All cash real estate
Great plan for lifetime homestead
No mortgage needed
Great plan for lifetime homestead
No mortgage needed
Showing posts with label real estate. Show all posts
Showing posts with label real estate. Show all posts
Tuesday, February 09, 2016
Financial Sarcasm Roundup for 02/09/16
New Hampshire voters have made up their minds tonight, mostly in favor of outsiders. I have made up my mind in favor of myself, because I can fix all of America's problems with sarcasm.
Silicon Valley startups aren't happy anymore. Unicorn employees are taking off their party hats, realizing that the unicorn they were riding to riches was a donkey in its own party hat all along. Employees who were counting on their stock options to pay for a McMansion are watching those dreams evaporate. Liquidation preferences are the well-connected VCs' way of walking away laughing at everyone who worked hard from the start. BTW, I have never seen the point of the Crunchies awards. A corporation's performance is not like a movie or pop song. The only performance that matters is the bottom line. Net income is the only award that pays bills.
Germany is lining up praise for Deutsche Bank. I recall hearing the same things from Bear Stearns and Lehman Brothers before they fell apart. It's too bad the ECB's bank stress tests weren't really stressful. Examiners could have looked under the hood at Deutsche Bank and figured out what needs fixing. Now investors need to take a look at the entire European banking sector's exposure and figure out who's sitting on powder kegs. Greek sovereign debt is the obvious first place to look, then Chinese sovereign debt, then other emerging market debt, then any rotten bananas stored in these banks' break room refrigerators.
San Francisco property owners are sitting on big bubble values. No one saw this coming, of course, after the dot-com bubble and housing bubble of the last decade. I love the mention of all-cash buyers looking for investment properties. The clueless private equity funds and assorted rich people who bought homes in The City sealed their own fates. I will buy what they abandon at bargain prices.
Voting is awesome. Medieval peasants would rebel against their lords when they didn't like working conditions. Today we have the bloodless option called elections to voice displeasure with Establishment elites. I would seriously consider voting for a candidate who formally adopts sarcasm as a campaign platform.
Silicon Valley startups aren't happy anymore. Unicorn employees are taking off their party hats, realizing that the unicorn they were riding to riches was a donkey in its own party hat all along. Employees who were counting on their stock options to pay for a McMansion are watching those dreams evaporate. Liquidation preferences are the well-connected VCs' way of walking away laughing at everyone who worked hard from the start. BTW, I have never seen the point of the Crunchies awards. A corporation's performance is not like a movie or pop song. The only performance that matters is the bottom line. Net income is the only award that pays bills.
Germany is lining up praise for Deutsche Bank. I recall hearing the same things from Bear Stearns and Lehman Brothers before they fell apart. It's too bad the ECB's bank stress tests weren't really stressful. Examiners could have looked under the hood at Deutsche Bank and figured out what needs fixing. Now investors need to take a look at the entire European banking sector's exposure and figure out who's sitting on powder kegs. Greek sovereign debt is the obvious first place to look, then Chinese sovereign debt, then other emerging market debt, then any rotten bananas stored in these banks' break room refrigerators.
San Francisco property owners are sitting on big bubble values. No one saw this coming, of course, after the dot-com bubble and housing bubble of the last decade. I love the mention of all-cash buyers looking for investment properties. The clueless private equity funds and assorted rich people who bought homes in The City sealed their own fates. I will buy what they abandon at bargain prices.
Voting is awesome. Medieval peasants would rebel against their lords when they didn't like working conditions. Today we have the bloodless option called elections to voice displeasure with Establishment elites. I would seriously consider voting for a candidate who formally adopts sarcasm as a campaign platform.
Monday, January 25, 2016
The Haiku of Finance for 01/25/16
Private mortgage deals
Real estate notes and trust deeds
Weird and hard to do
Real estate notes and trust deeds
Weird and hard to do
Amateur Private Real Estate Finance Includes Notes And Trust Deeds
Private lending has been around for property developers ever since those ancient Pharaohs built their pyramids. Our capital markets today allow for much more public participation and transparency. Bank depositors provide capital for secured mortgages. Real estate investment trust (REIT) investors provide capital for property developers, augmenting the capital available from syndicated bank loans. The private capital market for small-scale real estate investors is now fragmented with boutique solutions. Many such creative real estate investing solutions are complex and not intended for amateurs. They are even fertile grounds for scams.
The assignment of a contract for the purchase of real estate sounds to me like brokering a transaction without being a properly licensed Realtor. I would not want to be in the shoes of an assignor or assignee if a property they're flipping was on some Realtor's multiple listing service and the Realtor files a complaint with their state's regulatory body. Private parties who are not licensed and do not adhere to government regulations or the National Association of Realtors' code of ethics open themselves up to serious risks if they can't complete an assignment deal.
Hard money loans are more expensive for borrowers than bank mortgages. These loans do not conform to standard credit guidelines and default at higher rates. Inexperienced hard money lenders can easily become suckers for a fast-talking sales pitch. Even experienced lenders can be stuck with a non-performing loan book in a significant market downturn, and they may not always have recourse to a bank that can help them offload troubled properties.
Seller financing strikes me as being just plain dumb. A borrower who cannot get a mortgage from a conventional source probably should not qualify for any loan at all, even from a private source. A seller willing to trust such a person's creditworthiness is trading the speed of an easy title transfer for the huge risk of non-payment. The advantages of this deal type all skew towards an unethical buyer: easy money, fast ownership, and rent-free living space if they never intended to pay up. Perhaps a desperate seller would do such a deal just to get rid of a very bad property, which would be just as unethical if the property had serious deficiencies.
The so-called "subject to" real estate deal sounds unbelievably complex for anyone who is not an experienced real estate attorney. The paperwork needed to get iron-clad agreements looks daunting. I looked for authoritative sources in my "subject to" Web search and found mostly amateurish promotions for this deal category that did not adequately describe risks.
Mortgage assumption is possible in some situations where the FHA or VA is involved. The good news is that banks and government regulators have rules for this quasi-official process. Buyers meeting conventional mortgage standards can use assumable mortgages if they meet lending standards and have enough cash to make any needed down payments.
These types of deals can lead investors to participation in real estate notes and trust deeds. Mortgage notes are a form of securitization paralleling the real estate sector's whole-hog embrace of mortgage-backed securities. Real estate trust deeds serve as security for loans that avoid third party participation. Notes and trust deeds are small-scale versions of the financing that mortgage REITs and trust deed investment companies (TDICs) provide. I will never understand why amateur investors would spend their precious time pursuing small lot notes and single trust deeds when professionally managed REITs and TDICs are diversified, well-capitalized alternatives.
These types of deals can lead investors to participation in real estate notes and trust deeds. Mortgage notes are a form of securitization paralleling the real estate sector's whole-hog embrace of mortgage-backed securities. Real estate trust deeds serve as security for loans that avoid third party participation. Notes and trust deeds are small-scale versions of the financing that mortgage REITs and trust deed investment companies (TDICs) provide. I will never understand why amateur investors would spend their precious time pursuing small lot notes and single trust deeds when professionally managed REITs and TDICs are diversified, well-capitalized alternatives.
Modern finance has tamed what used to be the wild world of real estate finance. Investing in real estate today is as easy as selecting REITs in a brokerage account. REITs come in multiple flavors: commercial, residential, mortgage-only, ETFs, you name it. The publicly traded ones all have prospectuses and histories of SEC filings for transparency. Privately originated notes, trust deeds, and other financing methods are less liquid and transparent than publicly traded securities. Some amateur investors will insist on biting off more risk than they can chew, just to fulfill their fantasies of becoming real estate moguls from their living rooms.
