All Forum Posts by: James Paine

@Alex Sanfilippo If you are buying 1-4 unit residential assets and ever plan on doing a 1031 exchange out of them I wouldn't put my assets into an LLC. The reason is that when you go to get a loan on your new properties it will be a lot more difficult with an LLC.

@Dave Foster  Solid Advice. 

If you want immediate cash flow start a business?  I've owned and operated several businesses and most business I've seen bleed cash during startup. Those businesses that make it can provide good cash but most businesses fail.  I've sold 3 companies successfully and am currently operating 1 non-real estate company that does $20MM+ in revenue.  That business is profitable but not cash flow positive, yet.  

My overarching feeling is just that buying for cash flow in real estate assets that you think will have rents that keep up with inflation.  In my play, you do have to speculate which markets will not see a decline in rentership and rents but you don't have to guess which market will go up next.  

The rents on the properties I own in the midwest will cover my properties and my lifestyle during most economic times.  The thin current margins in SJ, LA, SD, and SF will not allow most people to weather a storm if that storm doesn't happen after significant rental or property value appreciation. I've owned property in LA and SF.  (Rent control sucks)  I also on tons of property in SD.  I bought that SD property at a time when I could get 8%+ cash flow yields.  I didn't care about the market being down, as that would be speculative.  I cared that I could get good properties, at good yields, in a good market. 

Markets go up and down and when I buy a rental I intend on holding it for life and typically not refinancing it ever but paying it down over time and collecting the cash all along the way. 

@Matt R.

Jason - A few pieces of advice:

1. If you can get a good cash flow property in Connecticut then go for it.  If not then don't. 

2. Buy for CF not just to cut your teeth.  

3. Somethings are better to do the first time with an expert. That could be a montor, turn-key guy, or ???

Hello All! I just finished book 7th book of the year. I am a little behind but I have been traveling a lot and picking some pretty long books. I might have to get a few shorter ones in so I can hit my goal of 52 books this year. Below are my general takeaways from the book, not a full book report. Thanks for forgiving the grammar and spelling issues. I do these “reports” as quick memos to all of you as my friends. Please let me know if you know someone that would like to be added to my email list for these.

The Demographic Cliff by Harry S. Dent Jr.

Amazon: 4 Stars

Good Reads: 3.6 Stars

I liked this book but I think I always say that. This book gives you a good picture of what is going on in the world and a lot to think about regarding demographics and how that will affect the economy, your life, and your business. This Harry Dent guy has made some good calls in the past but has also been wrong probably as much. I really do like sections of the book that make you rethink lessons of the past and the cyclicality of the world we live in. What I don’t like is he makes some wild calls and also for some reason thinks he can predict things down to the month even if they are years out. For what it’s worth when oil was at $110 he called it dropping to less than $30 by the end of 2015.

• TDC tells real estate investors to avoid buying property for appreciation. That strategy is now dead. Instead, the best strategy for years to come is to buy real estate cheaply and then rent it out for cash flow. Any appreciation we do see will be in the lower end starter homes. Real estate will never be the same in most developed countries. Only buy real estate if you need it long term or if you plan on buying rentals that you rent out for positive cash flow. The old fashioned way of making money in real estate i.e. The Monopoly game is coming back. You don't buy for the appreciation you buy for the rents and income it generates, or of course, to live in. If you don’t believe that real estate can stay flat or decline for a very long period of time in a developed nation look at Japan 22 years of near flat home prices in the chart below.

• How many economists do you know that have ever run a business? Despite very high intelligence these people simply don't live in the real world. You can know a lot about something but not understand it at its most basic level. As Einstein use to say if you can't explain something to a 6-year-old then you don't really understand it yourself.

• Growth and evolution of people and businesses take failure to learn. Long and continued success only allows for complacency or overconfidence which allows for massive mistakes.

• In real estate when there are more di-ers than buyers, we are in a whole new ball game. This is the coming dynamic.

• The US Government's estimates of population growth are off. They are drastically overestimating. Thus, they are overestimating their budget and other expenditures they are making today.

• Starter home purchases peak around age 31. That number will inch up a year or two but should be where marketing is focused on real estate agents selling lower price point homes. Something I also thought of is that Quicken Loans is marketing Rocket Loans as the new age online solution for getting a home loan. Guaranteed Rate is marketing a similar product. The main message is that loans are so much easier than when you got them last time with a loan broker. BUT most people age 29-33 have never bought a home so really they need to tweak the message a bit. Maybe something like, "don't get a loan the way your parents did".

