Ever read a Stephen King novel? Think I’ve read about a third of ‘em. For the most part not my cuppa tea any more, though the mini-series version of IT is why my first born still hates clowns at 29. What King does with most of his writing, is to screw with your mind, but differently than most scary-book authors. King creates atmospheres where not much makes sense. He realizes the human condition needs things to be logical, at least when everything comes out in the wash.
Sound a lot like the economy lately?
Nothing makes sense. As in IT, the reader weaves through about a thousand pages trying to make any kinda sense of what’s happening. IT, IMHO, was King’s best work ever. I was seriously sorry to finish the book. For awhile I wasn’t sure if I wanted get to the ending of this StephenKing Economy. I say that, but I thought Carter had surely screwed the pooch beyond anything but Divine Intervention by 1980. Same with the S & L crappola in the early-mid 1990′s.
Yet, here we all are. Go figure.
Planning for the absolute worst case scenario is a no-brainer. Ya sell everything now, buy a couple wheelbarrows of gold, some silver to make change, and head for the cabin by the lake in Montana. But that’s not what I’m talkin’ about here.
I’m talkin’ about the level or so before that, which, let’s be honest, is a far more likely scenario. But what is that, and what might it entail?
Painting with broad strokes, I say the following has a chance of coming to pass — or not.
- The double-dip recession I’ve thought was gonna happen all along. Hope I’m wrong.
- A repeat of the ugly party the early 1980′s threw, a whole buncha goin’ nowhere fast — stagflation, or something akin to it.
- However, instead of only a few years, it goes on for 8-10 years. BYOB
- The economy never gets Grapes of Wrath bad by any stretch, but it doesn’t remind anyone of the after-prom party.
- Real estate goes down — but seriously, not enough to matter much, as this happens when property values are pretty much lickin’ the basement floor.
I don’t claim all those factors will come into play, or that there won’t be another 10 that will. I’m just sayin’ IF that scenario develops, as I’m suspecting it has a chance to by say, 2012 or ’13, how will your portfolio perform for you once it hits the fan? It’s something you should at least be thinkin’ about, cuz once it happens, your real estate portfolio is pretty much gonna remain static for awhile.
Who’s gonna come out smellin’ like a rose, and who’s gonna end up smellin’ like the stinky end of the stick? You’ll most likely be one or t’other cuz I suspect there will be very little middle ground.
There’s a strategy I’ve been using with a certain segment of my clients the last couple years that seems to me at least, to be one way to navigate through that scenario. If the ice cream cones served at the party turn out to be known forever as, Double-Dip with Stagflation Sprinkles, enjoy them. They’ll be a lot better than the CowChip Special served to folks using a strategy better suited to, um, less interesting times.
It’s not new, or even brilliant — it’ll just work.
Note: Every investor I’ve advised to use this strategy, without exception, had portfolios yielding sub par cash flows, based upon the net equity of the portfolio. By exiting their poorly performing local market, they not only retained the current cash flow amount, but typically increased it by at least 50% — almost immediately. If they were already retired, it was with the excess cash flow that they were able to execute the loan reduction portion of the strategy. Once they free and cleared all properties, their annual cash flow increased very significantly, without any projected rent increases whatsoever.
- Take liquid assets and your stocks and invest in one of the states with very low or no income taxes. Not all of them meet my own criteria, but some do. Think Texas, but they’re not the only place.
- The region you pick must have in place local & state governments that are demonstrably business/investment friendly.
- When it comes to employers, you definitely don’t want what Grandpa used to call a OneAct Pony — just one industry. Duh
- If at all possible, the regional numbers on defaults/foreclosures should be visibly less than the rest of the country. They exist, ya just hafta look.
Once you pick the region, it’s time to choose which property(s) to acquire.
Let’s don’t get silly here, OK?
You know a great neighborhood when it hits your radar, right? Right. Besides the normal stuff, i.e., nearby employment, solid schools, excellent tenant quality, etc., you wanna look for one thing that will make things obvious to ya. Ever seen a neighborhood that almost everyone seems to love? You know, like when you’re at a BBQ and Nancy says, “We found a great house to rent in the Such ‘n Such district.” The minute she names it you realize you’d love to live there too.
Not sure how to know a great neighborhood? Try using the BawldGuy MomRule. If I wouldn’t put my 79 year old mom into the property to live alone? I pass. Nobody misunderstands that, at least so far.
That kinda location. Nothing less — period. You must have an A or A+ location, cuz that’s where the corresponding quality tenants wanna be. You want either new/newer property or completely rehabbed within an inch of its life.
So now you found where, and picked a few properties. How do ya structure them? Here’s what I suggest you might wanna consider.
1. Acquire a third to half of ‘em for cash — no debt whatsoever.
2. Buy the rest of ‘em with 35-50% down payments. The exact amount will be dictated not only by the net sales proceeds of your old stuff, but by the timeline that fits your situation best.
3. Take every penny of the cash flow generated by all of ‘em, and apply it to one of the indebted properties’ loan. Do this ’till it’s also free & clear. Rinse and repeat for any other indebted units.
Note: If you were already living on the cash flow, just use the extra cash flow you’ll now be enjoying. This isn’t a suicide mission.
4. Use as much of any other income source you have available to add to the velocity of these loan reduction payments. Don’t put yourself at risk by any means, but use any cash you have after taxes AND after you’ve developed a very healthy cash reserve. DO NOT SKIP CASH RESERVES. Behaving like a financial Evel Knievel is not the way to go at this point. Duh
5. Invest as much as you can into an EIUL — an investment grade insurance policy (my description) that will guarantee you will never have a losing year while Stephen King’s economy is doin’ its thing. Down the road it will also be a source for tax free income and/or interest free/penalty free loans. The folks who listened to me back in 2007 and got the heck outa the stock market and into EIULs, enjoyed returns of 0-2% annually while their buddies at work were losing 30-50% of their retirements in 401Ks and the like. When times are rockin’ they’re making up to 16% annually.
Even if rents fall a bit, and vacancies rise a bit, you’ll still be far better off than you were before you applied this strategy. Most investors are geographically bound, an emotional issue which has and will continue to cause much mayhem when the south end of a northbound cow hits the whirling blades. Give up some control — get over it, before it gets over on you. It will ya know. There’s nothin’ magical about your local market — unless of course, it’s described above.
In 5-10 years, sometimes more or less depending upon your specific situation, you’ll end up with way more cash flow than if you’d stayed in Bug Tussle City, AND much of it will be tax sheltered. Also, in 10-30 years, your choice, the EIUL will be primed to either spit out needed tax free cash flow, or provide lump sum — tax free — cash for…whatever.
I hope this scenario doesn’t develop, but either way, this strategy will put you ahead. The best case scenario still calls for several years of catchin’ up when it comes to real estate. Those who invest using strategies designed to produce for them sans any expectation of either appreciation or rent increases will be the ones who’ll be smiling when things turn around.