profitable for many reasons, but just like a business, it brings with it liabilities.

These liabilities are minimized when you do things such as:

• Put the property's ownership in a limited liability company (LLC) 
• Become properly insured (liability insurance, not just hazard insurance)
• Set up business checking accounts for the properties (don't use your personal checking)
• Require your tenants to carry renters' insurance

The main goal is to separate your personal assets from your real estate investments. This is an important asset-protection strategy that Income for Life members learn and get guidance from their coach on.

While this recession we are in will launch the careers of some successful real estate investors, it's important to remember that real estate investing is a business in itself, and you must educate yourself on how to run that business.