• The peak of all home buying and majority of home purchases happen between age 37-41 including investment property and trade up homes. 41 is the peak for trade up.

• 10% of households buy a vacation home. The peak age for that purchase is 48.

• 63-65 years old is a peak for trading down and moving closer to the grandkids.

• The need for new construction could be slowed because if more people die than turn 37-41 then the need for new homes drastically slows. See the Buyers vs. Di-ers chart above.

• Urban areas will be slightly shielded from some of the potential price declines because of the proximity to services and entertainment.

• The big mistake people and economists make is that all growth is not linear! See the principles below.
  • All growth and evolution is exponential, not linear.
  • All growth is cyclical, not incremental.
  • Bubbles always burst; there are no exceptions.
  • The greater that bubble is, the greater it’s going to burst!
  • When bubbles burst, they tend to go back to where they started or a bit lower.
  • Financial bubbles tend to get more extreme over time, as the available credit that fuels them expands as our incomes and wealth expand.
  • Bubbles become so attractive that eventually they suck in even the skeptics.
  • No one wants the “high” and easy gains to end, so we go into denial as the bubble evolves, especially in its latter stages.
  • Major bubbles occur only about once in a human lifetime, so it is easy to forget the lessons from the last one. (And the last one’s my favorite.)
  • Bubbles may seem fruitless and destructive when they burst, but they actually serve a very essential function in the process of innovation and human progress.

• Gold prediction of $250/oz 2023. He argues that currency shouldn’t be measured against gold but only other currencies.

• Dow to hit 5800 by 2019 at latest. There is a chance the Dow drops below 3500. (If that happens ignore this book and buy No Load (10-15bps) indexes that track S&P. Also, buy the cheapest 100 stocks that have safe debt loads. Read everything by Templeton as he bought the cheapest 100 stocks during the great depression which is one of the ways he started his fortune.)

• Urbanization is one of the most critical factors for economic growth. Incomes triple when the population goes from rural to urban. China government has purposely urbanized at a rate greater than any country in history and plan to urbanize another 20% over the next 10 years.

It appears that the argument for incomes and GDP increasing when urbanizing holds true, see below:

• Basically moving non-skilled farmers into construction jobs or manufacturing. I am worried the construction jobs will be gone as they are already building ghost cities. 24% of homes in China that are hooked up to the electrical grid are not pulling any energy. GHOST TOWNS!

• Dent believes China’s real estate bubble is one of the largest bubbles of any kind he has ever seen and that it will NOT end well.

• Countries that focus on higher end products and not manufacturing or commodity exports will do the best and are doing the best currently. The only way to fight demographic based economic problems as a country is through innovation.

• Sub-Saharan Africa has the best demographic trends however due to widespread corruption and not joining the capitalist movement the opportunities for its people and growth are extremely limited. If the wave of falling commodity prices continues then the outlook is not strong.

• I don't like that he thinks he can predict the timing of things so well. I would be a bigger believer if he gave longer ranges. In the book, he often calls things that are years out by the quarter like, in the 3rd quarter of 2019...

• Copper to get to $125 2015 which is a 73% drop from the peak was his prediction, looks like it dropped a lot but hasn’t quite gotten there yet.

• Silver to see $5-$10 very soon.

• He called oil between $20-$30 in 2015 (nice call!) Also, the book expects oil to trade between $40-$60 for the next 10 years or more. Check out the image below which is the 2-year oil price chart. This book was published in 2013 so his call was pretty amazing.

• Inflation over the long term correlates to a higher not lower standard of living (crazy but cool). Inflation has been high over the last 3,000 years during times of pop growth, technological revolution, mega innovation creates greater specialization of labor. These trends raised our quality of living. Inflation has been a leading indicator of progress.

• Look at the change in outsourcing of tasks now compared to 100 years ago. 100 years ago you farmed your own food, made or traded for the good you needed and were largely self-sufficient. Inflation could be good (did he change my mind?) Specialized labor is the creation of new work due to innovation and inflation. Things we never needed or did ourselves in the past. (Dry cleaning, home repairs, fast food, graphic design, etc)

• Currencies trade against one another. Not against gold. Currency is just a means of trade. Currency deviation isn't just a US problem. Everyone is doing it.

