Bill Roberts - "Baby Boomer" Retirement Planning

A Penny For Your Thoughts - On Second Thought You Better Make That A Dollar by Bill Roberts

I recently read an article by Matt Heaton explaining the role of the Fed on interest rates: Why does no one in the media understand The FED?

I wrote my own take on this: Greenspan, The Evil Villain

Home Prices

But it doesn't matter which one of us you believe, the fact of the matter is that interest rates affect home prices.

Some people think that the recent (2002 - 2005) run up in the price of a single family residence was some kind of conspiracy.

If there was a conspiracy it extended all the way up to the Federal Reserve Board because the price of a house can be demonstrated to be a function of the monthly payment (on the mortgage) and that is a function of the interest rate on a home loan. When the Fed ran the interest rates down to zero, the corresponding bond rate for a Fannie Mae loan package was also at a very low rate.

The average buyer, whether for big screen TVs, new cars, or a house makes his decision based on his ability to make the payment, not on the price.

In the final analysis "price" has nothing to do with the price.

Money has everything to do with the price:

• The cost of money
• The availability of money
• The future expectations of money

So if there was a conspiracy to drive home prices up, it was manifested by the Fed. As they drove interest rates down, they drove home prices up. I thought they just wanted to stimulate the economy!

People have written whole books on interest rates, prices, and inflation. I don't think that I can do it justice here. Suffice it to say, we have an abundance of "money" and the Fed wants to use "money supply" to control price level.

They "manipulate" interest rates as a means of controlling money supply. Right now they would like to raise rates in an effort to reduce inflation (which is how they refer to increases in price level). But it won't work. At some point they will want to stimulate the economy again and interest rates will come down.

Law of Unintended Consequences

And sooner rather than later because according to the law of unintended consequences, the higher interest rate has actually increased the money supply. Lower interest rates in Europe and Asia can't compete with our rates so all the free money flows into our banks. We have too much money. Inflation will soon follow. The only way to fix it will be to lower the interest rates again.

So what does all this mean? It means that our slump will end soon. Home prices are still going to go up. Not because "demand" is going to increase. Not because houses are going to become scarce. But simply because people will be able to borrow more and still be able to afford the payment.

Whether or not we have sub-prime loans, housing will become more affordable with lower interest rates. Underwriting standards will be "relaxed" again in order to lend out all the available money.

We will not have a repeat of the "mortgage market meltdown" because we learned a thing or two this time. Investors will need to put some skin in the game. No more 100% financing for non-owner occupants. Pay option ARMs will still be available, but borrowers will need to qualify at the fully amortized, fully indexed payment amount.

All in all, good times are coming. If I was a Democrat I would sing "Happy Days Are Here Again." I just might sing it anyway.

Are you ready?

Call Bill Roberts for help with your Real Estate Investment needs at (619) 244-4610.

Why Buy Land? By Bill Roberts

I am always hearing people say "I would never buy raw land." It's like they don't know that it is land that appreciates. They think that only improved property appreciates. But actually it is the land component of improved property that appreciates, not the structure. The structure actually DEPRECIATES, and eventually needs to be torn-down.

Land is a good investment:

• The costs of upkeep are low.
• The taxes are low.
• But the RATE of appreciation is greater than for the improved property next door.

As an example, assume you have a 3-bedroom 1800 square foot house on a lot. You paid $300,000.00 for it just 3 years ago. There is a vacant lot next door (if it had a "door") that was $75,000.00 at the time you bought your house. Your house is now worth $600,000.00 or 100% increase in value.

But what about the vacant lot? What is it worth now? What if you could actually build a duplicate of your house next door for less than $250,000.00 with another $50,000.00 for everything else including permits, finance charges during construction, and landscaping?

$300,000.00 to create a $600,000.00 house! Most of that difference is the value of the lot. While your house doubled in value, the lot quadrupled in value. If you knew this back then, you would have bought the lot instead of the house.

The difference in home values from one area to another is primarily the difference in land values. The cost of construction can vary but not significantly. Costs of entitlements can vary, but they don't represent the major component of the cost of a new home. So what is the major difference from one area to the next?

