The “Barbell” strategy of investing

In the marketplace of ideas, there is no shortage of strategies for investing to produce superior returns. These range from the ‘crackpot’ infomercials schemes that infest early morning television to people that are afraid of the stock market altogether, and also include the research of Nobel laureate economists. The key question for an aspiring investor to ask is what they can learn from each method and strategy.

Let’s start with the Nobel economists. There have been many prominent thinkers who have extolled the virtues of portfolio diversification as it relates to investment in the stock market. The analysis and conclusion of their models are very logical and convincing. When combining securities whose price volatility is not highly correlated, the aggregate effect can be to lower the volatility for the total portfolio, while still preserving average returns. The factor that this analysis misses is the impact of rare, but catastrophic events like a total market collapse. While it is true that portfolio diversification can reduce normal volatility, it is also true that this diversification will not protect against a systemic market disruption.

On the other end of the spectrum, we find people who are afraid of the stock market altogether. Many of the people who express this sentiment were heavily influenced by the stock market crash of 1929 and the great depression. Typically, these people gravitate toward the perceived safety of bonds in lieu of stocks. The implicit problem with this strategy can take one of two flavors. The first is if the bonds are conservative low-interest instruments with guaranteed principal values. There is a significant risk that the value of these bonds will not keep pace with inflation. The other side of risk with bonds is if the investor seeks out high-risk bonds that pay out attractive interest rates, but are issued by companies in dangerous financial condition that may default on their debt obligations.

The final piece of the spectrum is the ‘crackpot’ schemes that are pushed by slick-sounding hucksters. Most of these so-called ‘fool proof’ systems promise fabulous returns by following a few over-simplified steps. Typically, these systems are designed for a particular market environment. When the market shifts, the strategies that once produced tremendous wealth can suddenly generate crippling losses. A prime example is the ‘house flipping’ mania that swept across the country during the real estate bubble. One investor after another reported tremendous gains from buying houses, doing modest rehab work, and then re-selling the house for a significant profit. This system seemed to be working great until the market shifted and the speculative buyers disappeared. At that point, there were suddenly a large number of people holding investment properties that they couldn’t afford to pay the mortgage on, could no longer afford to rehab, and were not able to rent out for a sufficient amount of money to pay the mortgage and taxes.

Each of these strategies carries strengths and weaknesses. The optimal way to blend these factors in an advantageous way is what has been affectionately labeled the “barbell” strategy. The basis for this name is based in the notion of combining relatively stable assets such as income real estate with speculative investments such as stock options. Traditional investment theory recommends channeling funds into the middle of the investment spectrum with a diversified stock portfolio. However, the impact of rare events has shown a need for stability that stocks do not adequately provide. Thus, in order to capture upside growth opportunities it is optimal to speculate with a small portion of the total investment portfolio so that the risk of loss is mitigated by the stable portion of your portfolio.

In the end, this style of investing defies almost all of the advice that is popular in the news media. Traditional advice is tilted toward primary investment in the false sense of security that is offered by a ‘diversified’ portfolio of stocks. Unfortunately, this strategy lacks the ability to withstand rare market disruptions, while possessing a limited upside growth opportunity because of the portfolio’s diversified nature. Prudent investors should seek to build a base of returns from assets like income real estate that are spread around in fragmented markets so that speculative opportunities can be pursued without endangering the base portfolio value.

]]> http://www.creatingwealthpodcast.com/57-the-barbell-strategy-of-investing/feed 0 foreclosures,jason hartman,loan modification,mortgage modification,properties investment,property investment,property management companies,reo The “Barbell” strategy of investing - In the marketplace of ideas, there is no shortage of strategies for investing to produce superior returns. These range from the ‘crackpot’ infomercials schemes that infest early morning television to peopl... (http://www.creatingwealthpodcast.com/wp-content/uploads/2009/12/barbell-300x144.jpg)The “Barbell” strategy of investing In the marketplace of ideas, there is no shortage of strategies for investing to produce superior returns. These range from the ‘crackpot’ infomercials schemes that infest early morning television to people that are afraid of the stock market altogether, and also include the research of Nobel laureate economists. The key question for an aspiring investor to ask is what they can learn from each method and strategy. Let’s start with the Nobel economists. There have been many prominent thinkers who have extolled the virtues of portfolio diversification as it relates to investment in the stock market. The analysis and conclusion of their models are very logical and convincing. When combining securities whose price volatility is not highly correlated, the aggregate effect can be to lower the volatility for the total portfolio, while still preserving average returns. The factor that this analysis misses is the impact of rare, but catastrophic events like a total market collapse. While it is true that portfolio diversification can reduce normal volatility, it is also true that this diversification will not protect against a systemic market disruption. On the other end of the spectrum, we find people who are afraid of the stock market altogether. Many of the people who express this sentiment were heavily influenced by the stock market crash of 1929 and the great depression. Typically, these people gravitate toward the perceived safety of bonds in lieu of stocks. The implicit problem with this strategy can take one of two flavors. The first is if the bonds are conservative low-interest instruments with guaranteed principal values. There is a significant risk that the value of these bonds will not keep pace with inflation. The other side of risk with bonds is if the investor seeks out high-risk bonds that pay out attractive interest rates, but are issued by companies in dangerous financial condition that may default on their debt obligations. The final piece of the spectrum is the ‘crackpot’ schemes that are pushed by slick-sounding hucksters. Most of these so-called ‘fool proof’ systems promise fabulous returns by following a few over-simplified steps. Typically, these systems are designed for a particular market environment. When the market shifts, the strategies that once produced tremendous wealth can suddenly generate crippling losses. A prime example is the ‘house flipping’ mania that swept across the country during the real estate bubble. One investor after another reported tremendous gains from buying houses, doing modest rehab work, and then re-selling the house for a significant profit. This system seemed to be working great until the market shifted and the speculative buyers disappeared. At that point, there were suddenly a large number of people holding investment properties that they couldn’t afford to pay the mortgage on, could no longer afford to rehab, and were not able to rent out for a sufficient amount of money to pay the mortgage and taxes. Each of these strategies carries strengths and weaknesses. The optimal way to blend these factors in an advantageous way is what has been affectionately labeled the “barbell” strategy. The basis for this name is based in the notion of combining relatively stable assets such as income real estate with speculative investments such as stock options. Traditional investment theory recommends channeling funds into the middle of the investment spectrum with a diversified stock portfolio. However, the impact of rare events has shown a need for stability that stocks do not adequately provide. Thus, in order to capture upside growth opportunities it is optimal to speculate with a small portion of the total investment portfolio so that the risk of loss is mitigated by the stable portion of your portfolio. Jason Hartman clean http://www.creatingwealthpodcast.com/57-the-barbell-strategy-of-investinghttp://media.blubrry.com/creatingwealth/www.creatingwealthpodcast.com/media/FFRTheBarbellStrategy.mp4 http://feedproxy.google.com/~r/creatingwealthvideopodcast/~3/bhJ66DOigCY/55-re-inflating-the-debt-bubble http://www.creatingwealthpodcast.com/55-re-inflating-the-debt-bubble#comments Mon, 04 Jan 2010 16:16:47 +0000 info@creatingwealthpodcast.com (Jason Hartman) http://www.creatingwealthpodcast.com/?p=681 Re-Inflating the Debt Bubble

Reading the news has never been the best way to inspire optimism. This phenomenon has never been more true than it is today for financially astute people that are aware of causes and consequences. In a recent press conference, the US President was touting a new blitz of government programs to get the US economy “back on track.” On the surface, this seems like a laudable goal, until you consider what is meant by getting the economy back on the track it was previously traveling.