Thursday, July 23, 2015
The Haiku of Finance for 07/23/15
Find some real estate
No one needs a seminar
Cheaper ways to learn
No one needs a seminar
Cheaper ways to learn
Alternatives To Scott McGillivray's Real Estate System
I recently received an unsolicited postal mail invitation to attend a free Scott McGillivray real estate seminar in Burlingame. I have no intention of taking Mr. McGillivray up on his offer of free stuff in exchange for an entire morning of my precious time. I've been to enough free real estate seminars (okay, just a couple) to know how they work. I can think of other ways to break into DIY real estate.
If I were serious about fixing and flipping properties, my first stop would be my local big-box home and garden retailer. Those chains have free classes on rehabbing and they can help price out job materials. Your helpful hardware dealers are always there for you because they want repeat business.
My next stop would be my local public library. Have you ever heard of those? They still exist in the digital age and the ones in San Francisco have excellent collections marked "real estate." I would grab the most detailed tomes on home repair and maybe a book on appraising. Speaking of the digital age, Zillow and RealtyTrac have all of the local market info I need to price whatever I want to buy or sell.
Automation has not yet obliterated local bank branches. Every bank has lists of foreclosed properties they want to unload. Loan officers are dying to talk to bank customers who walk in the door ready to take problems off the bank's books. Federal agencies like HUD and the VA still have foreclosures available sometimes for those with the patience to navigate their systems. I love it when a ready-made source for deal flow is near at hand.
Live seminars used to be good for a laugh when I needed free entertainment. I don't need fast-pitch, high-pressure seminars to give me some negligible amount of real estate knowledge. I can learn a lot more on my own.
If I were serious about fixing and flipping properties, my first stop would be my local big-box home and garden retailer. Those chains have free classes on rehabbing and they can help price out job materials. Your helpful hardware dealers are always there for you because they want repeat business.
My next stop would be my local public library. Have you ever heard of those? They still exist in the digital age and the ones in San Francisco have excellent collections marked "real estate." I would grab the most detailed tomes on home repair and maybe a book on appraising. Speaking of the digital age, Zillow and RealtyTrac have all of the local market info I need to price whatever I want to buy or sell.
Automation has not yet obliterated local bank branches. Every bank has lists of foreclosed properties they want to unload. Loan officers are dying to talk to bank customers who walk in the door ready to take problems off the bank's books. Federal agencies like HUD and the VA still have foreclosures available sometimes for those with the patience to navigate their systems. I love it when a ready-made source for deal flow is near at hand.
Live seminars used to be good for a laugh when I needed free entertainment. I don't need fast-pitch, high-pressure seminars to give me some negligible amount of real estate knowledge. I can learn a lot more on my own.
Thursday, June 25, 2015
The Strange Confluence of Cash Flow, Real Estate, and Maybe Even Futures
I am really curious about a whole bunch of financial concepts. I get even more curious when one or more purveyors of proprietary strategies join up in a marketing maelstrom. Let's explore a recent confluence of several practitioners.
Go ahead and try to locate a source for someone named Dahl Downing and something called Cash-Flow Strategies. Google Search results gave me absolutely nothing. There is nothing morally or legally objectionable about squeezing every last cent of wealth enhancement into an IRA. I also do not object to flipping income-producing properties or participating in tax deed auctions provided the players involved know what they're doing. I just cannot understand doing these things without referencing a credentialed expert source or appropriate legal guidelines. It takes a lot more than having an "invested IQ" to pull these things off. It also takes more than a couple of slap-dash Web portals that warrant a Google warning about hackers.
Background homework on the stars of Flipping Vegas is just as entertaining as one could imagine. Perhaps a computer algorithm or a paid gaggle of trolls have published a large number of negative comments all over the Web. Anything is possible. It is also possible that a lot of consumers with real complaints just need to vent their opinions. Contracting out a presentation to pitch an abundance of education probably won't help matters.
There are better ways to spend time than chasing wild rabbits into dark holes. I elected not to waste one of my weekend mornings listening to slick seminars on real estate. I did not need to find out whether cash flow or futures were also on the agenda once I saw a whole bunch of shabbily dressed people milling about a hotel lobby waiting to register. I really am better off on my own, thank you very much.
Go ahead and try to locate a source for someone named Dahl Downing and something called Cash-Flow Strategies. Google Search results gave me absolutely nothing. There is nothing morally or legally objectionable about squeezing every last cent of wealth enhancement into an IRA. I also do not object to flipping income-producing properties or participating in tax deed auctions provided the players involved know what they're doing. I just cannot understand doing these things without referencing a credentialed expert source or appropriate legal guidelines. It takes a lot more than having an "invested IQ" to pull these things off. It also takes more than a couple of slap-dash Web portals that warrant a Google warning about hackers.
Background homework on the stars of Flipping Vegas is just as entertaining as one could imagine. Perhaps a computer algorithm or a paid gaggle of trolls have published a large number of negative comments all over the Web. Anything is possible. It is also possible that a lot of consumers with real complaints just need to vent their opinions. Contracting out a presentation to pitch an abundance of education probably won't help matters.
There are better ways to spend time than chasing wild rabbits into dark holes. I elected not to waste one of my weekend mornings listening to slick seminars on real estate. I did not need to find out whether cash flow or futures were also on the agenda once I saw a whole bunch of shabbily dressed people milling about a hotel lobby waiting to register. I really am better off on my own, thank you very much.
Thursday, March 26, 2015
The Haiku of Finance for 03/26/15
Build property wealth
Do not exceed risk control
Landlording's no game
Do not exceed risk control
Landlording's no game
Alfidi Capital Inaugural Visit To Bay Area Wealth Builders
I have been on the Bay Area Wealth Builders (BAWB) email list for years. I have never visited one of their events until this month. I had to go check them out because real estate writer John T. Reed was their headlined guest speaker at the March 2015 monthly networking meeting. The photo below has my reflection in the window to prove I was there, way up north in Corte Madera.
The host started with a rundown of the macroeconomic forces affecting real estate valuations. I totally agree with him that the Federal Reserve faces a very complex interest rate environment, completely of its own making. I have not located a public source for the relationship between interest rate basis point changes and changes in a borrower's qualifying minimum income for a mortgage, but banks know how to calculate the relationship. Real estate professionals track the Standard and Poor's Case-Shiller Home Price Indices both nationally and for their metro area. The St. Louis Federal Reserve Bank's FRED has a convenient Case-Shiller data series for the San Francisco Bay Area. Crunch that data until your heart's content. You can also crunch the California Association of Realtors' data and statistics to see if any realtors' predictions about perpetual home value increases ever panned out. The CAR's Housing Affordability Indexes on that website show how San Francisco properties are much less affordable that those in the rest of the state.
Property owners had time to pitch their investments. I noted that most of the properties seemed to be outside California. I don't get the appeal of out-of-state properties for most real estate investors. I respect sophisticated investors who can afford to research and visit distant locales but most beginners will find it easier to perform due diligence closer to home. I won't even think about buying real estate outside the nine county Bay Area because I'm not willing to travel any farther than I can drive in a couple of hours.
The most unique financing method BAWB discussed involved using an IRA as a source of funds. I would not use my own IRA to advance a loan to a third party investor. There are other ways to capture the value of a mortgage note within a tax-advantaged retirement account, such as by simply buying shares in a securitized mortgage loan product. There are even ETFs tracking mortgage-backed securities. Owning liquid, registered, exchange-traded securities eliminates all of the headaches real estate investors face from IRA-funded renovations that add Unrelated Business Income Tax (UBIT) liability. Owning publicly traded mortgage securities in an IRA also avoids scrutiny of mortgage originators under Dodd-Frank and the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act. Playing around with loans in IRAs is not the game for me. My IRA is not a bank and I am not inclined to impair its value with some third party's credit history. I am also not inclined to fiddle around with wrap-around mortgages; thanks but no thanks. I guess some real estate investors prefer to tempt fate and play with fire just for the thrill of ownership.