It's the land!

A good investment strategy for the aspiring wealth builder is to buy land in the path of progress, hold it until its area is over-taken by growth, then either sell for a massive profit or develop it for an even greater profit.

Unimproved ≠ Useless

And if you can't stand the holding costs while you're waiting then find a farmer to lease it to. Where I am in Southern California you can "lease" vacant land to nursery operations for a lot more than your typical farmer would be willing or able to pay. There are a lot of uses for vacant land.

Vacant land is also good for "storage." People in cities and suburbia need somewhere to park their extra cars and their "toys" like RVs, boats, and trailers. Some of these "uses" will actually pay enough to make payments on the land for you in addition to covering your holding costs (taxes, weed control, etc.)

The Best Opportunity

The "real money" in land is in acreage that can be sub-divided. Just like any wholesaler that breaks up large quantities of things and sells them individually or in small quantities at a much higher price, the land developer sub-divides and sells smaller lots at a much higher price.

And if he can change the "use" to the highest and best use while he is at it, he can get even more for the land. Its win-win and win again!

I like to buy land. I prefer to buy land. Give me land, lotsa land!

See also Land Banking - The Alternative To Eating Dog Food Straight From The Can

If you want to include land in your real estate investment program call Bill Roberts (619) 244-4610.

How Much Should I Offer For Your House? by Bill Roberts

We are well into a BUYER'S MARKET. Some people think this means that you can "steal" any piece of property that catches your eye. It doesn't matter what the seller wants, or needs, or even what the comps are. You smell blood. Just make a low-ball offer. If you make a hundred low-ball offers, some poor schmuck will accept it.

He accepts it because he has to. Yours is the only offer he has received and he's between a rock and a hard place.

Now the question is: "should you do this?"

The question should be "why not?" There are two very distinct philosophies in real estate investment. Some think that you make your money by buying "right" and others believe that the profit in real estate comes about by the actions of time, inflation, use change, and utilization.

A story: I bought my first house in 1969 for $18000. I was young and brash. I wanted the best deal possible. The asking price was only $19500. That $1500 difference represented ALL of the sellers' equity. They walked away with nothing. I was proud of myself for getting such a good deal.

Twenty years later my ex-wife sold the house for over $500,000. In the big picture what difference did that $1500 make? None to me but it made a lot of difference to the sellers.

If the property is worth having, it is worth having at market price.

Please understand, I don't mean asking price. Market price is arrived at by doing a comparative market analysis. Since houses in particular neighborhoods are more-or-less similar they lend themselves to valuation comparisons.

Don't Steal

Make your money the old-fashioned way. Not by stealing but by using your head. Find a way to build equity in the property by improving it or changing its use, or holding it to let development to catch up with you (path of progress) or build equity through time and inflation.

A good solid investment property will do nothing but return an excellent ROI if managed properly. Even a property with a 4- or 5% cap rate can make sense if held for a number of years, managed properly, and located in a growing area.

If you are investing in real estate, then you need to think "long Term" since real estate is not for speculators.

Flippers may not like hearing this but too bad. Didn't your mother teach you not to steal?

Right now is a very good time to buy. Prices in a lot of areas are considerably lower than they were last year. The bottom is in sight. Don't miss this opportunity.

For help with your real estate investments call Bill Roberts (619) 244-4610.

You're Blaming Me For What? By Bill Roberts

Here we go again. Another round of posts pointing fingers at somebody else for the current real estate market, what some like to call THE MORTGAGE MELTDOWN.

Here are just a few of the latest posts:

How Much Should Realtors Be Fined for Their Part in the Subprime Lending Crash?

Should Realtors be blamed for the sub-prime crisis? (A rebuttal)

Florida Real Estate Flipper Gets Caught with His Pants Down

And here is an older one to help put things in perspective:

Clouding The Issues

What are the reasons that are out there for this crisis?

• Greedy real estate agents
• Greedy mortgage brokers
• Fraud
• Greedy Wall Street types
• More fraud
• Greedy "flippers"
• Greedy sellers
• Greedy buyers
• Stupid buyers

Every one of these "reasons" has generated many posts from interested parties. When I say interested, I mean interested in BLAMING someone else.