It is not a secret that the precipitous collapse of the US economy was created by a prolific expansion in debt financed investment and consumption. This helix of credit escalated asset prices upward in a speculative bubble until they were so high new buyers could no longer be found to continue paying the ever increasing prices. As the prices contracted, many people and funds with overleveraged positions found themselves ‘upside down’ when values plunged below the purchase prices. This downward vortex was fed further by people who had purchased home mortgages that they did not have the capacity to afford based on the assumption that their homes would continually increase in value. As prices fell, foreclosures increased, which further depressed prices, which created more foreclosures.

Most people of even an elementary education level intuitively know that this much debt cannot be undertaken without a tremendous level of risk. True economic growth is fueled by increases in the level of productivity for labor output that allows a nation to increase the amount of output with the same amount of input. Misalignments of prices from market manipulations frequently disrupt this natural progression of labor productivity increases with boom and bust cycles. The unfortunate fallout of this phenomenon is that politicians are frequently more interested in creating an artificial ‘boom’ that they can claim credit for than fostering genuine economic growth

For evidence of this phenomenon, one must look no further than the efforts of the current Presidential administration to re-inflate the debt bubble as a means of artificially propping up the economy in absence of a discernable improvement in the underlying fundamentals. After many months of campaigning against traditional populist straw dogs of “Greed” and “Corporate America” the people currently in charge are repeating the exact same actions that perpetuated the last debt bubble.

For example, one of the ‘fixes’ proposed was to increase allowable debt levels so that more people could refinance their homes. Another round of government sponsored programs was to give away taxpayer money to new home buyers and new car buyers. In each of these cases, the government is directly encouraging further indebtedness to finance short-term consumption. The philosophy guiding these actions is a belief that this debt-financed consumption will “get the economy moving” again.

Looking at the total credit outstanding across all sectors as a ratio of Gross Domestic Product shows a startling trend of increasing indebtedness. Even more startling is the fact that the recent economic collapse served as little more than a speed bump in this upward trajectory, and all signs point to the current administration accelerating the debt bubble with ballooning record budget deficits and fiscal policy directed at encouraging debt to stimulate short term consumption.

The intense irony of this situation is that it is a carbon-copy repeat of the behaviors that caused the current financial mess in the first place. Sustained economic growth can only come from production and innovation. These things cannot be produced by government fiat or market manipulations. They must emerge from individual people having the right incentives to create valuable products and services. As long as the government continues to engage in ‘smoke and mirrors’ forms of market manipulations and debt bubble inflation, it is not very likely that the necessary conditions for a market recover will emerge.

Packaging your Commodities: Commodity Investing through Residential Real Estate

For most people, it is difficult to read through a financial newspaper or watch late night television without seeing repeated (possibly obnoxious) exhortations to invest in commodities such as gold or silver. The logic of these advertisements is frequently sound, since it is certainly true that government irresponsibility is leading toward a currency collapse and massive inflation. What frequently gets left out of the analysis is the other options available for investment that offer far greater prospects for return than gold or silver.

At the Financial Freedom Report, we are in absolute agreement over the prospect for commodity price inflation in the future. We are in absolute agreement over the massive deficits, crushing debt, and lax monetary policy of the government being a harbinger of runaway inflation over the coming decades. We are also in agreement over the dimming long-term prospects for the stock market, since there does not appear to be a new pool of investment capital to propel the stock market into an upward spiral like the one experienced over the last 25 years.

The strategy that we advocate at the financial freedom report is to use the attributes of rental real estate to invest in the commodities used for home construction. By following this strategy, we gain ownership of valuable commodities such as wood, concrete, petroleum products, and other building materials with the advantage of leverage from the bank and tax advantages from the government. We affectionately refer to this phenomenon as ‘packaged commodity’ investing because the commodity products are packaged into a residential home instead of sitting in a warehouse. The culmination of this strategy lies in the fact that commodities packaged into real estate investments can be rented to tenants. As an investor, this allows you to purchase commodity products while outsourcing the interest payments to a tenant and hedge against inflation with fixed rate debt, while delaying the payment of taxes through a section 1031 exchange.

*Theoretical example created through www.building-cost.net

The way that this strategy ultimately plays out is that the packaged commodities produce rental income through your property while inflation pushes up the cost of materials and the cost of labor. Over time, these increases in construction costs will generate a ‘rising tide’ that drives up market values. The cost of construction for new homes is split between materials and labor roughly even, with a contractor profit margin right around eleven percent of the construction cost. As the cost of materials and the cost of labor rises, it is likely to drive increases in replacement cost since the contractors do not have the ability to absorb large cost increases into their profit margins over an extended period of time. In practice, this will result in cost increases being passed along to the consumer in the form of higher prices.

Furthermore, it is important to consider the fact that many people need to be paid from the contractor profit margin on new construction. This makes home building an inherently volatile industry, since profit margins can expand or contract very dramatically, depending on the market cycle. Because of this, we advocate a strategy of purchasing attractive rental properties from somebody else instead of moving into the homebuilding business ourselves. This strategy allows us to ‘outsource’ the risks of new construction and focus on finding attractive deals.

*Theoretical example created through www.building-cost.net

An example of how this dynamic plays out is illustrated in the theoretical graph comparing market values against replacement costs. In an environment where the market value exceeds the replacement cost for new construction, it will trigger new housing starts by builders that recognize the opportunity for profits in excess of normal market conditions. In the case of a speculative bubble like the one that recently collapsed, huge amounts of resources pour into the home building industry to pursue the large profits. As this shift continues, the market will eventually become over-built with inventory, resulting in downward pricing pressure as bulders attempt to sell off their inventory at discounted prices.

Once the market value falls below the replacement cost in a given market, it will create a sharp decrease in new housing starts. The reason for this phenomenon is because people will be able to purchase existing homes for much less than the cost of construction from individuals that need to sell or from banks that are attempting to liquidate foreclosures. During this time, builders will find themselves in a terrible financial bind since the market prices will not be high enough to profitably build new houses. In many cases, bulders will have to operate at a loss for an extended period of time while they build out on permits and lots that have already been purchased in an attempt to recourp some of the costs. Over time, if the market values inflate back above the replacement cost, it will trigger another wave of building.

*Theoretical example of market prices and replacement costs

As this boom-bust cycle plays out, astute investors will have tremendous opportunities to profit. The most pronounced of these opportunities is to buy when prices are depressed and sell when prices are inflated. On the surface, this sounds very simple to do but it is an extremely difficult strategy to execute, because it requires prospective investors to move contrary to the prevailing market forces. During speculative booms or value rallies, the pressure on everybody is to buy and buy fast. When values are going up, up, up, there is no shortage of people who are willing to pay silly prices on the belief that they can always sell for a profit. Conversely, when values are depressed it can be very difficult to get the necessary investment capital for financing purchases. There will be more sellers than can possibly be imagined, but buyers will be extremely scarce.

At The Financial Freedom Report, we advocate a strategy of counter-cyclical buying for long term cash flow and appreciation. We prefer to target properties at prices below the replacement cost that generate attractive levels of cash flow. This produces a two-headed benefit of residual cash flows from rental income that can be used to pay for the mortgage, and a naturally low purchase price that is likely to become very attractive when market values eventually regress back toward the replacement cost. The key to this strategy lies in being able to ‘wait out’ the market gyrations with strong cash flow. By avoiding large amounts of negative cash flow, investors will remain solvent so that when inflation pushes up the replacement cost for their property and market values regress back to equilibrium, creating attractive gains in value.