John T. Reed spoke at length about the most common mistakes real estate investors make, with the main ones listed on his website. I learn something new every time I hear this guy talk. Real estate investors can read John's free articles so I don't have to recap his main points here. I am sufficiently impressed with the voluminous legal requirements for landlords that I am deterred from ever investing in physical domiciles for live tenants. Humans are an inconvenience and most amateur landlords must be masochists if they underestimate the risks John identifies. I will never ignore PITI components and how they impact ROI. I always have an exit plan; that's why I would rather own a REIT or ETF than a physical building. If poor cost accounting fails to identify poorly performing projects, then the multiple derelict buildings and empty lots I see around San Francisco must reflect a whole bunch of landlords who flunked managerial accounting. John closed out with a recap of his approach to liquid hard assets and other parts of his hyperinflation hedging strategy.
The BAWB session was a success for me because I came away more intelligent about real estate. I don't envision any physical property ownership in my future but the animal spirits moving real estate investors are compelling. I would return if BAWB wants me as a guest speaker. I am certain I could speak at length about REITs and related securities that don't require retail landlording. I could also talk the audience's ears off about economic statistics that drive markets and investor behavior. Real estate investors will then bask in the glow of the glory that is Alfidi Capital.
Full disclosure: I paid $20 to attend this BAWB event. I usually attend business events for free but I relaxed my cheapskate rule just this once. It was the correct decision because I got my money's worth in wisdom. No one paid me to make this disclosure.
The host started with a rundown of the macroeconomic forces affecting real estate valuations. I totally agree with him that the Federal Reserve faces a very complex interest rate environment, completely of its own making. I have not located a public source for the relationship between interest rate basis point changes and changes in a borrower's qualifying minimum income for a mortgage, but banks know how to calculate the relationship. Real estate professionals track the Standard and Poor's Case-Shiller Home Price Indices both nationally and for their metro area. The St. Louis Federal Reserve Bank's FRED has a convenient Case-Shiller data series for the San Francisco Bay Area. Crunch that data until your heart's content. You can also crunch the California Association of Realtors' data and statistics to see if any realtors' predictions about perpetual home value increases ever panned out. The CAR's Housing Affordability Indexes on that website show how San Francisco properties are much less affordable that those in the rest of the state.
Property owners had time to pitch their investments. I noted that most of the properties seemed to be outside California. I don't get the appeal of out-of-state properties for most real estate investors. I respect sophisticated investors who can afford to research and visit distant locales but most beginners will find it easier to perform due diligence closer to home. I won't even think about buying real estate outside the nine county Bay Area because I'm not willing to travel any farther than I can drive in a couple of hours.
The most unique financing method BAWB discussed involved using an IRA as a source of funds. I would not use my own IRA to advance a loan to a third party investor. There are other ways to capture the value of a mortgage note within a tax-advantaged retirement account, such as by simply buying shares in a securitized mortgage loan product. There are even ETFs tracking mortgage-backed securities. Owning liquid, registered, exchange-traded securities eliminates all of the headaches real estate investors face from IRA-funded renovations that add Unrelated Business Income Tax (UBIT) liability. Owning publicly traded mortgage securities in an IRA also avoids scrutiny of mortgage originators under Dodd-Frank and the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act. Playing around with loans in IRAs is not the game for me. My IRA is not a bank and I am not inclined to impair its value with some third party's credit history. I am also not inclined to fiddle around with wrap-around mortgages; thanks but no thanks. I guess some real estate investors prefer to tempt fate and play with fire just for the thrill of ownership.
John T. Reed spoke at length about the most common mistakes real estate investors make, with the main ones listed on his website. I learn something new every time I hear this guy talk. Real estate investors can read John's free articles so I don't have to recap his main points here. I am sufficiently impressed with the voluminous legal requirements for landlords that I am deterred from ever investing in physical domiciles for live tenants. Humans are an inconvenience and most amateur landlords must be masochists if they underestimate the risks John identifies. I will never ignore PITI components and how they impact ROI. I always have an exit plan; that's why I would rather own a REIT or ETF than a physical building. If poor cost accounting fails to identify poorly performing projects, then the multiple derelict buildings and empty lots I see around San Francisco must reflect a whole bunch of landlords who flunked managerial accounting. John closed out with a recap of his approach to liquid hard assets and other parts of his hyperinflation hedging strategy.
The BAWB session was a success for me because I came away more intelligent about real estate. I don't envision any physical property ownership in my future but the animal spirits moving real estate investors are compelling. I would return if BAWB wants me as a guest speaker. I am certain I could speak at length about REITs and related securities that don't require retail landlording. I could also talk the audience's ears off about economic statistics that drive markets and investor behavior. Real estate investors will then bask in the glow of the glory that is Alfidi Capital.
Full disclosure: I paid $20 to attend this BAWB event. I usually attend business events for free but I relaxed my cheapskate rule just this once. It was the correct decision because I got my money's worth in wisdom. No one paid me to make this disclosure.
Wednesday, January 28, 2015
Dog-Gone Pitch Strikes Again With Real Estate Private Pre-Auction Baloney
My faithful readers may be familiar with my contempt for some dog-gone hucksters and their perpetual real estate seminars. I blogged about this stuff almost five years ago. Some organization obviously read my review of the seminar shortly after I published it and disliked it enough to have a flunkie respond. They never bothered to remove my name from their mailing list. So many employees are even dumber than I had estimated.
The result of someone's administrative oversight still arrive in my mailbox to this day. I sometimes receive special invitations to attend a "private pre-auction real estate event" at hotels in San Francisco. The group upgrades the venue sometimes, getting away from the airport hotels for more touristy spots. The fold-out postcard always promises introductions to dealmakers hand-selected by a guru himself. If they're anything like the hand-selected bums and losers I met at the original free seminar, the quality of their deals is likely to be zero.
Serious real estate investors can find real deals at local real estate clubs. Your local bank can give you a heads up on any foreclosed properties from their REO portfolio they want to unload quickly. Don't even bother hanging out with the bottom-feeders and shills that are likely to populate a mass-pitched event.
The result of someone's administrative oversight still arrive in my mailbox to this day. I sometimes receive special invitations to attend a "private pre-auction real estate event" at hotels in San Francisco. The group upgrades the venue sometimes, getting away from the airport hotels for more touristy spots. The fold-out postcard always promises introductions to dealmakers hand-selected by a guru himself. If they're anything like the hand-selected bums and losers I met at the original free seminar, the quality of their deals is likely to be zero.
Serious real estate investors can find real deals at local real estate clubs. Your local bank can give you a heads up on any foreclosed properties from their REO portfolio they want to unload quickly. Don't even bother hanging out with the bottom-feeders and shills that are likely to populate a mass-pitched event.
Reprising a Real Estate Festival of Baloney
This is a repost of an article I originally published in April 2010. I took it down when the people I exposed threatened me with a lawsuit, and I did not wish to fight some deep pocketed operation in court. I have since removed all references to this person's enterprise and to other real people who were connected to this promotion.
I love free stuff but hate wasting time. Today I came up FAIL on both counts.
I was recently cold-called by some real estate seminar promoters. These people probably got my phone number from the usual lists. They were pitching a free seminar that I knew would be a tease for some huge rip-off. This free seminar came with a twist: A free book and digital camera, plus an appearance by a TV business personality, were part of the deal.
Who's the TV personality? He won the first season of a reality TV competition and spent a couple of years under contract with the network as a shill for a blowhard real estate developer and his charities. Now he's married to another entertainment talking head, completing his transformation from legitimate entrepreneur into soulless media package.
