If you’re thinking of making an investment in a Seller’s market, read this first…

We are living through interesting times. If you’re thinking about investing in real estate (or anything for that matter) in a Seller’s market, it’s essential to change your investing strategy to respond to different investment cycles.

Amateur investors learn an investing trick that worked once and try using that same trick over and over in all market cycles. That’s like planting corn in your garden every single month of the year. Some months you’ll have a bumper crop and other months you’ll wonder why there is no corn growing in your frost-covered garden. Your mutual fund sales person will call that dollar cost averaging; I call it silly.

There are times for buying and there are times for selling and times for just holding on. Having invested through the last real estate cycle of boom and bust and boom again, I am currently investing a lot more conservatively than I was in 2003-2007. Although real estate is local and there will always be good deals to be found, in today’s market good deals are definitely getting harder and harder to find. That’s because we are in a Seller’s market. In a Seller’s market, amateur investors overpay for properties because they don’t see any other alternative.

Investing 101 – buy as much as you can during a BUYER’S market. My home building company was very aggressive about purchasing heavily discounted vacant lots during the down market. Now that the housing market is booming, we are building houses with the help of contractors like Ideal Construction LLC and selling more houses than ever.

Vacant lot prices have quadrupled from the market bottom making it extraordinarily difficult to find vacant lots to replenish our inventory for future development.

Investing 202 – don’t overpay for assets during a SELLER’S market. Most home builders are currently ‘overpaying’ for the small supply of lots on the market, because they only know one trick – building houses. They have to pay the high market prices for lots because that is the raw ingredient that makes their business run. Many home builders will ‘overpay’ for lots even if that means their profit margins virtually disappear. Because they only know one trick, it means ‘overpay’ for their raw ingredient of lots or go out of business because they have no more lots to develop.

If you’re thinking about buying real estate in a Seller’s market, think long and hard about that decision. Although I don’t think we are at the peak of the current real estate or stock uptrend, I do think we are currently well above where the next market bottom will be for both real estate and stocks. Of course, if you’re buying real estate for long term cashflow and positive arbitrage, it could still make sense to buy today because interest rates are still incredibly low. You could say that real estate is in a Seller’s market, but interest rates are still in a Buyer’s market. If you are buying ‘over priced’ real estate with ‘under priced’ financing and you are positively arbitraged you hold on for a very long time, you’ll probably do very well. (Positive arbitrage is when your CAP rate exceeds your interest rate)

Investing 303 – When equities are overpriced, sell equities and buy bonds. In most of today’s US real estate markets, real estate is now overpriced. Click here to read my blog article “How To Predict Real Estate Prices” to determine whether your real estate market is currently under or over priced. DON’T MISS THIS PROFESSIONAL INVESTOR HINT: I am currently selling most of my real estate portfolio, using the cash to buy mortgage notes, and will sit on the sideline collecting mortgage interest until the equity market / home prices crash. I plan to buy back into the real estate market at the next cycle low. I am currently buying precious metals as their price continues to drop, as well as farmland and timberland as an ultra-conservative hedge against hyper-inflation and a potential currency collapse. Market cycles are very long. It can be a decade or more from market bottom to market top and back down again. Amateur investors do not think far enough into the future. They plant corn seeds in summer expecting to harvest their corn crop in the middle of winter. Sometimes it just makes common sense to stop planting and wait for the proper season for planting to come along.

Investing 404 – Not all bonds are created equal.  Mortgage notes are my personal choice of bonds. The only thing I own in my IRA is mortgage notes. A mortgage note (bond) is a promise to pay secured by a piece of real estate. If the borrower pays me as agreed, I am happy because I have earned a 10% interest rate with no tenants, no toilets, and no vacancy. If my borrower pays late I earn late fees in addition to mortgage interest and my ROI goes even higher. If I buy a corporate or government bond and they don’t pay, I can pretty much write off that investment as a total loss. If I buy a real estate mortgage note (bond) and the borrower doesn’t pay as agreed, I will do the happy dance of joy because I get to foreclose upon the real estate for pennies on the dollar. By restricting my original loan amount to 75% of the property value, I should make a higher return on my money by foreclosing on the borrower’s equity rather than getting paid as agreed. That’s what I call a win-win! If the price of real estate drops and I have to foreclose, I at least have the borrower’s 25% down payment equity as protection from loss. I also have title insurance to help protect my investment from fraud and/or sloppy paperwork.

I am currently focused on buying income producing mortgage notes in Dallas, Fort Worth, and San Antonio Texas. These three cities have excellent population growth, economic diversity, very affordable and stable housing prices, and the foreclosure laws are extremely favorable to lenders. I’ve been buying and brokering mortgage notes in those cities for about five years and I’ve developed an extremely strong system in the process.