It is unfortunate to think about the way in which the government has created speculative bubbles and inflation. We would all prefer to live with a responsible government, but that does not appear to be a realistic possibility at any point in the near or distant future. Because of this, prudent investors should position themselves to take advantage of government irresponsibility. The best way to accomplish this goal is by capturing attractive purchase prices from deflated bubbles, and by riding the wave of inflation as the cost of materials and the cost of labor push up the replacement costs for properties. By engaging in this strategy for wealth creation, it will place astute investors in control of real assets that produce real value for real people. Over time, this will allow you to side-step market manipulations and speculative bubbles while providing for the needs of yourself and the people you care about.

Why aren’t more people investing in income properties when it’s the most lucrative, safest choice in history? Good question. Probably because people would rather watch television than improve their financial condition. Sure, everybody says they want to get rich but what are they actually doing about it besides flapping their gums?

Talking wistfully about something you have taken no action to achieve is called whining. Don’t go into the Green Parrot Bar in Key West with that attitude. It’s an official ‘no sniveling’ zone.

So let’s take a quick peek a some of the more common excuses people use to not get wealthy in real estate.

Reason #1 – “I don’t have enough cash.”

Sorry. Not a legitimate reason. Find a great deal and cash will find you. Negotiate the purchase price! Take equity out of your home – it’s losing value by the day in there anyway! Have you looked into the sweet $5,000 down deal Platinum Properties Investor Network has arranged in Atlanta? Next!

Reason #2 – “I don’t have any time.”

Sorry. Everybody’s got time. You need to prioritize. We’re talking about your financial future here. Surely, it’s more important than three hours of slumming in front of the television or computer. Toss the kids and spouse in the car on a Saturday afternoon and cruise the neighborhoods looking for ugly houses for sale.

Reason #3 – “Everyone says this stuff doesn’t work.”

Everyone? Ask Donald Trump, Jason Hartman, or Steve Wynn. True, you’re probably getting a skewed perception of reality if your primary source of information is late night tv. This stuff does work when you do it right.

To learn how to do real estate the right way, check out www.JasonHartman.com for The Complete Solution For Real Estate Investors™

Reason #4 – “Realtors are a difficult bunch.”

This is very NOT true when you work with Platinum Properties Investor Network. Our local area managers are real estate agents who LOVE to work with you. If they don’t, we quit sending them business and, believe us, they want our business.

Reason #5 – “I might lose money.”

Real estate is way safer than the stock market. It’s funny. The pattern we’ve noticed over more than two decades in this business is, the more you education you get, the less risky real estate is. It’s a calculated risk, one you can control much better than Wall Street.

Reason #6 – “I don’t know what to do.”

You don’t need to know it all. You just need to know who to ask. Don’t let analysis paralysis get in the way of the rest of your life. It’s that important! Come to a Platinum Properties Investor Network seminar, then set up an appointment with one of our expert investment counselors and then do it. Pull the trigger. Buy your first property. We’ll hold your hand if needed and advise you every step of the way.

Had enough myth-busting for one day?

Fiscally Fit: A check-up for your financial fitness

1. What happens to home values when the replacement costs increase?

   1. The go up like a rocket

   2. They go down because nobody can afford to build

   3. They are pulled toward the cost of new construction

   4. They don’t change . . . construction costs don’t matter

2. What is happening to the economy now that the debt bubble has burst?

   1. The recovery going to happening, because Ben Bernake said so

   2. The government attempting to re-inflate the debt bubble in order to stimulate short-term demand

   3. It’s just like the great depression, only worse

   4. The recovery has already started . . . the government reporting agencies are just suppressing the information

3. What is happening to real unemployment?

   1. It is going up, contrary the manipulated numbers that are published

   2. Can’t you read? . . . it’s going down because the stimulus package is working

   3. It’s already higher than during the great depression

   4. It’s going to be back below five percent in no time

4. What happens when government spending becomes a bigger portion of total GDP?

   1. It gets the economy back on its feet

   2. It erodes long-term growth by displacing private investment capital

   3. It make people more equal by re-distributing income

   4. It makes the environment better because of government regulation

Answers: 1) c, 2) b, 3) a, 4) b

Explanation of Answers:

What happens to home values when the replacement costs increase?

Over time, home prices naturally converge toward the cost of construction. The reason for this is twofold. First, new housing starts tend to boom when prices are high, creating an increase in supply that generates more competition and usually lowers market prices toward equilibrium. Second, when prices are depressed and market values dip below the cost of construction, new housing starts will drop off precipitously. As an extended period of time passes with no new homes being built it will slowly pull prices up toward equilibrium. Thus, in all cases the cost of construction plus land is the approximate equilibrium point to which home prices naturally converge.

What is happening to the economy now that the debt bubble has burst?

The impact of the debt bubble bursting was a dramatic contraction in the availability of credit. This meant that many people who were previously spending on credit are no longer able to continue spending. In this kind of economic environment, many people begin ‘deleveraging’ or actively reducing their debt burden. However, in this economic cycle the government is attempting to stimulate short term demand with credit based spending, ostensibly re-inflating the debt bubble. The way that they are doing this is with tax credits for new home buyers or rebates for people that trade in old cards to purchase new ones. These programs are all encouraging increased indebtedness in an attempt to stimulate the economy. Unfortunately, sustained economic growth can only come from increases in production and productivity, and none of the government programs is addressing either fundamental factor of economic growth.

What is happening to real unemployment?

The way that government statistics track unemployment is to remove ‘discouraged workers’ from the pool by only tracking people that are actively seeking work. Fundamentally, this means that people who stop looking for work (and are not employed) are removed from the pool for counting the statistics. This means that the total number of jobless people can actually go up, while the unemployment rate goes down like what happened in July’09. Furthermore, the official numbers count people who are under-employed in part time work but would like to work full time as fully employed. It also counts people who work in commissioned sales like Real Estate or Insurance as being employed, even though they may not have earned a commission check for quite some time. When analyzing the strength of the economy, it is important to not only look at the published statistics, but the underlying assumptions.

What happens when government spending becomes a bigger portion of total GDP?

The important to thing to consider when talking about government spending is that the government cannot spend a single dime without taking it away from somebody else first. This comes from direct taxation, borrowing in the credit markets (displacing private capital), and printing money (devaluing the savings and equity of all people who hold dollar-denominated assets). As the government grows larger, it must necessarily displace or destroy private investment and spending to finance its operations. Since government operations are necessarily politically motivated, it naturally follows that the real output of government spending will result in substantially less production and productivity improvement than if that same capital had been deployed though private channels. As the government seizes control over more and more of the economy, it pushes more decisions onto the desk of politicians and neutralizes the market forces that create economic growth.

The recent financial news has been abuzz with exhortations over the anticipation of an end to the recent financial calamity. The stock market has already discounted this optimism into its valuation, as current market values represent a multiple of forecasted earnings per share well in excess of historical trends. The conventional wisdom is that the economy will get “back on track” in the next few months and resume its previous trajectory of long term growth. The factor that nobody seems to be considering is the fact that the previous ‘track’ the economy had been traveling down is the express route to collapse that generated this whole financial meltdown in the first place.

It is not a secret that the explosive economic growth experienced during recent years was largely caused by debt financed consumption artificially increasing demand for goods and services. Unfortunately, this debt bubble inflated beyond the capacity of many people and financial institutions to carry. When the bubble eventually burst, it created a cascading devaluation of financial instruments, which triggered forced deleveraging, which further depressed values, which triggered more forced deleveraging.

Now that the government is throwing money away at an unprecedented, breakneck speed there is additional stress on the system since the overspending is being financed with the undertaking of additional debt and monetary expansion by the Federal Reserve. These irresponsible actions will eventually have the impact of raising interest rates, and may push the economy back into recession.

