Idaho Statesman 9/11/2010

Again, Why would ANYONE want to be a landlord?

Why Would Anyone in Their Right Mind Become a Landlord?

Money Magazine’s September 2010 issue includes a Special Report entitled “10 Ways to Make Real Money Again”, two of the 10 being real estate investments: #4 Rental Properties and #8 Distressed Commercial Real Estate. Not surprisingly, both come with serious warnings. Distressed commercial real estate is high risk with an uncertain return, possible devastating capital calls, unpredictable appreciation and is rarely available in a REIT. Residential Rental Property brings with it the risk, as they put it, that “One destructive renter or decline in a locale’s quality of life could wipe out your return.” Ouch!

So, again, “Why would anyone in their right mind become a landlord, either commercial or residential?”

In the past there was no readily available alternative; today there is: HECS investing. No renters, no taxes or insurance, no risk of vacancy or vandalism and no maintenance expenses to eat away at your profits. And no 24/7/365 responsibilities for your renter’s happiness: i.e. no midnight phone calls, 2 am trips to the rental to fix the toilet or letters from a tenant’s attorney threatening to sue you.

So, one more time, “Why would anyone in their right mind invest in rental property?” when they can purchase fractional interests in owner-occupied residential real estate, deposit it in their portfolio and let it do its magic. Not all HECS products are the same, of course. Shop carefully.

HECS equity investments in real estate: the safety of real estate investing with the blend of flexibility, liquidity and returns that exceed bonds, stock and even T Bills.

Target Date Mutual Funds - Right Idea, Wrong Assets

Friday’s WSJ (Wall Street Journal) FUND TRACK column by Daisy Maxey highlights a new strategy adopted by mutual funds to sell retail investment products to younger investors. They are calling these ‘target date funds’ and Vanguard explains their offerings are generated by ‘interest expressed by parents, grandparents and younger investors themselves.’ Vanguard’s ‘Vanguard Target Retirement 2055 Fund’ was launched last week and its main value claims are to have a long-term focused on the year 2055, be broadly diversified and be a bargain with a lower expense ratio than comparable funds. Bill McNabb, Vanguard COE described it, weakly, as a “little bit of a statement about starting to invest as soon as possible and doing so in a diversified manner.”
I’m underwhelmed by Vanguard’s effort but heartened by what appears to be public recognition that a long term personal commitment to financial responsibility is actually a good idea. Never mind that it is primarily a long term investment in a short term product mix of stocks and bonds providing regular work for fund managers for a very long time (45 years) and that it is designed for investors who want to have little involvement in the investments and will need to settle for minimal returns. It’s good for Vanguard and, other than the high cost of lost opportunity, won’t hurt the investors a lot. In reality, the mutual funds offering these are simply competing with your local bank’s savings accounts: money put away is money not spent…
The question becomes: why adopt a long-term investment strategy that relies on the performance of short term investment products that ultimately become an annuity income for fund managers? I would contend that assets that appreciate and are managed by co-owners with a vested interest in maintaining the value of the asset is a much better choice. The only such investment class to provide those features is real estate and the only subclass to protect the investor from the vagaries of relying on continued employment (of borrowers) to minimize risk is the HECS.
Target retirement funds are a great idea. Find one filled with Home Equity Conversion Sales that have an average appreciation rate for a tenure forecast of 30 years and that reinvests those assets that don’t make it that long and you will find a fund that can be counted on for unrivaled stability and risk-adjusted return that will multiply by 20 your retirement savings. Had such a fund been acquired in 1979, appreciated at the Case/Shiller US average appreciation rates thru last December and had reinvested its cash in-flows from early liquidations, the fund would have converted a 4.38% appreciation rate into an annual return of 9.63%, far better than the US stock market’s anemic 1.1%.

Ed Lotterman Got It Right, as Usual...

In his August 2nd, 2010 column, "Don't underestimate economic complexity" Ed Lotterman points out that the economy is much too complex to attribute performance to a few simple factors, even such heavy-weights as taxation and deregulation. There are just too many factors to account for; in fact, ultimately, the performance of the economy is the sum of every decision each of us makes from moment to moment that has an impact on the flow of money. My decision to not spend an extra 30 minutes at a downtown coffee shop saved me $2.50 in parking and cost the parking facility $2.50 in revenue. I then spent it (and much more) filling my gas tank at Costco rather than Albertsons since it is 20 cents cheaper even though it is much further away but that distance was off-set by being close enough to make the $3.20 saving worthwhile. That series of economic decisions was actually much more complicated (and I think rational) but the time it would take for you to read it would be wasted...