I wanted the free stuff, so I said yes, plus I really needed to amuse myself. A week later their call center followed up by pitching me a "VIP seating" package that I politely turned down. No way was I paying one stinking penny for what I consider to be free entertainment. I hadn't even walked in the door and they were already trying to find a way to get my money. They later sent me a confirmation email stating that the TV personality would appear by "remote linkup," and the real presenter was someone else. Boy, was I in for a treat.
The momentous day of the seminar was today (actually, it was a day in April 2010, but remember this is a repost) at an airport hotel near San Francisco. This particular hotel has been the scene of a few other free seminars I've attended, with the likes of two other shills pitching their garbage.
Who's one of those shills? He's a self-promoting personal improvement guru whose amateurish sweat lodge retreat caused the deaths of three participants in October 2009. His company can't pay any legal claims because it spent every penny customers had prepaid for future events that are now cancelled. Brilliant!
Who's the other shill? You know him as the author of one series of books about a rich parent who probably never existed. I'll let you read what others say about the person's real estate knowledge so you don't waste your own time or money.
The time I spent waiting for the registration table to open gave me some entertainment. A disheveled man carrying a ratty bookbag and wearing a shirt that looked like it hadn't been changed since 1979 asked me if this was the right place for the seminar. I said yes, but I didn't want to break his heart by breaking the news that the TV celebrity would only be present electronically. "My relatives all think I'm crazy for coming here," he said. I wasn't about to argue with him. During the seminar he actually started talking to himself. I guess I didn't have to argue with him at all, since he was doing it for me.
I sat in the back of the seminar room because I suspected I might be making a quick exit, free stuff or not. I asked one of the speaker-dudes if I could get my free digital camera now. Unsurprisingly, he said "No, I have some things to teach you first." Some young chick I crossed paths with asked me if we were supposed to do anything with the registration letter we got in the mail. She chuckled when I said, "Of course not." The suckers who were dumb enough to pay for VIP seating were sitting up in the front two rows, sectioned off with . . . wait for it . . . masking tape. There were at least eleven of these idiots up there, soon to be separated from more of their money by the shysters running this carnival.
The guy next to me admitted he only wanted the free camera too. "I have to get my wife a birthday present, and this looked like the best way since I'm unemployed and have no savings." Wow. I was mentally going through the items I remembered from a publicly available Real Estate Artist B.S. Checklist and all of the signs were appearing as predicted. The audience members were all definitely the dregs of society, sloppily dressed and ugly. Two guys even came wearing slippers.
The main event started. The TV personality appeared all right, not via "remote linkup," but by a digital recording that looked like it had been edited from a Skype session. He gave a generic introduction that mentioned no target audience, so it was obviously designed to be used repeatedly on the road. I honestly believe that most of the people in the room were dumb enough to think he was speaking to them live. Mr. TV Dude, I'll tell you right now, being associated with this promotional scheme is going to come back to haunt you when the whole thing collapses from lawsuits.
The main pitchman leading off was some guy I had never seen before. He's pitched similar seminars for the blowhard real estate developer; the TV personality's recorded intro mentioned him as a former blowhard associate and triathlete. I only knew him as the guy who told me I had to "learn something from him" to get a free camera at the end. Both learning something and getting that free camera were looking increasingly unlikely.
The first 30 minutes of the seminar told me everything I needed to know about what the promoters thought of their audience's intelligence. More signs from the B.S. checklist appeared. The pitchman dropped hints at a luxurious lifestyle by showing pics of a huge development he claimed to have some part in finishing. The rubes in the VIP seats must have been suitably impressed.
I decided to leave after two slides insulted my intelligence. The first was a chart that looked like a standard distribution of real estate foreclosures. The obvious problem (to my MBA-trained mind anyway) was that the timeline on the graph ran from 2007-2012 but a box imposed on the chart - split down the middle - said the bulge of foreclosures would be 2010-2011. In other words, a two-year timeline was symmetrically imposed on a six-year timeline even though they both had different midpoints. It was also a perfectly symmetrical distribution, which for a timeline makes no sense at all. The statistically illiterate people in the audience probably missed that one.
The next insult was too much to bear. The platform pitchman said that banks don't like holding foreclosed properties because they don't want to manage real estate. Fair enough. Then he said this whopper: "When the bank forecloses on a mortgaged property, it's no longer an asset for the bank. It becomes a LIABILITY." That's complete BALONEY. A home owned by a bank is still an asset; it's just not producing any income, from mortgages, rents, or otherwise. It does not move from one column of a balance sheet to another, although it does change asset categories and can be written down in value significantly. Analysts like yours truly know this; idiots and suckers wearing slippers to seminars will never know it.
I couldn't take any more. I left after exactly 40 minutes of this circus. I wasn't going to wait around for another six hours in the hope of getting the TV personality's free book, some free digital camera that was probably junk, and whatever free lunch they mentioned. It was probably going to be a baloney sandwich. I'd had my fill of free baloney for the day.
I hope you all enjoyed this blast from the past. It's almost five years old and I still think it's funny. All that I have read about this particular real estate promotion since I wrote this article in April 2010 convinces me that they have not changed their ways. I will not name names because I don't need a reprise of the legal liability they threatened to throw at me a few years ago. The reprise of the article, stripped of identifying information, is enough.
I love free stuff but hate wasting time. Today I came up FAIL on both counts.
I was recently cold-called by some real estate seminar promoters. These people probably got my phone number from the usual lists. They were pitching a free seminar that I knew would be a tease for some huge rip-off. This free seminar came with a twist: A free book and digital camera, plus an appearance by a TV business personality, were part of the deal.
Who's the TV personality? He won the first season of a reality TV competition and spent a couple of years under contract with the network as a shill for a blowhard real estate developer and his charities. Now he's married to another entertainment talking head, completing his transformation from legitimate entrepreneur into soulless media package.
I wanted the free stuff, so I said yes, plus I really needed to amuse myself. A week later their call center followed up by pitching me a "VIP seating" package that I politely turned down. No way was I paying one stinking penny for what I consider to be free entertainment. I hadn't even walked in the door and they were already trying to find a way to get my money. They later sent me a confirmation email stating that the TV personality would appear by "remote linkup," and the real presenter was someone else. Boy, was I in for a treat.
The momentous day of the seminar was today (actually, it was a day in April 2010, but remember this is a repost) at an airport hotel near San Francisco. This particular hotel has been the scene of a few other free seminars I've attended, with the likes of two other shills pitching their garbage.
Who's one of those shills? He's a self-promoting personal improvement guru whose amateurish sweat lodge retreat caused the deaths of three participants in October 2009. His company can't pay any legal claims because it spent every penny customers had prepaid for future events that are now cancelled. Brilliant!
Who's the other shill? You know him as the author of one series of books about a rich parent who probably never existed. I'll let you read what others say about the person's real estate knowledge so you don't waste your own time or money.
The time I spent waiting for the registration table to open gave me some entertainment. A disheveled man carrying a ratty bookbag and wearing a shirt that looked like it hadn't been changed since 1979 asked me if this was the right place for the seminar. I said yes, but I didn't want to break his heart by breaking the news that the TV celebrity would only be present electronically. "My relatives all think I'm crazy for coming here," he said. I wasn't about to argue with him. During the seminar he actually started talking to himself. I guess I didn't have to argue with him at all, since he was doing it for me.
I sat in the back of the seminar room because I suspected I might be making a quick exit, free stuff or not. I asked one of the speaker-dudes if I could get my free digital camera now. Unsurprisingly, he said "No, I have some things to teach you first." Some young chick I crossed paths with asked me if we were supposed to do anything with the registration letter we got in the mail. She chuckled when I said, "Of course not." The suckers who were dumb enough to pay for VIP seating were sitting up in the front two rows, sectioned off with . . . wait for it . . . masking tape. There were at least eleven of these idiots up there, soon to be separated from more of their money by the shysters running this carnival.