The most likely way that this scenario will unfold is that the Federal Reserve will either contract the money supply in response to inflationary pressure or allow the currency to inflate until investors refuse to purchase bonds at face value and demand higher coupon rates. Thus, the ‘front door’ for interest rate increases is controlled by the Federal Reserve since they can contract the money supply, which will force up short-term interest rates and incentivize long-term bondholders to sell and buy short-term notes with higher yields. The “back door” for interest rate increases occurs when investors lose confidence in the ability of the government to meet its debt obligations without devaluing the currency and refuse to purchase bonds unless they are discounted by the treasury.

These interest rate increases will have two significant impacts on the economy. The first is in relation to long-term interest rates, which serve as the basis for fixed rate mortgages. When mortgage rates are forced up in conjunction with long-term bonds, it will immediately slow whatever housing recovery may be under way as it increases the cost of borrowing to purchasers. This will have the net effect of decreasing the amount of house that can be purchased per dollar of monthly payment. The impact of this phenomenon will be a downward shift in the range of home prices that people can afford, which will ultimately stall the housing recovery.

When these effects eventually spill over to short term rate increases when the Federal Reserve eventually begins a campaign to fight inflation, the impact will travel further downstream in the economy. The reason for this downstream impact is the fact that short term interest rates influenced by the Federal Reserve are the basis for revolving credit account and lines of credit that many consumers have been using to finance their consumption spending. When the short term interest rates increase, it will initiate an upward shift in the amount of interest owed on consumer debt and will also increase the required payments. This will have the net effect of reducing the amount of income available for consumption spending.

As these two effects compound on top of one another, they create a very real possibility of a ‘double dip’ recession that continues downward after a brief period of stabilization. The ultimate reason for this phenomenon is a continued campaign of market manipulation by the government to ‘stimulate’ the economy in absence of market fundamentals that are supportive of sustained long term growth. Unfortunately, this boom-bust cycle will continue indefinitely until the focus eventually returns to creating the necessary market fundamental for long term growth instead of sponsoring government programs to stimulate demand with borrowed money, but make no changes in the incentives that guide investment decisions.

As astute investors, it is important to be wary of market sentiment that amounts to ‘wishful thinking’ for an economic recovery in the absence of supporting fundamentals. Recognizing these boom-bust trends and the propensity for government entities to manipulate the financial markets is a key tool for investors that are looking to protect their wealth and prosperity. At the Financial Freedom Report, we advocate investment in real assets that are secured by fixed-rate debt and rented out to tenants as the optimal strategy for fighting this campaign of market manipulation by the government.

In the last few months, Jason has had some big name guests on the Creating Wealth Show. Some of Jason’s recent guests of note are Pat Buchannan, Robert Kiyosaki, and Catherine Austin Fitts.

Pat Buchannan is well known in the United States as an outspoken conservative voice in favor of limited government, and less globalization. In his Jason’s interview with Pat, they discussed the prospect for large amounts of inflation in the near future. Pat commented that the US debt would be floated away on a sea of inflation. At the Financial Freedom Report, we couldn’t agree more with this sentiment, and advocate that investors defend their financial wellbeing with income producing assets that are financed with fixed-rate debt.

Robert Kiyosaki is the author of the noted “Rich Dad” series of books, games, and videos. In his interview with Jason, he discussed the importance of financial education in achieving success. They also discussed the importance of passive income to financial success, and the impact of dynamic investment strategies. Robert rightly pointed out that it is possible to make money in any kind of investment, and also possible to lose your shirt in any kind of investment. The key is always to become educated. At the Financial Freedom Report, we couldn’t agree more with this sentiment.

Catherine Austin Fitts is the founder of the Solari report, and is a renowned thinker in the financial world. She advocates for a decoupling from the centralized banking model that channels influence toward the dominant industry players and government. Put another way, she is an advocate of free markets but the current system is nothing even remotely resembling a free market. We advocate direct ownership of investment property as a way to help circumvent the systemic bias toward institutional players.

The Creating Wealth show will continue to seek cutting-edge thinkers that help provide insight into investing and the economy. We firmly believe in the importance of becoming educated, and the best source of education is frequently to seek advice from experts. This does not necessarily mean that we agree with everything that all of our guests say . . . what it means is that we believe there is always something that can be learned.

Jason Hartman’s Creating wealth show has had a wide variety of notable guests over the last few months. One of Jason’s recent guests was Gillian Tett, a British journalist, whose recent book Fool’s Gold confronts the current banking and financial crisis. In March 2009, Dr. Tett was named the Journalist of the year at the British Press Awards. During her interview with Jason, she spoke at length about the systemic problems of the current system, and potential solutions.

The principal problem inherent in the current banking system is that free market forces are not allowed to prevail, as demonstrated by the government efforts to bail out failing banks. The problem created by this system is that when financial institutions are protected from failure by the government, it incentivizes them to take extremely large business risks since their upside is vast, and their downside is covered by the government. In response to this upside-down set of incentives, many have called for increased regulation of banks. One of the difficulties discussed was the fact that some of the problems that precipitated the credit collapse were the direct result of regulations imposed on the banks by public authorities.

Ultimately, the principal source of the problems for financial institutions is the fallacious notion that risk can be eliminated. By perpetually shifting risks onto counterparties, the financial world devolves into a large game of ‘hot potato’ where everybody tries to toss the hot potato to somebody else before the timer expires and the ticking bomb explodes. An example of this phenomenon is the practice of securitizing mortgage products into collateralized debt obligations. As these products were combined with one another, it became more and more difficult to ascertain the risk profile of a given security. When the credit crisis emerged, these became ‘hot potato’s’ as investors tried to offload the securities onto one another before the values collapsed.

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- Can finance up to 10 properties with conventional financing
- Total ROI with tax savings – 27%

This large, single-story home is impressive. When purchasing this home, investors have the unique opportunity to finance up to 10 financed properties in the Dallas market with conventional financing. (7 properties financed through a local lender can also be possible – that is a total of 17 properties!) The Dallas real estate investment market is very stable. It never experienced the bubble market burst in home values like many other large cities. While other markets shot up in value and are now experiencing dropping prices, the Dallas real estate investment market continues to appreciate at a healthy annual rate. With guaranteed tenant placement, 1st year property management, and home warranty included, this income property is an investor’s dream come true!

Property Highlights:
- Jonesboro, GA
- Fully rehabbed property
- Only $5,000 down
- Total ROI with tax savings – 64%

Let’s travel back in time. Remember when good income properties required only 10, 5 or even 0 percent down? These coveted numbers have not been feasible for some time… until now! Only $5,000 down will buy you this 3 bedroom, 2.5 bathroom income property in Atlanta, GA. Listed within the top 10 cities Americans are relocating to in 2009 sits this upbeat, capital city  of Georgia. With a growing population of over 5 million citizens, Atlanta is home to many stillhealthy corporations, including Coca-Cola (KO), and marketing firms like Catapult New Business. To top it off, this house has a tenant in place upon purchase. Don’t miss your chance to secure your financial future with these prudent income properties.

Property Highlights:
- Jonesboro, GA
- Fully rehabbed property
- Built 2007
- 5 bed, 3 bath

Like-new house that is in a new neighborhood. The builder still has homes for sale. The house is the first house on the left when you pull into the neighborhood. Built by the third largest private home builder in the country.

http://www.JasonHartman.com

The Bottom Line: Current Investment Outlook

As with all difficult times, it can be very hard to see glimmers of light in the midst of economic freefall. With the current trajectory of job losses, economic contraction, and government intervention into the economy, there are many people who are on the verge of giving up hope for a brighter future. The most important point to consider in this situation is that national policy is not within the circle of influence for most individuals. What this ultimately means is that we must focus our energy on the things that we can do within the political environment we live in.