Using the strength of my investor network (the same network that brought you to be reading this blog post today), I have developed a steady supply of mortgage note investment opportunities. I promise you won’t find mortgage note investments like these anywhere else, because these notes are specifically created by my team to fit my personal investment philosophy.

All of our mortgage notes:

(1) are in the foreclosure friendly state of Texas and the rapidly growing markets of Dallas, Fort Worth, and San Antonio.

(2) are secured by recently renovated, highly affordable, single family homes in class B neighborhoods near major employment centers.

(3) have strong borrowers with less than 45% debt to income ratio.

(4) are 1st position deeds of trust at ~75% loan to value.

(5) have mortgage payment comparable to the cost of renting the same property. If it is the same monthly payment to rent or own, the borrower has little economic incentive to default. If you do foreclose on a non-performing note, you can resell the property for cash or rent out the foreclosed property and generate about the same net operating income as you were getting from your note.

(6) are supported by a conditional buy back guarantee from Hassle-Free Cashflow Investing giving our investors peace of mind and a secondary source of repayment for their mortgage investment.

(7) are professionally serviced by a licensed and bonded mortgage servicing company.

(8) are self-directed IRA friendly. Our team can handle all of the compliance paperwork for you.

(9) are turnkey and hassle-free.

(10) have lender title insurance in place issued by Chicago Title Company and paid for by the borrower.

(11) have zero investor closing costs associated with the purchase price.

(12) are able to be purchased at a nominal discount below the face value of the note – usually about 99 cents on the dollar and the 10% annualized ROI would be improved if the borrower paid their note off early.

(13) have complete due diligence files available on the property, the loan, and borrower.

(14) are professionally underwritten by a licensed and insured residential mortgage loan originator (RLMO) to be “Frank Dodd compliant”.

(15) are secured by houses who have a minimum value of $75,000.

(16) are fully amortized over 15 years but can be resold for the amount of the unpaid balance at any time.

(17) have a bite sized purchase price between $60,000 – $120,000

If you would like to purchase high-yielding real estate notes secured by 1st position deeds of trust recorded against quality real estate in Dallas-Fort Worth, TX send us an email – David@HassleFreeCashflowInvesting.com or call 866-931-9149 ext 1

To request general information about mortgage note investing, you can read my free white paper – “CLICK HERE for Secrets of Hassle-Free Cashflow Lending” as well as watch this video “CLICK HERE for Investing and Tax Strategies for Mortgage Note Investors” and this video “CLICK HERE for Nuts and Bolts of Being a Private Lender.”

Inflation rate and things your stock broker won’t talk about

Inflation rate and other things your stock broker won’t talk about

It was all over the radio today (5/3/13) “stock market hit a new high because of a better than expected jobs report”. That is talking head BS. The market goes up when there are more buyers than sellers and NO ONE knows what is driving the buy decision. The vast majority of the market is professionally traded by institutional investors and banks who are not trading based on jobs reports. If the market is at an all time high, why aren’t you selling?  There is going to be a lot of profit taking in the very near future which means more sellers than buyers. If you have a buy and hold approach to stocks you are going to get creamed!!! That is an antiquated investment idea that your mutual fund sales person wants you to believe in so they can afford new shoes for their kids.

Here’s the short answer on my philosophy: ownership of publicly traded stocks should be for the wealthy and for sophisticated traders who have the time, team, risk tolerance, and intellectual resources to go from cash to asset and back to cash as the market indicates. The financial services industry through an obscene amount of marketing and the passing of ERISA laws have conned middle class Americans into believing that the stock market is an appropriate place for their money. The addition of mutual funds seems like a good way to make a risky investment for the wealthy sanitized for consumption by average Americans except for this hugely important point…. the value of mutual funds is not based on the performance of the underlying stocks owned by the mutual fund; the value of the mutual fund is based on what other investors and traders are willing to pay for shares of the mutual fund. Therefore mutual fund pricing works basically the same as a stock and thus is no safer or more appropriate for an unsophisticated investor than direct ownership of stocks. 

I’m not saying that you can’t make money buying stocks. I’m saying that a buy and hold strategy ABSOLUTELY WILL NOT WORK because their has been a fundamental shift in our economy and here it is… America *and other nations* are purchasing their own sovereign debt and thereby controlling the price of their bond market. Treasury rates are at an all time low (see chart below) because of artificial interference in the bond market (*due to bonds being purchased by the same governments that issue them).