The performance of our economy is much more dynamic and unpredictable than we'd like; in fact, economics is much more akin to the science of fluid dynamics and the Heisenberg Principle (think weather prediction) than integral calculus. And when you think in terms of weather prediction, try to imagine that each molecule that makes up the atmosphere has 'free will' and can make seemingly irrational (and hence unpredictable) decisions. That is why the science of economics (literally 'house law') is a backward looking view of the world thru a misshapen lens.

So what? Your economic well-being is best served by shrewd simplicity and patience. And these are best provided by HECS investing in real estate where the Sharpe Ratio and the Sortino Ratio give you the optimal fighting chance of achieving your long-term economic goals.

A Welcome Word of Encouragement

The HECS product that my company, Fractional Equities, LLC, has developed is called a ROOF®; it is an acronym for "Residential Owner Occupied Fractional." Chartered Financial Analysists, Licensed Investment Advisors, Broker-Dealers, CPAs, attorneys and regulators have been thoroughly examining it and its performance for the last two years. Joanne Bachmann, president and principal at Doherty, Bachmann & Sons, an investment banking firm, sent us the following appraisal:

"Hi, John. Nice to hear from you. Please know that I continue to be very impressed with you and with the amount of thought and work you have put into ROOF®s. I believe you have a unique product that's positioned to hit the market at just the right time. Your instincts and hard work should bring you great success.

It was indeed a pleasure to meet you and to learn a little about your background and your wonderful family. I wish you all the best and will be watching for ROOF®s in my neighborhood!

Joanne"

Joanne's note concerning timing is insightful as residential real estate values are severely market-discounted and are likely to remain so for the next 4 years in most markets according to Reinhart & Rogoff. Reverse mortgages will continue to flail about, struggling against their inherent flaws and only desperate and naive seniors will buy one.

This is an ideal time to invest in HECS, purchasing fractional interests in lien-free senior homes before appreciation returns to historic performance.

"Buy a (Fractional Interest in a) House to Protect Yourself from Inflation"

In his Bargaineering.com site's 'Personal Finance' article, "How to Protect Yourself from Inflation", Jim Wong strongly recommends buying a house! His arguement is that as inflation erodes the value of your dollars, you would use future dollars of less value to pay off a mortgage established in today's dollars.

But what if you already own a home? The cost of selling your home and buying a new one would exceed the savings from inflation. Buy a rental? Then you have the risks and responsibilities of becoming a landlord with the attendant 'terrible 'T's': tenants, teenagers, trash, taxes & toilets (The real list is much, much longer. I really don't know why anyone would voluntarily become a landlord...)

But what if you could buy a fractional interest in residential real estate and the majority owner that occupies the home takes care of ALL of the ownership responsibilities and expenses for you? It would even make sense to consider borrowing the money (like a mortgage) in order to 'buy a house' today using tomorrow's less valuable dollars!

And, as a bonus, if your fractional purchase is in an appreciating MSA, you would enjoy your share of the appreciation of the property.

Now is the Time for HECS Investing

Reinhart and Rogoff in their fascinating book This Time is Different explore, for probably the first time ever, the relationship between real estate and large-scale financial crises, particularly bank failures. Among other fascinating insights, their research uncovers the pattern of the 4 to 6 year period of languishing home values following a serious economic downturn. This is hardly surprising since the last 30 years has seen the relationship between banking profitability and mortgage lending focused-on by 'supply-side' proponents, fanned with 'ATM' ease of access to home-equity cash, and ridden like crazy into our current 'Great Recession.'

This leads me to three immediate insights:

First, the government's fanning of the 'American Dream' of universal home ownership, which is both unsustainable and of questionable value, is suspiciously aligned with the banking lobby's interest in short-term profitability. It is a relatively easy case to make that the banking/mortgage industry's crisis is self-made as it attempts to make equity available to its owners solely by means of debt-loading to the point of collapse. The Military/Industrial Complex railed against during Vietnam and the Cold War can be said to have been replaced by the HUD/Banking Complex as the political and economic interests of both conservative and liberal politicians align with the banking and mortgage industries. New homeowners (with new mortgages) make loyal voters.

Second, the next 4 years will be the ideal time to invest in residential real estate as values, driven back to earth by the banking industry's liquidity retreat and the federal government's staggering debt load, are prevented from appreciating.