Thus, our attention must shift away from the speed in which the economy is being nationalized and move toward the ways we can position ourselves to avoid personal financial disaster from said circumstances. We must proactively direct our focus off of the way financial markets are being manipulated, and shift in the direction of learning how we can structure our portfolio to avoid the market manipulation entirely.

Make no mistake that there are very difficult times ahead. The generations that were swept to wealth on the bull market of the last 25 years will soon realize that the fundamentals driving previous market rallies are no longer present. The notion of comfortable retirement may extend out of reach for ordinary workers who follow the dogma of savings and investment in the stock market, as returns disappoint and consumer prices skyrocket from government monetary policy.

As proactive, astute investors, it is the responsibility of all of us to structure our finances in such a way that our future is not dependent on the actions of a political movement. At the Financial Freedom Report, we recommend accomplishing this goal through investment in rental real estate located in sensible markets, financed by high- quality, long-term debt. By maintaining a keen focus on the actions that are within our sphere of influence, each of us can create a financial future that remains bright in the midst of chaos and uncertainty in the marketplace.

What’s In a Deal? – Pro-Forma Analysis of Platinum’s Hottest Properties

One of the greatest services that Platinum Properties offers (for free) is to deliver Pro-Forma analysis of pre-screened real estate deals. These Pro-Forma summaries are constructed using the Property Tracker software suite, and communicate a wealth of useful information about the deal in question. To demonstrate the power of this tool, let’s examine one of the low down payment deals in Atlanta.

In the upper part of the Pro-Forma, you will find the location of the property along with the bedrooms, bathrooms, and square footage. The summary also includes the estimated purchase price and market value, along with the estimated down payment. In this case, the house is a special deal where the investor can purchase for only $5,000 down with a “two-step close” that involves purchasing the property and then immediately refinancing it to get into the deal for much less down than is typical.

Other useful figures on the Pro-Forma are the estimated loan fees, closing costs, and rehab costs to get the property ready for renters. These items are added up to estimate the total cash requirement for the investment, and are displayed next to the cost per square foot and forecasted rent per square foot. As you move down the left hand side of the summary, you will see the forecasted monthly and annual rents, expenses, cash flow, and net performance.

One of the most important things to note is how Platinum Properties uses very conservative assumptions in constructing its Pro-Forma analysis. First of all, Platinum always incorporates the impact of vacancy in the rent income projections. Many other (and less ethical) sales organizations fail to account for the fact that finding new renters can sometimes take time, and will inflate the income forecast for their deals by neglecting to incorporate the impact of rent vacancy. Furthermore, Platinum only forecasts value appreciating at 6% per year, which is slightly below the long-term average rate of real estate appreciation. This is purposefully done to avoid presenting deals that are heavily dependent on appreciation, and is fully consistent with the Platinum philosophy of only investing in properties that make sense on the day you buy them.

Looking over to the right side of the Pro-Forma, you will see the estimated loan information, as well as financial indicators. The indicators provide a highly valuable barometer of the characteristics implicit in the deal. The first item in the indicators section is the debt coverage ratio, and demonstrates the extent to which net operating income for the property can cover the debt expenses. It is worth noting that this ratio has somewhat limited value, since it is highly influenced by the down payment amount. (More equity = less debt = better coverage.) At the Financial Freedom Report, we like to carry more vs. less leverage, since more leverage lets us invest our available cash in more deals.

The next two items on the Financial Indicators section are the Annual and Monthly Gross Rent Multiplier. What these numbers show is the ratio of the purchase price relative to the annual or monthly rent. The importance of this ratio lies in the fact that it demonstrates the extent to which the property produces an attractive amount of rent revenue. When this ratio is low, it means the property generates a large amount of revenue relative to its price, and vice-versa when the ratio escalates. We can clearly see that the price for this deal is seven times the annual rent revenue. Practically speaking, this is an attractive rent multiplier since it means that the gross revenue collections will be equal to the purchase price in seven years. Bubble markets frequently have Annual Gross Rent Multipliers in excess of 10, with some going above 15. Needless to say, we do not advocate investing in markets that produce cash at such a low rate.

The next item is the Capitalization Rate or “Cap Rate” as it is frequently referred to by realtors. The Capitalization Rate indicates the Net Operating Income as a ratio of the Purchase Price for a property. It is important to note that the Cap Rate does not incorporate the impact of debt servicing, and only shows the rate of operating cash flow you would experience with no leverage. (Did we mention that we love using leverage to increase the total returns of our investments?)

The next item on our list is the Cash on Cash Return. When investing in a flat or declining market, this can become one of the most important indicators for a deal. The reason for this is because it measures the annual net cash flow as a ratio of the total cash invested. Practically speaking, this shows the rate at which your initial investment will generate cash, with no value appreciation incorporated. In finance, there is a popular statement that “Cash is King” . . . that sentiment is no less true in real estate. It is also worth mentioning that if you can reduce the amount of initial cash invested while still maintaining positive cash flow, your Cash on Cash Return will rise dramatically. This happens because you are lowering the amount you need to invest in order to capture the rental income. Needless to say, we like this strategy quite a bit.

The last two items on the Indicators section is the Return on Investment (ROI) and the ROI with tax savings. This represents the total value you are capturing as an investor when looking at cash flow plus future appreciation in relation to the amount you initially invest.

This is the place where leverage has a BIG impact, because it lets you capture more appreciation for less initial cash. It is important to note that appreciation can be very volatile and is not captured until you sell or refinance the property. However, in the long term, a dollar of cash flow and a dollar of appreciation are the same money. Because of this, we like to look at the total ROI of our investments as the primary indicator of their long-term prospects. In this case, the extremely low down payment required catapults the ROI into the stratosphere with an astounding 77% return on investment after tax savings!

The final section that you will find is the key assumptions and comments. This is shown to be clear in the way that the Pro-Forma is built so that investors can judge the quality of the estimates for themselves. Thus, we have seen that the Pro-Forma is a very powerful tool for evaluating deals, and Platinum Properties provides it for free to prospective investors. By learning to read, understand, and act on the information contained within these summary sheets, investors can generate tremendous amounts of wealth that will allow them to realize their dreams.

The Creating Wealth Show #105:

Propelling investment success using econometrics and

competitive analytics

In the one hundred and fifth episode of Jason’s extremely popular Creating Wealth show, he interviews David Savlowitz, the head of Competitive Analytics (CA), a niche full-service market intelligence firm. In this show, David explains the way that his firm uses a multiplicity of data to generate more robust information for their clients than can be obtained by the simplistic scorecards that are employed by most of the financial media. The methods that CA employs analyze supply and demand by using statistics, econometrics, predictive modeling, comprehensive research, and applied mathematics.

In this show, Jason talks with David about the ways that Competitive Analytics uses comprehensive data analysis to drive prediction models for their clients. One of the methods that they frequently employ is an economic composite score that is based on a multiplicity of weighted indicators. When applying this methodology to the general economy, David’s model is predicting the bottom of the economic cycle in Q4, 2009 with a return to equilibrium by Q4, 2011. Furthermore, David’s models are forecasting a U-shaped recovery that will have an extended trough. This stands in sharp contrast to previous V-shaped recoveries that experienced an immediate “bounce back” from the market lows. The reason for this extended trough is because a significant adjustment needs to be made in order to equalize the debt-financed over-consumption that fueled the recent asset bubbles.