The guy next to me admitted he only wanted the free camera too. "I have to get my wife a birthday present, and this looked like the best way since I'm unemployed and have no savings." Wow. I was mentally going through the items I remembered from a publicly available Real Estate Artist B.S. Checklist and all of the signs were appearing as predicted. The audience members were all definitely the dregs of society, sloppily dressed and ugly. Two guys even came wearing slippers.
The main event started. The TV personality appeared all right, not via "remote linkup," but by a digital recording that looked like it had been edited from a Skype session. He gave a generic introduction that mentioned no target audience, so it was obviously designed to be used repeatedly on the road. I honestly believe that most of the people in the room were dumb enough to think he was speaking to them live. Mr. TV Dude, I'll tell you right now, being associated with this promotional scheme is going to come back to haunt you when the whole thing collapses from lawsuits.
The main pitchman leading off was some guy I had never seen before. He's pitched similar seminars for the blowhard real estate developer; the TV personality's recorded intro mentioned him as a former blowhard associate and triathlete. I only knew him as the guy who told me I had to "learn something from him" to get a free camera at the end. Both learning something and getting that free camera were looking increasingly unlikely.
The first 30 minutes of the seminar told me everything I needed to know about what the promoters thought of their audience's intelligence. More signs from the B.S. checklist appeared. The pitchman dropped hints at a luxurious lifestyle by showing pics of a huge development he claimed to have some part in finishing. The rubes in the VIP seats must have been suitably impressed.
I decided to leave after two slides insulted my intelligence. The first was a chart that looked like a standard distribution of real estate foreclosures. The obvious problem (to my MBA-trained mind anyway) was that the timeline on the graph ran from 2007-2012 but a box imposed on the chart - split down the middle - said the bulge of foreclosures would be 2010-2011. In other words, a two-year timeline was symmetrically imposed on a six-year timeline even though they both had different midpoints. It was also a perfectly symmetrical distribution, which for a timeline makes no sense at all. The statistically illiterate people in the audience probably missed that one.
The next insult was too much to bear. The platform pitchman said that banks don't like holding foreclosed properties because they don't want to manage real estate. Fair enough. Then he said this whopper: "When the bank forecloses on a mortgaged property, it's no longer an asset for the bank. It becomes a LIABILITY." That's complete BALONEY. A home owned by a bank is still an asset; it's just not producing any income, from mortgages, rents, or otherwise. It does not move from one column of a balance sheet to another, although it does change asset categories and can be written down in value significantly. Analysts like yours truly know this; idiots and suckers wearing slippers to seminars will never know it.
I couldn't take any more. I left after exactly 40 minutes of this circus. I wasn't going to wait around for another six hours in the hope of getting the TV personality's free book, some free digital camera that was probably junk, and whatever free lunch they mentioned. It was probably going to be a baloney sandwich. I'd had my fill of free baloney for the day.
I hope you all enjoyed this blast from the past. It's almost five years old and I still think it's funny. All that I have read about this particular real estate promotion since I wrote this article in April 2010 convinces me that they have not changed their ways. I will not name names because I don't need a reprise of the legal liability they threatened to throw at me a few years ago. The reprise of the article, stripped of identifying information, is enough.
Monday, August 25, 2014
Avenues to Real Estate Paper Notes
Passive income from real estate is a fascinating topic. Anyone who finds income from property-secured notes boring is free to stop reading now. I pick up tips from real estate sources every so often about how cash flow notes work. I have never invested in one but I know just enough to figure out where to start.
Beginning with cash flow notes means finding reliable information. Personal Real Estate Investor magazine has plenty of articles on strategies for selecting properties and avoiding bad decisions, but I didn't find anything there on cash flow notes. Google searches for "cash flow note investing" and related word combos reveal plenty of sites claiming to offer education on note investing. The most realistic introduction to the topic I've found is W.J. Mencarow's The Paper Source, which offers plenty of free background information on researching notes.
Brokering notes seems more difficult than buy-and-hold investing because it requires a constant search for counterparties. Investing in a note for the long term simply requires a search for available inventories. The secondary market for notes linked to real estate are private placements, but I suspect that crowdfunding portals covering real estate will eventually list them for sale. That would be a huge step forward for transparency.
Professional investment managers offer funds that buy pools of available notes and work with homeowners who are delinquent on payments. This turns non-performing notes into performing notes after a few months of renewed payments. The key to success for these firms is their ability to buy nonperforming notes at large discounts. I do not have firm data on the size of this market; banks obviously have some non-performing notes they want to remove from their balance sheets to avoid impairments. Fannie Mae and Freddie Mac sell large blocks of notes as "tapes" priced in nine figures. Hedge funds and private equity firms buy these tapes and resell them in smaller lots to private money managers. Fund managers who refuse some non-performing loans in those tapes may give the large private equity firms the chance to foreclose on homes and become landlords. Foreclosing on hundreds of houses is a lot of work, which is why most private equity firms getting into landlording prefer to make all-cash offers on normal home sales. A smaller fund that buys their non-performing notes directly from a bank has a similar opportunity to become a landlord.
Investing in these notes reminds me of tax lien investing. The similarity with tax liens is that purchasing one allows the opportunity to foreclose and take possession of real property. The difference is that investors must purchase tax liens from municipal government agencies, and must purchase notes from banks or large asset managers. Purchasing liens may offer an investor seniority over a mortgage note owner, although I have read conflicting interpretations on how one is senior to the other. Nolo's discussion of liens and mortgages in foreclosure illustrates how recording dates can complicate matters. That is a very important thing to know if competing investors seek the most expeditious route to foreclosure. Nolo's discussion of mortgages and deeds of trust will be of interest to investors purchasing notes outside their own state. Knowing which category prevails for a note will determine whether the foreclosure process is attractive.
Foreclosing on delinquent notes is not the only result of a note investing strategy. Buying and holding them to collect the cash flow is the stated rationale of the private funds lining up to buy them and restructure their payment terms. Retail investors who do not qualify for the gates in privately managed note funds always have the option of buying publicly traded funds that manage ABS and MBS paper. That route does not involve the cumbersome, labor-intensive approach through private placements. Privately managed pooled note funds have defined life spans and high fees. They are not transparent and the field is prey for scams.
I would consider cash flow notes for my own portfolio in normal economic times. These are not normal times. The strong possibility of hyperinflation in the US means debtors can pay back liabilities with future dollars that are worth much less. Owning a cash flow note backed by real estate exposes the holder to asset destruction during hyperinflation. The underlying real estate remains but the note becomes worthless. Aspiring landlords should remember how high inflation can turn their pile of notes into a pile of manure.
Nota bene: None of this discussion constitutes investment advice. I have to state that out of concern that some nutcase will make false claims against me. I do not give personal financial advice.
Beginning with cash flow notes means finding reliable information. Personal Real Estate Investor magazine has plenty of articles on strategies for selecting properties and avoiding bad decisions, but I didn't find anything there on cash flow notes. Google searches for "cash flow note investing" and related word combos reveal plenty of sites claiming to offer education on note investing. The most realistic introduction to the topic I've found is W.J. Mencarow's The Paper Source, which offers plenty of free background information on researching notes.
Brokering notes seems more difficult than buy-and-hold investing because it requires a constant search for counterparties. Investing in a note for the long term simply requires a search for available inventories. The secondary market for notes linked to real estate are private placements, but I suspect that crowdfunding portals covering real estate will eventually list them for sale. That would be a huge step forward for transparency.