Now, I also have posted on this subject. I've done my homework. I've decided that it is not (primarily) about fraud. Of course there has been some fraud, but then there always is some fraud. See I'm Really Tired Of Hearing "Fraud"

And I don't think that greed has been the over-riding force here. Of course greed is always present. Most people are responsive to things which they perceive as beneficial. Give me lots of money and I can see a benefit there. It's natural.

But there really is a bogeyman here. I blame him for the whole mess. I don't care if it was an unintended consequence. He did it. We all are paying the price for this guy's actions.

OK. Who is this bête noir? See Greenspan, The Evil Villain

If you have an opinion regarding this, let us know. If there are other current posts addressing this, let me know and I'll add them to the list.

Land Banking - The Alternative To Eating Dog Food Straight From The Can by Bill Roberts

Is Land Banking for you? Should you get started immediately?

If you are not sure then what you need is an example.

Traditional IRA

Let's say you have $100,000.00 in your IRA account at a major brokerage house. You want to retire in 10 years. What will this IRA be worth then?

In order to answer that we need to make certain assumptions: You will invest another $5,000.00 per year into your account at the beginning of each year in an effort to "catch up."

You will "earn" an 8% ROI compounded annually because your IRA is "invested" in a mutual fund that historically has grown at that rate.

Ten Years Later

If this is where you start "drawing down" your IRA by $2,000 per month it will not grow any more but will start to actually decline.

Can you live and maintain your lifestyle with a measly $2,000 per month added to your Social Security? And remember, inflation will have cut the purchasing power of that two grand by a significant amount in ten years.

The Land Banking Alternative

Now for our Land assumptions: You find a nice five acre parcel about five miles out of town on a main road at a point where a major cross street will be. When the city catches up with this land, it will be very desirable. The price is a hefty $200,000 now, but its future potential is fantastic. You anticipate getting a million dollars or more in ten years when it is time to retire.

• Is this a good investment?
• Can you actually do this?
• What about financing?

After a "down payment" of $100,000 the owner agrees to carry back a first trust deed on the balance at 8% interest payable $1,000.00 per month or more until paid. This type of owner financing for land is generally doable. Conventional financing is also available at other rates and terms.

Making Use of the Land

This particular parcel is well-suited for growing palms. A palm grower/nurseryman has agreed to lease the property from you for $12,000.00 the first year with a 7.2% per year escalator. He sees the value of having his retail nursery here along with growing palms. Over the ten year period he expects to make a lot of money with this location. He knows that as the city grows towards this corner, it will become increasingly more advantageous. In a couple more years he wouldn't be able to get it at all, at any price. He is really anxious to make this deal.

The whole project is put in management to make it just as easy to manage as the mutual fund was. You get a monthly statement, your taxes are filed, and you just sit back and wait. No sweat!

After just eight years you have managed to pay off the land completely.

After the 10 year lease expires, and just in time for your retirement, you have the property appraised. It seems that it is now worth $200,000.00 per acre or $1,000,000.00 for the entire 5 acres. This increase is partially due to inflation, but it is also due to the fact that the town has grown out towards your land.

Make The Comparison

So compare the performance of your traditional IRA investment with using a self-directed IRA to engage in a little Land Banking:

Your traditional IRA is worth $294,119.94 versus your self-directed IRA which has a value (cash plus land) of $1,029,370.98. It's NO CONTEST! You end up with 3-1/2 times as much money to retire on by banking on land.

At this point you could sell the land, develop the land, or renew the lease to the nursery. Because of the increase in value, you will be able to take distributions from your IRA without affecting its value or its ability to continue to grow. This represents a much better alternative than the traditional IRA.

The scenario described is for example only. There are many other possible scenarios for your self-directed IRA. You could invest in free-and-clear land, residential income property, immediately developable land, or even shares (participations, memberships) in an LLC. You are limited by your imagination, amount of "work" you want to do, and your tolerance for risk.

If you want more information or you are ready to set-up your own Self-Directed IRA call Bill Roberts (619) 244-4610.