The unique part of David’s methodology is the fact that his team uses a very wide variety of input variables in an attempt to capture future items that may become big swing factors. He rightly understands the implicit danger that can be present within quantitative economics for people that do not fully understand the analysis. This danger stems from the fact that econometric analysis uses trends in the past to predict the future, and thus cannot anticipate the impact of events that have never happened before. The importance of this insight comes from the fact that rare events like September 11th, 2001, the Russian Financial Crisis, and the collapse of credit default swaps were never incorporated into any prediction models because they had never happened before.

Each of these events had an unfathomable impact on the marketplace that left people who were blindly following technical trends of the past absorbing unbelievable losses (or pushing those losses onto the taxpayer in the form of a government bailout). As a point of reference; the hedge fund “Long Term Capital Management” was the brainchild of Robert Merton and Myron Scholes. It made heavy use of econometrics to undertake highly leveraged arbitrage trades in the bond market, but nearly collapsed the financial markets after the Russian Financial Crisis in September of 1998. This became the first iteration of a “too big to fail” argument, and is being used as the precedent for the government bailouts of financial institutions that are currently being pushed on the marketplace.

This is not to say that quantitative analysis and econometrics are implicitly dangerous. It is simply to say that it is a tool . . . a very powerful tool that needs to be understood before it is used. When applied by knowledgeable professionals, it can generate valuable insights. When given over to pseudo-intellectual or short-sighted agents, it can become a tool of mass financial destruction as the algorithms become an item of blind faith that drives insane investment decisions. As with all tools, the result depends largely on how it is used. Thankfully, David keeps the scope and limits of his analytics in perspective. A strong dose of this perspective is highly advised for anybody that seeks to incorporate econometric analysis into investment decisions.

]]> http://www.creatingwealthpodcast.com/38-the-creating-wealth-show-105/feed 0 The Creating Wealth Show #105: Propelling investment success using econometrics and competitive analytics - In the one hundred and fifth episode of Jason’s extremely popular Creating Wealth show, he interviews David Savlowitz, (http://www.creatingwealthpodcast.com/images/cwp.jpg)The Creating Wealth Show #105: Propelling investment success using econometrics and competitive analytics In the one hundred and fifth episode of Jason’s extremely popular Creating Wealth show... Jason Hartman clean 4:58 real,estate,podcast,jason,hartman,creating,wealth,invest,money,rental,property,income,investinghttp://www.creatingwealthpodcast.com/38-the-creating-wealth-show-105http://media.blubrry.com/creatingwealth/www.creatingwealthpodcast.com/media/FFR-CreatingWealth105-Econometrics.mp4 http://feedproxy.google.com/~r/creatingwealthvideopodcast/~3/Vtt6QPqbJGU/37-the-business-of-life-winners-take-action http://www.creatingwealthpodcast.com/37-the-business-of-life-winners-take-action#comments Mon, 19 Oct 2009 17:03:09 +0000 info@creatingwealthpodcast.com (Jason Hartman) http://www.creatingwealthpodcast.com/37-the-business-of-life-winners-take-action The Business of Life

By Douglas J. Utberg, MBA

Winners Take Action

The world that we live in is not short on information. In fact, the preponderance of information that we are constantly bombarded with can create a state of constant confusion that scares us into inaction. In the martial arts, this phenomenon is referred to as the “chattering monkey mind.” The key to success lies in filtering down to the useful information – and then decisively taking action.

This is especially important to remember since the preponderance of success and financial literature revolves around “systems” and “strategy.” This is especially true if you have ever suffered from insomnia and run across an “infomercial” on late-night television that advertises a “risk-free” system to make profits with “no money down.” It can certainly be fun to laugh at some of these marketing gimmicks, but even the best strategy in the world is completely useless unless you are willing to act.

Action involves incurring the risk of failure and criticism from friends and family. The factor that most financial books and infomercial systems tend to under-emphasize is the importance of taking the leap. The hitch is that the action must be guided by intelligent thought. Thought without action produces no results, because the strategies are never implemented. Action without thought is effectively the same as gambling, and only works if you are in exactly the right place at exactly the right time with exactly the right system . . . and even then, it may not work the next time you try it.

The proverbial “key” lies in being what Bill Fitzpatrick refers to as a “thinking person of action” . . . namely, somebody that thinks actively, absorbs information quickly, and acts decisively when the opportunity presents itself. In order to achieve this kind of coexistence between thought and action, it requires that your mind be constantly trained on thoughts of opportunities so that it is always ready to act.

Best Wishes, Doug

Please feel welcome to subscribe by

following the link below:

www.BusinessOfLifeLlc.com

Patrolling the Plastic: Keeping Track of the Consumer Credit Market (From the Chart Store Weekly Chart Blog for the week ending July 10, 2009)

Analysis of the total consumer credit outstanding shows that the last 10 years, the total consumer debt outstanding as a percentage of disposable personal income has rounded the hump from its all-time high, and is retreating downward. The recent credit market disruption has left many people deleveraging their debt positions, and is pushing this index down further. Unfortunately, the average amount of consumer credit outstanding is still very high relative to the average of 17.5% from 1959 to 1994. Much of the economic expansion in the late 1990s and early twenty-first century was based on debt-financed consumption.

The resultant debt bubble has compromised the ability of many families to continue with their prior spending habits. In practical terms, this means that a prolonged period of adjustment is very likely as consumers slowly move toward a sustainable equilibrium of credit that is nearer to the historical average. This period of adjustment is very likely to result in a downward shift in spending patterns, as well as the observed level of prosperity for the average consumer. Prudent investors should position their portfolios so that they control assets like entry-level rental housing that will be in demand by people who are adapting to the reality of living more modestly.

http://feedproxy.google.com/~r/creatingwealthvideopodcast/~3/4B8KfYABTDU/35-fiscally-fit-quiz-jason-hartman http://www.creatingwealthpodcast.com/35-fiscally-fit-quiz-jason-hartman#comments Mon, 12 Oct 2009 16:51:20 +0000 info@creatingwealthpodcast.com (Jason Hartman) http://www.creatingwealthpodcast.com/35-fiscally-fit-quiz-jason-hartman Fiscally Fit: A Check-Up for Your Financial Fitness

1. What is the best way to avoid future market bubbles?

a. Gold . . . lots and lots of gold.

b. A survival bunker isolated on 30 acres in the woods, surrounded by barbed wire.

c. By directly controlling universally needed assets.

d. By only investing with the “good” fund manager.

2. How does big government relate to big business?

a. Government works for us, and will stop those corporate pigs from cheating the little guy.

b. Government regulations shield big businesses from competition by increasing barriers to entry for new competitors.

c. Big Business has no influence on government now that the Republicans are out of power.

d. It doesn’t matter because all of the jobs in America are being outsourced to China.

3. What causes sustained price inflation?

a. Increases in demand from a hot economy pulling up prices.

b. Increases in the money and credit supply creating more dollars chasing fewer goods.

c. Big Oil, OPEC, and Corporate America.

d. Evil HMOs increasing the cost of health care.

4. What is the principal risk of econometric technical analysis?

a. There is no risk if you know what you’re doing.

b. The risk that your friends and relatives will become jealous of your success.

c. The risk of no government assistance if you are not associated with Goldman Sachs.

d. The risk of excessive reliance on quantitative models that do not have the ability to predict highly disruptive events that have never happened before.

Answers: 1) c, 2) b, 3) b, 4) d

Explanation of Answers

1) What is the best way to avoid future market bubbles?

Market bubbles result from large numbers of people flooding an investment simultaneously based on speculation that the values will continue to climb, even in the absence of supporting fundamentals. It is pleasing to assume that one can find a “good” fund manager who will anticipate these bubbles and avoid them, but the numbers clearly show that outperforming the market on a sustained basis is extremely rare, and that those who do so may only be “coin flippers” who happened to guess correctly over an extended period of time.

