Well, well, well… what an interesting year 2013 is shaping up to be!
The U.S. is still, at least according to the U.S., the world’s largest economy. Super!
Of course, U.S. gross national production includes the value of goods and services Americans produce regardless of their location – even overseas! But where do those employees live, rent homes, and spend money with local businesses (who rent homes and office space locally)?
Real estate investors typically care where the people are because people and their income is what gives real estate its value. After all, there’s lots of land on the moon, but it isn’t worth much because there aren’t any people there… at least not yet!
Sure, there are exceptions, such as mines and farmland. In these cases, the value isn’t really the land, but rather what comes out of the land. And as the world population increases, the demand for natural resources creates some very interesting opportunities for real estate investors.
The point is that money, people, and opportunities, just like the oceans of the world, are fluid. They move around.
Sometimes the moves are slow and you have lots of time to prepare and adjust. Sometimes, change comes like a thief in the night and you only have a short time to react. In all cases, you do better by being well prepared.
The concept is that you make more money having your portfolio in the right place at the right time, and you avoid disaster by staying away from the wrong place at wrong time.
As with personal safety, the key to portfolio safety is “Situational Awareness”.
With all the current chatter about gun control in the U.S., many American citizens are rushing out to purchase guns — many for the very first time.
Regardless of how you feel about guns and gun control, there’s something for investors to learn from considering how people approach the power and responsibility of gun ownership.
Some folks simply buy the gun, stash it, and hope to never use it. It just makes them feel safer to have it. Good.
Other people will take training classes and actually get out on a shooting range and practice, so that if they ever need to use the gun, they’ll be competent to do so. Better!
A sadly smaller percentage of new gun owners will continue on to more advanced training in personal safety, which includes more than simply learning how to properly operate the gun.
These people recognize that preparedness is much more than merely owning a gun or being competent to use it. They view themselves as the safety device and the gun as an important tool. Their own diligence in situational awareness and preparation is their most powerful weapon.
So who do YOU think is safer?
Our vote goes to the third group. Those who are trained to see the danger signs and take appropriate precautions, often avoid the need for more extreme measures to protect themselves.
Ignorance and complacency are dangerous because they often crack open the door and allow disaster to creep into your life.
Right now, the news feeds are abuzz about the U.S. debt ceiling, the infamous fiscal cliff, and Japan’s changing monetary policy. Not to mention the ongoing coverage of the U.S. foreclosure crisis, the Fed’s “forever low” interest rate policies, and the global escalation of “currency wars”.
Add to all that the longer term political and economic shifts resulting from China’s rise as an economic super power; plus corporations pursuit of global profits, and there’s a LOT of fluidity in the markets for ALL investors — real estate and otherwise — to be thinking about.
Meanwhile, many real estate investors are happily snapping up cash flowing properties at bargain prices and loading up on long-term low-interest debt (which we think is a VERY good idea right now).
This way, when inflation hits, they’re hedged. When inflation is on the horizon, it’s better to dump dollars and bonds, and use cheap debt to buy real assets and streams of inflating cash-flows to hold for the long term. In other words…
Leveraged and cash flowing real estate is a FANTASTIC way to short a falling dollar.
So, we look at these bargain happy investors like those gun owners who purchase a firearm and stick it in the closet. It makes them feel safer. But if they’re untrained and unaware, are they really as safe as they could be?
Remember, many investors in the last real estate run up thought they were safe too. But then macro factors changed quickly, and while folks were running to set up defenses, a tidal wave of bad mortgages hit the market and washed away years of equity. Ouch.
But some investors take their ownership to the next level.
These investors are skilled real estate operators. They invest time and money to master the fundamentals of property management, financing strategies, asset protection, insurance and cash-flow management. And they surround themselves with skilled technical advisers.
This is also all very good and we highly recommend becoming proficient at operating your portfolio.
But keep in mind, while skilled investors stay laser focused on operating their properties, either directly or though property managers, they often remain largely unaware of bigger economic factors that are likely to affect them sooner or later.
Little by little, these investors may see vacancies creep up, rents decline, and/or the quality of the tenant base degrade. But the pain is slow, the movements subtle and the cause unapparent, so it’s easier to work a little harder or accept less profit, than it is to step back and review the bigger picture.
The good news is that in a stable market, where the population and economy steadily expands, currency values and tax structures remain stable, life is simple and the skilled real estate operators usually survive. But…
The headlines tell us that today’s market conditions are FAR from stable.
Real estate values collapsed a few years ago in an unprecedented way. Sacred tax deductions, like home mortgage interest rates, are on the chopping block in 2013. Political promises get broken every day, government spending and regulation is rapidly expanding, and a bevy of tax changes have hit already — with more likely on the way. Yikes!
Now, you may not think that the things that keep small business operators and corporate CEOs up at night have much direct impact on you and your real estate. We encourage you to think again. After all, these are the same people who employ your tenants. Macro factors that change their decision making can affect YOUR bottom line.
The fact is that macro factors affect local markets unlike any other time in history.
And this trend is likely to continue. Add to that the desperation of over-spending, revenue starved governments, which is driving politicians and central bankers to act in ways once thought taboo, and you have to ask yourself:
In this environment, can a serious investor afford to be situationally unaware?
We don’t think so. Ignorance is not bliss and complacency is not easy.
We believe investors who can see the big picture and diligently pay attention to the clues in the news, will be the safest and most profitable of all investors in any environment, and especially in a market full of instability.
Excerpted from the official newsletter of The Real Estate Guys™ Radio Show.