• The US will not be able to pay for the retirement of the Baby Boomers.

• Dent recommends a savings plan similar to Australia with a Superannuation. Seems like a good idea to me!

• Superannuation is a way to save for your retirement. The money comes from contributions made into your super fund by your employer and, ideally, topped up by your own money. Sometimes the government will add to it through co-contributions and the low income super contribution.
• Your employer must pay 9.5% of your salary into a super fund. This is called the Super Guarantee and it's the law. The Super Guarantee will gradually increase to 12% in coming years.
• Over the course of your working life, these contributions from your employer add up, or 'accumulate'. Your super money is also invested by your super fund so it grows over time. When you retire, you will have money to live off - a nest egg. Super is a lifetime investment that has many benefits.

• The cool part about Superannuation is that you can choose how your money is invested if you are so inclined.

• Dent believes that “Contribution Margin” is one of the most important factors a business should look at. Contribution margin, or dollar contribution per unit, is the selling price per unit minus the variable cost per unit. “Contribution” represents the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs.

• Dent believes that front line employees need to be given the ability to contribute to contribution margin whenever possible. An example is that if I walk into a hotel at 1am after I get off a plane and ask how much the room rate is and they tell me $100. I tell them that is too much as I just need to sleep and leave for a meeting in the morning. The cost of the hotel cleaning my room and restocking the soap and towels is about $15 for this example. Then the contribution margin of my stay is $85. That front desk clerk should not allow me to walk out of the hotel until I book the room for anything above the $15. They are obviously not going to fill the room that late at night and my stay above $15 is pure profit for the hotel.

• The book argues that our healthcare system needs to be changed. The authors opinion is different from liberal or conservative. The government should cover all super basic services such as dental twice a year, 1 check up a year, etc. The government should also ensure that private insurance covers all people. People should buy high deductible plans that have say a $2500 deductible. All other health care expenses should be paid out of pocket that way people are less likely to abuse the system if they have to pay for things.

• Immigration from an economic standpoint is almost always a net positive.

• We will see a resurgence of the middle class during the coming downturn in the economy. The reason for that is the top 10% and top 1% hold almost all the stocks, debt, and real estate and they will be hit the hardest. The middle class will still continue to earn wages and because the upper class will lose wealth the gap between upper and middle class will get smaller.

• The winter crash is needed to get things back on track. Basically the economy needs crashes without government bailouts to restructure. Reduce debt and lean out companies. He believes that Quantitative Easing is a drug that will only prolong negatives. You need a down decade to ensure a prosperous century.

• Knowledge and Power by George Gilder is the best book the author read in 2013. Maybe I’ll read this book in a few weeks!

Thanks for reading this and let me know your thoughts! Also please let me know if you know someone that would like to be added to my email list for these. Or if you are sick of getting these.

Best,

JC Paine

Mitzi - Flip it and buy 2 with the downpayments the cash will generate. 

 What is it with people from Oakland and their need to trash talk?  (Raiders) 

I can also show you a chart that says if you invested in the stock market in 2002 for 5 years or 2009 for 5 years you'd be very rich.  You can get stats to back up anything.    

Also, beware that to a man with a hammer, everything looks like a nail.  You wouldn't happen to benefit from people believing that buying investments without cash flow is a good idea would you?

Just playing devils advocate and I really don't believe in buying non-cash flowing properties. 

The market that generates the best yield with acceptable tenant quality.  Also, you want to believe that market will be able to generate and keep the spread between its current yield and inflation.  So for me, Detroit and Cleveland are out. 

I vote Chicago but I am biasd for sure. 

 Buy after 2 years of consistent price declines or when you can get in a highly desirable area with a 6.5%+ yield.   Then sure Speculate.  I did and I won.  If you want safety buy for cash-flow.  

IF you want to hear why then follow me as I'll be posting a huge post tomorrow in my book review on The Demographic Cliff. 

One reason I am not a buy in Vegas right now is the low cap rate compared to desirability.   I know San Diego and Chicago like the back of my hand so I'll use those as examples.  

Chicago:  High Yield 8%+ (Cash on Cash) / Desirability Moderate

Vegas:  Low to Moderate Yield 5% / Desirability Moderate

San Diego: Low Yield 4% / Desirability Very High

Personally, if I was going to buy for low to moderate yield then I'd buy in an area with high desirability.  Otherwise, I'd buy for high yield.