Third, the risky nature of investing in residential real estate using traditional employment-based debt instruments will be illustrated in high-relief as employment continues to languish and foreclosures and short-sales hammer investor returns and the government's balance sheet.

Digesting the huge 'debt' meal we have gorged ourselves on will take time; time during which investing in lien-free residential real estate will reward investors, rescue Senior homeowners and significantly contribute to our economy's recovery.

This Time is Different, Reflections 7/18/2010

The concluding observation to chapter 2, "Debt Intolerance: The Genesis of Serial Default" is that, "Going forward, after the global financial crisis of the late
2000s subsides, a challenge will be to find ways to channel capital to debt-intolerant countries in nondebt form to prevent the cycle from repeating itself for another century to come." Reinhart & Rogoff's observations are spot-on for sovereign debt but, it needs to be noted, is equally applicable on a micro-economic scale.

There is no question that a prime mover of the 'global financial crisis of the 2000s' is the massive amount of unsustainable debt incurred by 'debt-intolerant' home buyers using insufficient income to purchase homes beyond their means and beyond the security of their employment.

How much more true is this of the fixed income homeowner in need of 'capital' today? The very same challenge of 'finding ways to channel capital to debt-intolerant homeowners in non-debt forms' is critical. Simply replace 'capital' with 'cash', 'debt-intolerant countries' with 'fixed income homeowners' and the use of HECS to convert existing home equity into cash becomes an obvious strategy for 'preventing the cycle from repeating itself...' Using HECS to provide cash to fixed-income homeowners relocates the 'risk equation' from continued employment to asset appreciation and in doing so, moves inflation from the 'risk enhancement' relationship it has with debt to the risk diminishment relationship of asset appreciation.

Restoring Liquidity to the US Economy

Rehydration of the US Economy

We are experiencing a period of financial dehydration caused by dangerously leveraged overuse of the existing aquifers (accumulated equity) and watersheds (profitability) of liquidity; the supply is running perilously low and the economy is seriously wilted with little hope of a timely recovery.

However, there exists a tremendous untapped aquifer of liquidity heretofore unavailable to either its owners or the general economy, even if credit was more accessible; house-rich but cash poor homeowners can’t make monthly loan payments. Owned by the Great Generation and their children, the Boomers, that aquifer is stunningly large: $4.5 trillion and can now be tapped with a HECS.


By providing access to that immense pool of home-equity existing beyond the wells drilled by mortgage companies, HECS can be used to inject $751.3 billion back into the US economy by putting it into the checking accounts of Senior homeowners without mortgages. Another $317.5 billion is accessible to senior homeowners with mortgages, relieving them of the current strain of mortgage payments made from a fixed income. In addition, pre-seniors, aged 50 to 64, with a qualifying mortgage expand the ‘aquifer’ adding approximately $ 1.4 trillion more for a total of $2.5 trillion liquidity available to be injected back into the economy, one household at a time.


A careful and deliberate tapping into that aquifer with HECS wells will rehydrate the American economy as it allows the trillions of dollars of unliened home equity and redirected former mortgage payments to be liquefied and reinjected into the economy as cash without the risk and overhead expenses of further debt.

That economy-refreshing liquidity is moved from the immense pool of investor cash looking for a safe and secure investment opportunity to the homeowner providing for their unbudgeted expenses. In doing so it also provides relief to the Senior 'safety-net' provided by the government. Eventually it moves to the main street economy providing jobs and the flow of cash that follows employment.

HECS allows the swelling ranks of seniors and pre-seniors, currently seen as a burden to the American economy, to become a source of relief, a source of job creation and a re-hydration of the economy.

American retired homeowners have been filling this vast reservoir with value for more than 30 years. They have paid an even greater amount of interest on the mortgages used to put this value away; they are no longer required to borrow it a second time in order to access it!

HECS Definition Added

HECS investing in real estate is both a unique investment strategy and a new class of asset investment. The White Paper Library now has a definition of "HECS" for your questions and/or comments.

Chapter 3 Added

Chapter 3 of "Financial Pressure on Boomers": 'Fractional Equities Brings Hope to Seniors and a Unique Opportunity to Real Estate Investors!' now added!

HECS Investing Meets the 'Boglehead Criteria'

See the article in the blog's White Paper Library for details.

This Blog is built on a series of 'White Papers' that lay a groundwork for the blogs that follow. Each paper is periodically revised so you may want to review them occasionally for new content. (The text editor doesn't allow typical Foot Notes so they become End Notes) See the White Paper Library below...