Professional investment managers offer funds that buy pools of available notes and work with homeowners who are delinquent on payments. This turns non-performing notes into performing notes after a few months of renewed payments. The key to success for these firms is their ability to buy nonperforming notes at large discounts. I do not have firm data on the size of this market; banks obviously have some non-performing notes they want to remove from their balance sheets to avoid impairments. Fannie Mae and Freddie Mac sell large blocks of notes as "tapes" priced in nine figures. Hedge funds and private equity firms buy these tapes and resell them in smaller lots to private money managers. Fund managers who refuse some non-performing loans in those tapes may give the large private equity firms the chance to foreclose on homes and become landlords. Foreclosing on hundreds of houses is a lot of work, which is why most private equity firms getting into landlording prefer to make all-cash offers on normal home sales. A smaller fund that buys their non-performing notes directly from a bank has a similar opportunity to become a landlord.
Investing in these notes reminds me of tax lien investing. The similarity with tax liens is that purchasing one allows the opportunity to foreclose and take possession of real property. The difference is that investors must purchase tax liens from municipal government agencies, and must purchase notes from banks or large asset managers. Purchasing liens may offer an investor seniority over a mortgage note owner, although I have read conflicting interpretations on how one is senior to the other. Nolo's discussion of liens and mortgages in foreclosure illustrates how recording dates can complicate matters. That is a very important thing to know if competing investors seek the most expeditious route to foreclosure. Nolo's discussion of mortgages and deeds of trust will be of interest to investors purchasing notes outside their own state. Knowing which category prevails for a note will determine whether the foreclosure process is attractive.
Foreclosing on delinquent notes is not the only result of a note investing strategy. Buying and holding them to collect the cash flow is the stated rationale of the private funds lining up to buy them and restructure their payment terms. Retail investors who do not qualify for the gates in privately managed note funds always have the option of buying publicly traded funds that manage ABS and MBS paper. That route does not involve the cumbersome, labor-intensive approach through private placements. Privately managed pooled note funds have defined life spans and high fees. They are not transparent and the field is prey for scams.
I would consider cash flow notes for my own portfolio in normal economic times. These are not normal times. The strong possibility of hyperinflation in the US means debtors can pay back liabilities with future dollars that are worth much less. Owning a cash flow note backed by real estate exposes the holder to asset destruction during hyperinflation. The underlying real estate remains but the note becomes worthless. Aspiring landlords should remember how high inflation can turn their pile of notes into a pile of manure.
Nota bene: None of this discussion constitutes investment advice. I have to state that out of concern that some nutcase will make false claims against me. I do not give personal financial advice.
Sunday, July 20, 2014
The Limerick of Finance for 07/20/14
Wealthy Chinese sour on real estate
Local home prices tend to deflate
Middle class won't think twice
Paying inflated price
Eating losses is something they'll hate
Local home prices tend to deflate
Middle class won't think twice
Paying inflated price
Eating losses is something they'll hate
Saturday, June 07, 2014
Thursday, April 03, 2014
The Haiku of Finance for 04/03/14
Urban building boom
Banks lend to developers
Stack credit sky high
Banks lend to developers
Stack credit sky high
Monday, February 24, 2014
Financial Sarcasm Roundup for 02/24/14
I can't imagine a life without sarcasm. Maybe other people can manage that but I can't relate to them. I don't write for the inattentive or unimaginative parts of the human race. This blog of mine isn't their cup of tea.
The SEC is studying whether changing the tick size of trades will improve liquidity for small cap companies. Tick sizes are a non-issue. Changing a trading increment doesn't add liquidity; only attracting more participants to a market adds liquidity. I can't believe the SEC hasn't figured this out. I need to lower my expectations even further. These people must have nothing better to do. Oh wait, I know, they could prosecute all of those financial executives who falsified mortgage documentation prior to the 2008 crisis. They could also go after Libor and currency traders who colluded to fix the market. Nah, that's not as rewarding as changing tick sizes.
Deutsche Bank thinks the Australian dollar is headed for a price collapse. Well, that's just great, since I'm using that currency to hedge the US dollar. Actually I don't care much for what Deutsche Bank thinks. Their derivative exposures to European markets are so bad that they could easily collapse themselves before the Australian dollar hits bottom. A cheaper Aussie dollar just means I'll buy more FXA. I can't say the same about any European banks.
The NAR notes that existing home sales are at 18-month lows. The real estate sales pros never let facts get in the way of their sales pitch. It's always a great time to buy a house, even in their mushy heads. I don't expect them to connect the decline in home sales with the Fed's reduced commitment to purchase mortgage-backed securities. The math on higher real interest rates is inevitably a negative for people who borrow to buy a house. Note further that I've said "house" and not "home." People who missed out on the flipping craze ten years ago jumped back in, and I'm pretty sure it will end the same way. Private equity shops borrowing to buy existing homes in all-cash offers are going to get flushed.
I've got a pretty busy week ahead with a few meetings and social events. This gives me several audiences to entertain, live and in person, with my sarcasm. I expect attractive women to swoon with every sarcastic financial utterance I generate in San Francisco.
The SEC is studying whether changing the tick size of trades will improve liquidity for small cap companies. Tick sizes are a non-issue. Changing a trading increment doesn't add liquidity; only attracting more participants to a market adds liquidity. I can't believe the SEC hasn't figured this out. I need to lower my expectations even further. These people must have nothing better to do. Oh wait, I know, they could prosecute all of those financial executives who falsified mortgage documentation prior to the 2008 crisis. They could also go after Libor and currency traders who colluded to fix the market. Nah, that's not as rewarding as changing tick sizes.
Deutsche Bank thinks the Australian dollar is headed for a price collapse. Well, that's just great, since I'm using that currency to hedge the US dollar. Actually I don't care much for what Deutsche Bank thinks. Their derivative exposures to European markets are so bad that they could easily collapse themselves before the Australian dollar hits bottom. A cheaper Aussie dollar just means I'll buy more FXA. I can't say the same about any European banks.
The NAR notes that existing home sales are at 18-month lows. The real estate sales pros never let facts get in the way of their sales pitch. It's always a great time to buy a house, even in their mushy heads. I don't expect them to connect the decline in home sales with the Fed's reduced commitment to purchase mortgage-backed securities. The math on higher real interest rates is inevitably a negative for people who borrow to buy a house. Note further that I've said "house" and not "home." People who missed out on the flipping craze ten years ago jumped back in, and I'm pretty sure it will end the same way. Private equity shops borrowing to buy existing homes in all-cash offers are going to get flushed.
I've got a pretty busy week ahead with a few meetings and social events. This gives me several audiences to entertain, live and in person, with my sarcasm. I expect attractive women to swoon with every sarcastic financial utterance I generate in San Francisco.
Wednesday, August 07, 2013
All Aboard For UN Agenda 21 In America
Agenda 21 is the United Nations' suggested policy architecture for sustainable development. I completely endorse both its spirit and details. I'll leave aside the straw man arguments charging its proponents with socialism. You'll read those vituperative objections all over the right-wing blogosphere and they just don't hold water. Agenda 21 is not a treaty and does not have the force of law in the United States. It is a framework for solving development problems that local communities may implement as they see fit. American communities are in sore need of some best practices to mitigate suburban sprawl.
The American preference for suburbia is a unique cultural pattern. The rural configuration of unused but fertile cropland (aka lawn space ) transplanted into an urban setting is a high-entropy lifestyle that encourages waste. Dense living is common in Asia and parts of Europe. It has been overdue here ever since the frontier closed, specifically the admission to statehood of those territories West of the Rockies.
I have lived in and visited major Asian cities. They work just fine with robust mass transit and realistic expectations about livable space. I lived in the greater metropolitan area of Seoul for a total of over two years. Air pollution only became a serious problem there once South Koreans began to adopt the American car-centric culture. Speaking of which, dense urbanism was reality in American cities until the postwar era when automakers and oil companies funded campaigns to remove urban light rail and bus service all across the US. Check out the exhibits at the Western Railway Museum in Suisun City, California if you question my facts.