Controlling universally-needed assets such as rental housing helps individuals to avoid bubbles by decoupling from financial markets with cash-producing physical assets. Gold represents an inflation-stable medium of exchange (i.e., a constant value currency), but it does not produce regular cash flow, and is therefore dependent on the whim of speculators for its market price. Finally, survivalist isolation may be attractive to some people, but is not the first choice for most investors. Thus, it becomes necessary to find ways for avoiding market bubbles without totally exiting from society.

2) How does big government relate to big business?

Government regulations impact the cost of operation for business entities. As the government increases regulations, it makes things increasingly difficult for new businesses to grow, thus shielding large business entities from competition. The circle closes when the business entities spend on lobbying politicians for legislation that further protects them from competition. In this way, big business and big government become two sides of the same coin, standing in the way of innovation and growth.

3) What causes sustained price inflation?

Changes in commodity prices can create temporary spikes and troughs, but the way that overall market prices establish equilibrium depends on the level of output, the amount of money in the economy, and the velocity with which that money circulates. A spike in the price of one commodity cannot move prices in the entire marketplace unless that price spike significantly contracts production. The only way that prices can increase in a sustained manner is for the government to continually expand the amount of money in circulation at a rate greater than the productivity improvement of capital and labor.

4) What is the principal risk of econometric technical analysis?

Technical analysis can be a very powerful tool, but it lacks the ability to predict future rare events that have never happened before. The reason for this is because econometric algorithms are based on market movements in past years. These models frequently do a fantastic job of modeling normal market gyrations, but cannot incorporate the impact of events that have never happened before. Because of this, over-reliance on technical analysis leaves investors susceptible to the impact of rare events that cause massive market disruptions.

At the end of 2008, Sara informed me about an REO property in Indianapolis that was built in 2004, and available from the bank for a very attractive price. The only hitch was that the property needed some rehab and repairs. (Go figure – owners who get foreclosed on don’t always take the best care of their houses.)

In this case, the agreed-upon price from the bank was $57,000. To finance this deal, I worked with a mortgage broker from Wells Fargo that was referred to me by Sara. Since this was a low dollar loan, 20% down plus closing costs only came to $12,000 that I needed to bring to the table at closing. The bank sent the documents via overnight express and I signed them in the presence of a notary public, then returned them with the cashier’s check.

At this point, the area specialist became my best friend and greatest asset in closing the deal. (Her name is Angela, and if you do business in Indianapolis, I highly recommend that you talk with her . . . she regularly goes above and beyond the call of duty to get the job done.) Not only did the she help me to line up a property inspection and homeowner insurance, but she also put me in contact with contractors to do the rehab work, and stopped by the property during the rehab to keep tabs on the progress. My experience with Angela and all of the other people involved was so positive that I have subsequently decided to pursue another deal in the Indianapolis area. (Repeat business for all of the parties involved!)

Once the rehabs were completed, it was time to contract with a property management firm and rent the property to tenants. This is yet another way that the Platinum network created value for me . . . The property management company offered a rate discount to customers from Platinum, because of all the referrals that have come in from Jason’s organization.

The net result of all this work is a 3 bedroom, 2 bathroom house that rented out for $1,050 per month on a 12-month lease. The total cost including rehab and repairs was $69,000, and my monthly mortgage payment (including tax & insurance) is a whopping $460.57 per month. This results in a 1.5% rent to value ratio, and quite a bit of monthly cash flow. (In keeping with Jason’s “Refi Till Ya Die” strategy, this cash flow can be used to refinance the property and pull out cash for investing in more properties.)

One of the most important aspects to the “Complete Solution” offered by Platinum Properties is the properties that you do not see. The reason the properties you don’t see are so important is because Jason’s team frequently fields requests for low-quality deals that are rejected before their clients ever see them. The diligence and steadfast dedication exhibited by the team at Platinum Properties allows investors like myself to view an assortment of high-quality deals, without enduring the hassle of sifting through all of the “dogs” in hopes that somewhere in the pile of average and unremarkable deals there lives a diamond in the rough. By filtering the deals before they are presented to clients and investors, the team at Platinum provides a valuable service that saves an untold amount of time in research for potential investors. The best part about this process is that I am now free to spend my research time focusing on a few good deals, instead of sifting through pages and pages of marginal deals, resulting in a higher quality for all of my transactions.

The bottom line is that this entire deal would not have been possible without the network of contacts and local experts from Platinum Properties. Jason’s team has done the legwork to find high-quality people and properties in the targeted markets. Furthermore, they have pre-screened management companies to streamline the process of getting the properties occupied by tenants. Thus, the team truly creates a “Complete Solution” for real estate investors.

For more information on implementing this strategy, visit www.JasonHartman.com.

We don’t mean to scare you – well, actually we do. The words above were spoken by President Obama at a recent press conference. Ouch. Does that mean the U.S. economy is a car with a bone-dry gasoline tank still rolling slightly from 233 years of inertia?

Maybe?

A better analogy might be the economy is a car with a bone-dry gasoline tank still rolling slightly from 233 years of inertia heading off a cliff! What can we, as law-abiding citizens, expect when our government continues to bankrupt itself and devalue our currency? Seriously. The federal government is a Ponzi scheme that makes Bernie Madoff look like a piker.

Here’s a glimpse into the future after the dollar collapses:

1. An explosion in prices as Americans scramble to buy basic necessities.

2. Sparse grocery shelves and long gas lines.

3. Failed businesses and a breakdown in commerce as long-term transactions vanish due to worthless currency.

4. Rampant crime and unemployment.

5. Disappearing government services.

Sound like fun? What can you do to protect your wealth? The simple answer is to own income- producing property. It’s the only investment liable to have any value when the fiat currency collapses.

The time to act is now. There may still be time before the greenback dies as the major player on the global currency market. But there may be less time than you think. Wall Street is already coming apart at the seams from greed and incompetence. Make it a point to explore history’s best bet when it comes to investing. Platinum Properties Investor Network offers free educational services for any investor interested in weathering the coming storm. Check us out at www.JasonHartman.com.

Within the lexicon of business terminology, there is a popular phrase entitled “too big to fail” that is frequently used to describe large industry players that are kept afloat by the government when they are faced with financial ruin. The theory behind these bailout initiatives is that liquidating a major industry player will result in a total market collapse. These claims are very difficult to substantiate, since the government frequently uses this rationale to justify its arbitrary actions, but never seems to allow one of these failing ventures to go into liquidation like a normal business.

In practice, the “too big to fail” phenomenon exists to perpetuate vested interests by artificially maintaining the status quo. Unfortunately, this phenomenon also applies to political movements as well. When individuals or movements are viewed as “historic” or “symbolic,” there is frequently a sentiment that it is “too big to fail” and that any level of incompetence or power obsession must be overlooked to avoid failure for the favored parties.

What we have seen is that attempts by government to manipulate the market frequently create much larger problems than those that were originally set to be “solved.”

In these situations, there is an endless litany of excuses that serve as the convenient justification for the expansions of government power that are necessary to protect businesses and individuals that are deemed “too big to fail” by the powers-that-be. Ultimately, we will find that the price of this massive government power grab is paid by the producers that make the country run. As these initiatives compound on top of one another over time, the ranks of the producers will contract as fewer people find it profitable to engage in business. Similarly, the ranks of the idle masses will rise as the number of people seeking free entitlements expands.