Ultra conservative investors who should be in dividend paying assets like bonds cannot buy bonds because the bond yield is a fraction of the Fed’s target inflation rate thus bond purchasers are accepting a guaranteed loss of purchasing power.  Bond investors are being forced into at risk equities (stocks) in an attempt to create yield and preserve purchasing power.  Today’s 10 year US Treasury rate is 1.62% while the Fed is targeting a 2% inflation rate *source Wikipedia and the meeting minutes of the January 2012 US Federal Open Market Committee (aka the Federal Reserve).   To put this into as simple language as possible…  if you buy a $100 US Treasury and hold it ten years until maturity you will have LOST $4.70 of purchasing power. 

Inflation rate and things your stock broker won't talk about

Here is where anyone can predict the future for what happens next.

Bond rates will either go up or stay the same (they can’t go much lower than they are now).  If bond rates stay where they are, more and more low risk money that should be in the bond market will move to the stock market which will further drive up prices. As money leaves the bond market to chase yields in the stock market, governments will have to buy even more of their sovereign debt which ultimately results in a higher inflation rate.

(Side Note: governments buy their own debt using newly created money.  Inflation is a reflection of money supply times velocity.  Velocity is the rate at which money changes hands in the economy.   New money results in inflation unless velocity goes down.  We haven’t seen a high inflation rate recently because velocity is at an all time low at the same time money creation is at an all time high.) 

As the inflation rate increases from increased money supply or increased velocity, the effective nominal gains experienced in the stock market will get wiped out through inflation and taxes on paper profits. 

(Another side note using the above chart as an analogy:  If you buy a stock for $100 and ten years later sell it for $121.90 and the price of a widget inflated at exactly the same rate from $100 to $121.90, have you preserved your purchasing power?  NO!!!  Because you will owe taxes on the $21.90 profit before you can buy your widget.  $21.90 profit less 25% tax = $16.43   Thus your $100 purchasing power is still eroded even if you can invest the same as the inflation rate.  One obvious solution is investing in inflation friendly assets like real estate.)

If *or when* bond rates go up, existing bond holders will experience losses on the face value of their bonds (bond prices move inversely with bond rates). As bond rates trend up, the discount purchase rate on bonds will increase to compensate for the perceived rising interest rate risk (bond holders become losers again).  Let me say that again in English…. if you want to sell your US Treasury Bond before the maturity date, you’ll have to sell it for LESS than what you paid for it if the prevailing bond rate goes up (which it probably will).  An investor will pay less for a bond paying 1.6% interest than they will pay for a bond paying 2% interest.  If you buy a $100 bond today with a note rate of 1.6% and tomorrow the prevailing note rate is 2%, you’d have to sell your $100 bond for less than $100 to attract a buyer.

When bond yields become attractive enough for low risk investors (aka when you can buy US Treasuries that pay a rate of interest higher than the targeted inflation rate), there will be a massive transfer of wealth from the stock market to the bond market.  Remember, there is an incomprehensible amount of money currently in the stock market that doesn’t want to be there.   I’m not talking about mom & pop investors…. I’m talking about banks, pension funds, and huge family trusts. When higher rates in the bond market begin to draw money away from the stock markets there will be some massive price turbulence in the stock market (mutual funds included).  NO ONE  knows whether the stock market will be higher or lower in 20 years than it is today. What I can guarantee is that  (1) we will have more price volatility than we’ve ever seen (2) smart traders will make a fortune because they love volatility (remember a trader gets into and out of positions, an investor holds for passive income – CLICK HERE for my article on the difference between being an investor and a trader), (3)  investors who are following a buy and hold, dollar cost average, diversification strategy are going to have no control over the value of their portfolio and they will be taking HUGE risks without the correlating potential for upside.

Stock investing rules have changed.

If you want to summarize the problem in a nutshell… the average American doesn’t know the rules of stock investing have forever changed, yet they feel safe owning stocks and mutual funds because their television tells them “It is safe to buy mutual funds because everyone else does it.” Mutual fund sales people are taught to sell products to middle class Americans who are not traders and they don’t have the skill or ability to actively and intelligently move from cash to asset to cash.  Few mutual fund sales people and even fewer of their customers understand basic economics and how a targeted annual inflation rate of 2-3% combined with sovereign debt purchasing driving bond yields to zero has removed “risk free yield” from the investing equation which has been the historical basis for all investment decisions to date.  A target inflation rate combined with sovereign debt purchases have fundamentally changed the rules of the investing game and your mutual fund salesperson either doesn’t know or doesn’t care to tell you.  

The solution:  Buy income producing assets like positive cashflow real estate.   Start or invest in closely held companies that generate cashflow and whose value is based on real things like the physical assets they own and the profits they create.

david campbell blog photoIf you’d like to schedule a no cost investment strategy consultation with Professional Investor David Campbell to see how you can increase your investment yields while lowering your investment risk, CLICK HERE.





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