The preference for big cars, suburban homes, and random driving excuses is a lifestyle enabled by several factors: two generations of Detroit's ad campaigns (thank GM's employment of Bernays' techniques) and large discoveries of light sweet crude in the US and Saudi Arabia. Well, Detroit is bankrupt because the US middle class can't afford its gas guzzlers anymore and the US's oil shale boom isn't reducing gas prices at the pump. That golden age is over. Feel free to do the math on how to sustain a suburb-centric civilization at a time when the disposable incomes of the suburban middle class are declining. Yes, I'm serious.
Hybrid-electric cars for everyone in the suburbs are not a completely sustainable solution. Think how much heavier the drive trains are on hybrids and electric cars than the drive trains of internal combustion cars. Heavier cars wear out roads faster and their drivers don't pay the gasoline taxes that fund the Federal Highway Trust Fund. Widespread hybrid adoption to maintain the suburban lifestyle fantasy will accelerate road degradation! The Mineta Transportation Institute and other policy think tanks have done the math.
Government already has the authority to determine land use. It's called zoning. I'm not allowed to build a single family home at One Market Street because it's zoned for commerce. Nor can I develop a 30-story office skyscraper here in the Outer Sunset on my block because it's zoned for residences. Government can and does determine what can be built where because development drives the public infrastructure that our taxes must fund to enable said development. Please compare the per-mile maintenance cost of light rail versus asphalt road and then state which is more cost-effective for our taxes to maintain. Dense development is better for taxpayers because municipalities can build and maintain public infrastructure more efficiently.
The ugliness of uncontrolled urbanization is evident all around Northern California. My hometown of Sacramento is now a greater metropolitan area that has absorbed the farm towns that used to be geographically distinct. I could never tell where Rancho Cordova ended and Citrus Heights began whenever I drove from Folsom Boulevard to Sunrise Avenue. The East Bay is just as bad; Walnut Creek, Lafayette, Concord, and other cities all kind of blend into each other at some point. Everything south of San Francisco is a big overdeveloped mess. Whatever charm was once found in San Mateo and Burlingame is now lost among too many buildings. One point of Agenda 21 is to promote community integrity by preserving greenbelts and other natural boundaries.
Homework assignments, if you're interested . . . Charles Hugh Smith's "Of Two Minds" blog . . . New Urbanism . . . Plateau Oil (not Peak Oil, as new technology has always successfully postponed that event). These are among many sources that document the costs of urban sprawl. Agenda 21 presents a framework for reducing the costs of urbanization in ways that respect traditional communities. I'm all in favor of using some Agenda 21 ideas where appropriate in the San Francisco Bay Area.
The American preference for suburbia is a unique cultural pattern. The rural configuration of unused but fertile cropland (aka lawn space ) transplanted into an urban setting is a high-entropy lifestyle that encourages waste. Dense living is common in Asia and parts of Europe. It has been overdue here ever since the frontier closed, specifically the admission to statehood of those territories West of the Rockies.
I have lived in and visited major Asian cities. They work just fine with robust mass transit and realistic expectations about livable space. I lived in the greater metropolitan area of Seoul for a total of over two years. Air pollution only became a serious problem there once South Koreans began to adopt the American car-centric culture. Speaking of which, dense urbanism was reality in American cities until the postwar era when automakers and oil companies funded campaigns to remove urban light rail and bus service all across the US. Check out the exhibits at the Western Railway Museum in Suisun City, California if you question my facts.
The preference for big cars, suburban homes, and random driving excuses is a lifestyle enabled by several factors: two generations of Detroit's ad campaigns (thank GM's employment of Bernays' techniques) and large discoveries of light sweet crude in the US and Saudi Arabia. Well, Detroit is bankrupt because the US middle class can't afford its gas guzzlers anymore and the US's oil shale boom isn't reducing gas prices at the pump. That golden age is over. Feel free to do the math on how to sustain a suburb-centric civilization at a time when the disposable incomes of the suburban middle class are declining. Yes, I'm serious.
Hybrid-electric cars for everyone in the suburbs are not a completely sustainable solution. Think how much heavier the drive trains are on hybrids and electric cars than the drive trains of internal combustion cars. Heavier cars wear out roads faster and their drivers don't pay the gasoline taxes that fund the Federal Highway Trust Fund. Widespread hybrid adoption to maintain the suburban lifestyle fantasy will accelerate road degradation! The Mineta Transportation Institute and other policy think tanks have done the math.
Government already has the authority to determine land use. It's called zoning. I'm not allowed to build a single family home at One Market Street because it's zoned for commerce. Nor can I develop a 30-story office skyscraper here in the Outer Sunset on my block because it's zoned for residences. Government can and does determine what can be built where because development drives the public infrastructure that our taxes must fund to enable said development. Please compare the per-mile maintenance cost of light rail versus asphalt road and then state which is more cost-effective for our taxes to maintain. Dense development is better for taxpayers because municipalities can build and maintain public infrastructure more efficiently.
The ugliness of uncontrolled urbanization is evident all around Northern California. My hometown of Sacramento is now a greater metropolitan area that has absorbed the farm towns that used to be geographically distinct. I could never tell where Rancho Cordova ended and Citrus Heights began whenever I drove from Folsom Boulevard to Sunrise Avenue. The East Bay is just as bad; Walnut Creek, Lafayette, Concord, and other cities all kind of blend into each other at some point. Everything south of San Francisco is a big overdeveloped mess. Whatever charm was once found in San Mateo and Burlingame is now lost among too many buildings. One point of Agenda 21 is to promote community integrity by preserving greenbelts and other natural boundaries.
Homework assignments, if you're interested . . . Charles Hugh Smith's "Of Two Minds" blog . . . New Urbanism . . . Plateau Oil (not Peak Oil, as new technology has always successfully postponed that event). These are among many sources that document the costs of urban sprawl. Agenda 21 presents a framework for reducing the costs of urbanization in ways that respect traditional communities. I'm all in favor of using some Agenda 21 ideas where appropriate in the San Francisco Bay Area.
Saturday, August 03, 2013
Wednesday, July 17, 2013
Fixed Income Facts and Fancy When Staring Down Inflation
An acquaintance got me thinking about the fixed-income universe. I haven't thought about it much lately for good reason. Fixed-income investments are wiped out in high-inflation economies and the Federal Reserve's implied policy of monetizing US sovereign debt dramatically increases the chances of high inflation. The fixed-income universe is much broader than sovereign debt. I ought to see if any income-generating instrument can survive high inflation.
The Dividend Yield Hunter lists multiple categories of fixed-income instruments that go way beyond bonds. I was not aware that exchange-traded debt existed in forms other than preferred stock (not really debt, but acts like it) and funds. The Tennessee Valley Authority, for example, lists its bonds on exchanges for the public to trade (TVC and TVE are examples). The usual cast of characters like MLPs, royalty trusts, and REITs round out exchange-listed offerings. I've never considered business development companies (BDCs) as fixed-income investments because they are unique ways to invest in undercapitalized small companies, sort of like VC firms but publicly traded. Dividend Yield Hunter lists BDCs as fixed-income, presumably because they must pay out their earnings like other pass-through entities. BDCs are also searchable over at QuantumOnline, and that site also lists exotic things like income deposit securities.
Fixed-income investing is a fine stabilizing element for a diversified portfolio in normal times when interest rates are at their long-term historical average and the national debt-to-GDP ratio is manageable. Americans are not living in normal times any longer. Most fixed-income investments will see their principal destroyed when high inflation reduces the dollar's value to nothing.
These are the types of fixed-income investments I have decided to avoid due to their vulnerability to inflation.
US sovereign debt of any kind. The Fed is going to swallow these things whole when foreign central banks sell them in a panic. The QE needed to absorb the world's outstanding stash of Treasuries will have to be monstrously huge.
Coupon debt of any kind. This includes any corporate debt or municipal bonds that pay a fixed coupon based on the bond's face amount. That face amount will be worth less than nothing after hyperinflation ends. Say goodnight, internotes.
BDCs. I don't care how generous the cash flow from repaid loans looks right now. BDCs are highly sensitive to short-term interest rates and real rates will skyrocket at the onset of high inflation. Their funding is unsecured, which means investors have little recourse to recover assets after bankruptcy. No thanks. Finally, their assets are loan portfolios. High inflation is a debtor's dream come true because it allows them to pay existing debts with future dollars that are worth less than current dollars. Inflation will destroy BDC loan portfolios. These are the crucial differences between BDCs and other private equity vehicles.
High yield debt. No way, ho-say. This was the first debt category to crack when the market turbulence of 2007 became the crisis of 2008. Junk bonds are always the first to be wiped out in any market downturn because their issuers have weak earnings or troubled business models.
These are the types of fixed-income investments I am open to considering, given the caveats mentioned. Their common denominator is their basis in a hard asset sector.
MLPs. I like pipeline MLPs as a play on hard asset servicing. Oil and gas are energy hard assets whose demand will be price inelastic during high inflation. My concern is whether FERC regulations will prove to be so onerous during hyperinflation that they destroy the pricing power of MLPs and their pipeline operating companies. I cannot rule out regulatory risk with pipeline MLPs. I may have to wait until renewable MLPs are active.
Royalty trusts. These are collections of orphaned oil and gas wells whose owners do not need to spend capex to upgrade them. They pass their earnings through to trust holders as the wells' reserves run down.
REITs. These are the trickiest to consider. Some residential REITs will fair poorly during hyperinflation if their holdings are concentrated in urban areas that are hostages to rent control ordinances. Those will not retain their pricing power during hyperinflation. Commercial REITs will fare better but many REITs own a mix of properties. The best sector bet for me may be iShares Dow Jones US Real Estate (IYR), an ETF of REITs, but based on its dividends it's currently trading more than twice what it should be worth.
I feel like restating my enmity for actively managed funds of any kind, including fixed-income. Bond mutual funds are no longer needed now that index funds and ETFs exist. Active management of fixed income portfolios is for institutional investors and corporations who must immunize their portfolios against interest rate moves or match durations to liabilities. They have specific goals in liability-driven investing. The larger investing world doesn't need to constantly fine-tune a fixed-income portfolio.
I must also reiterate my disdain for the superficial analysis some fixed-income investors use to evaluate the attractiveness of securities. I've heard some investors claim that MLPs and REITs trading for less than book value are bargains, but if those same entities have low ROEs then there's a reason they trade at such discounts. The market is discounting their ability to generate cash flow because a low ROE indicates they use capital inefficiently. They may be paying too much for debt because of past negative credit events or committing capital to operating payouts (like lawsuit settlements or regulatory fines) instead of facilities maintenance or improvements.
Finally, it's worth noting that rising volatility hurts the valuations of fixed-income investments. The VIX is currently trading below its historical average of about 20. Any rise in the VIX hurts fixed-income securities, with or without hyperinflation.
I'm staying the heck away from fixed-income investments. I'll keep my eye on only those few types that generate cash flow from hard assets like commodities or real estate.
The Dividend Yield Hunter lists multiple categories of fixed-income instruments that go way beyond bonds. I was not aware that exchange-traded debt existed in forms other than preferred stock (not really debt, but acts like it) and funds. The Tennessee Valley Authority, for example, lists its bonds on exchanges for the public to trade (TVC and TVE are examples). The usual cast of characters like MLPs, royalty trusts, and REITs round out exchange-listed offerings. I've never considered business development companies (BDCs) as fixed-income investments because they are unique ways to invest in undercapitalized small companies, sort of like VC firms but publicly traded. Dividend Yield Hunter lists BDCs as fixed-income, presumably because they must pay out their earnings like other pass-through entities. BDCs are also searchable over at QuantumOnline, and that site also lists exotic things like income deposit securities.
Fixed-income investing is a fine stabilizing element for a diversified portfolio in normal times when interest rates are at their long-term historical average and the national debt-to-GDP ratio is manageable. Americans are not living in normal times any longer. Most fixed-income investments will see their principal destroyed when high inflation reduces the dollar's value to nothing.
These are the types of fixed-income investments I have decided to avoid due to their vulnerability to inflation.
US sovereign debt of any kind. The Fed is going to swallow these things whole when foreign central banks sell them in a panic. The QE needed to absorb the world's outstanding stash of Treasuries will have to be monstrously huge.
Coupon debt of any kind. This includes any corporate debt or municipal bonds that pay a fixed coupon based on the bond's face amount. That face amount will be worth less than nothing after hyperinflation ends. Say goodnight, internotes.
BDCs. I don't care how generous the cash flow from repaid loans looks right now. BDCs are highly sensitive to short-term interest rates and real rates will skyrocket at the onset of high inflation. Their funding is unsecured, which means investors have little recourse to recover assets after bankruptcy. No thanks. Finally, their assets are loan portfolios. High inflation is a debtor's dream come true because it allows them to pay existing debts with future dollars that are worth less than current dollars. Inflation will destroy BDC loan portfolios. These are the crucial differences between BDCs and other private equity vehicles.
High yield debt. No way, ho-say. This was the first debt category to crack when the market turbulence of 2007 became the crisis of 2008. Junk bonds are always the first to be wiped out in any market downturn because their issuers have weak earnings or troubled business models.
These are the types of fixed-income investments I am open to considering, given the caveats mentioned. Their common denominator is their basis in a hard asset sector.
MLPs. I like pipeline MLPs as a play on hard asset servicing. Oil and gas are energy hard assets whose demand will be price inelastic during high inflation. My concern is whether FERC regulations will prove to be so onerous during hyperinflation that they destroy the pricing power of MLPs and their pipeline operating companies. I cannot rule out regulatory risk with pipeline MLPs. I may have to wait until renewable MLPs are active.
Royalty trusts. These are collections of orphaned oil and gas wells whose owners do not need to spend capex to upgrade them. They pass their earnings through to trust holders as the wells' reserves run down.
REITs. These are the trickiest to consider. Some residential REITs will fair poorly during hyperinflation if their holdings are concentrated in urban areas that are hostages to rent control ordinances. Those will not retain their pricing power during hyperinflation. Commercial REITs will fare better but many REITs own a mix of properties. The best sector bet for me may be iShares Dow Jones US Real Estate (IYR), an ETF of REITs, but based on its dividends it's currently trading more than twice what it should be worth.
I feel like restating my enmity for actively managed funds of any kind, including fixed-income. Bond mutual funds are no longer needed now that index funds and ETFs exist. Active management of fixed income portfolios is for institutional investors and corporations who must immunize their portfolios against interest rate moves or match durations to liabilities. They have specific goals in liability-driven investing. The larger investing world doesn't need to constantly fine-tune a fixed-income portfolio.
I must also reiterate my disdain for the superficial analysis some fixed-income investors use to evaluate the attractiveness of securities. I've heard some investors claim that MLPs and REITs trading for less than book value are bargains, but if those same entities have low ROEs then there's a reason they trade at such discounts. The market is discounting their ability to generate cash flow because a low ROE indicates they use capital inefficiently. They may be paying too much for debt because of past negative credit events or committing capital to operating payouts (like lawsuit settlements or regulatory fines) instead of facilities maintenance or improvements.
Finally, it's worth noting that rising volatility hurts the valuations of fixed-income investments. The VIX is currently trading below its historical average of about 20. Any rise in the VIX hurts fixed-income securities, with or without hyperinflation.
I'm staying the heck away from fixed-income investments. I'll keep my eye on only those few types that generate cash flow from hard assets like commodities or real estate.
Monday, June 17, 2013
The Haiku of Finance for 06/17/13
Crowdfund real estate
Locally own small projects
Big parcels later
Locally own small projects
Big parcels later
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