It is inevitable that a ”breaking point” will be reached at some time in the future where the burden foisted on the backs of the producers will be too great for them to bear. The optimal situation would be for a political reversal to happen before that point comes, so that the wanton damage being inflicted on the country by the power obsession of its leadership is stopped. In the interim, prudent investors should seek to pursue strategies that will allow them to profit from the government irresponsibility so that their wealth will not be totally destroyed before control of the government is returned to more responsible hands.

6. Thou shalt control what is put into thy own body

Health and nutrition are an important part of survival in a catastrophe.  Thus, it is extremely important that you control what you put into your body so that it can work at top performance and heal itself adequately in a crisis situation.  This is doubly important if you have a family to take care of, because crisis situations will require extensive manual labor and may also see you needing to care for small children who do not have the capacity to care for themselves.  One thing that can be done as a regular form of practice is to prepare meals without processed or packaged ingredients.  Processed food is certainly convenient, but it is not likely to be available in a crisis situation.

7. Thou shalt defend thyself

It is entirely likely that a crisis situation will invoke looting and rioting.  It is also likely that these activities will be heavily concentrated in urban areas with large populations of people who will be simultaneously without resources.  Desperate people tend to do desperate things.  Similarly, desperate measures will create lots of chaos, and this chaos is frequently concentrated in the areas where there is the most desperation.   The principal areas expected to be the target of chaos are metropolitan urban areas with high levels of population density.  The more remote suburban, exurban, and rural areas are not expected to be in much danger from riots, due to the difficult of organizing a mob sufficient for it to move out into the suburbs.  Since it is not practical to move out of the city for the express purpose of being safe from riots, it is highly advisable for people living in dense cities to engage in very careful preparations for the contingency of a descent into chaos.

It is also possible that you will need to defend your family from attackers, even if prudent preparations have been made.  Precautions such as security systems, martial arts training, and access to weapons may help to ward off attackers if conditions turn desperate.  It is important to note that many items that are not typically considered as “weapons” can be used to defend your family if necessary.  Regular household items such as steak knives, tire irons, mop handles, and frying pans can be the difference between keeping your family safe and being looted by rioters.

8. Thou shalt possess and control universally needed goods and resources

The current economy depends upon currency-based exchanges.  In practical terms, this means that everybody accepts dollars in exchange for goods and services.  Consider what will happen in the event of severe inflation.  What if dollars decline in value, and are no longer accepted in exchange for food, gas, or clothing?  In the event that commerce regresses back to barter and trade, you will want to control goods and resources that are universally needed so that you can trade them for other things that your family requires.  Typical barter items are things like non-perishable food, gasoline, medical supplies, over-the-counter medication, and maybe even gold, silver, cigarettes, alcohol, or ammunition.  This strategy can also be extended to your investment portfolio.  The most effective way is by shifting your investments away from “paper assets” such as stocks, bonds, or mutual funds, and purchasing items of universal need, such as rental housing.  By denominating your investments assets in “things” that everybody needs, it will place you in control of critical resources when they are needed the most.  For more information on this strategy, visit www.JasonHartman.com.

9. Thou shalt protect thine own FIR (Finances/Identity/Records)

One of the first things to happen during times of chaos is a drastic rise in crime and theft.  Not surprisingly, identity theft is one of the fastest-growing classes of crime. Keeping your identity safe requires that some prudent precautions be taken so that you do not become an easy target.

One of the first things to do is limit your internet footprint to only the providers that you fully trust, and check your credit report regularly to see if anybody is accessing your information.  In addition to this, it is important to keep all personal documents and information locked away where it cannot be easily accessed or stolen.  Also make sure to shred any documents you are throwing away that contain personal information or account numbers.  When safeguarding your identity, consider the fact that times of chaos may be dealt with by the government in a very oppressive fashion.  It may become necessary to drop “off the grid” in order to protect your family.  Take some time to consider what you will do if this course of action becomes necessary.

10. Thou shalt have a support network

Consider who you will be depending on for support in a time of chaos.  Also consider who will be depending on you.  If a rapid deterioration of economic and societal norms emerges, it will be very important to have a strong community of people in your local vicinity.  Creating and maintaining this community is one of the strongest defenses that you can build against a crisis or catastrophe.  By pulling together the skills, resources, and expertise of people in your general vicinity, it will help to organize your efforts, undertake larger tasks, and make you a less attractive target for looters.  Make sure to keep networking . . . of all the commandments, this may be the most important for protecting your family.

The notion of Holistic Survival is based on the idea that survival in uncertain times requires an all-encompassing or “holistic” approach to be successful.  As a way to articulate this principle, we have prepared “The Ten Commandments” of Holistic Survival as a guide for preserving your personal and financial wellbeing in the current volatile environment.  The importance of these guidelines is found in the fact that the world is becoming more complex and uncertain at a frighteningly fast pace.  Thus, the strategies of yesterday are no longer suited for the environment of tomorrow.

The Ten Commandments:

1. Thou shalt think independently

Being prepared for the unexpected requires people to develop an aptitude for thinking outside the box.  It is important to think about the types of disasters that can occur in the area where you live, and what you would do in response.  In crafting your plans, it is also important to anticipate the response of other people who are not prepared.  It is very likely that people who have not adequately prepared for disruptions or problems will resort to rather drastic measures such as looting or rioting.  Thinking independently includes adequate preparation to provide for your family, along with proactively avoiding the likely focal points of increased chaos.  Another important part of being prepared is to learn the emergency plans that have been established for your community.  This will enable you to gain a preview of how events are likely to unfold in response to a state of chaos.

2. Thou shalt be prepared to do without

This commandment revolves around having an emergency plan for your family.  This emergency plan should be inclusive of planning for going without supplies such as food and water, along with going without information or direction from the political authorities.  It is also important to understand that your family may not be at the same place when a chaotic situation unfolds.  Furthermore, contemporary means of communication like the internet and cell phones may not be available.  In this kind of a situation, communication through Citizens Band (CB) radio and ham radio may become the only reliable means of communication.   Of these options, ham radio is the only broad-reach communication option that is outside of the traditional communication grid.  Each family should develop a holistic emergency plan and be prepared for the chaos that frequently results from crisis situations.

3. Thou shalt maintain control

The crux of this commandment is to stay cool and calm in a crisis situation . . . similar to our Creating Wealth commandment to maintain control of your investments.  Stay positive and avoid excessive stress or panic.  Panic only places extra stress on top of a highly stressful situation.  Controlling your emotions will allow you to keep a level perspective, and place yourself in a position of strength.  Staying positive is doubly important because of the high likelihood for panic to spread out to other people in crisis.  Many social problems can result when panic becomes a pandemic and people make rash, emotional decisions out of fear.  Many downcast people eat, spend money excessively or become addicted to abusive substances during difficult times.  These kinds of self-destructive behaviors need to be proactively avoided so that you will be able to maintain a cool head and clear mind.

4. Thou shalt be self-sufficient

Self-sufficiency is primarily about having the ability to provide for your own food, clothing, water, shelter, medicine, transportation, communication, power and plumbing over an extended period of time.
ost families prepare for this contingency by assembling an emergency kit.  You should seek to have sufficient supplies for you and your family to survive for up to 3 months on your own without doctors, grocery stores, or other modern amenities.  Consider what you will do if there is no medical care available in your area, or if all of the hospitals are swamped.  In the event that a disaster occurs, it is likely that all of the local grocery stores will be out of stock within a few hours.  It is important to ensure that your family is prepared for this contingency.

5. Thou shalt practice the primitive

Every year you should prepare by drill or practice to return to the primitive.  This means intentionally depriving yourself of the conveniences that we have become accustomed to.  The easiest way to practice this is to go on a yearly camping trip and live in the wilderness.  Other ways to practice are turning off your power or water for an extended period of time.  The importance of these drills is to help your family to develop the skills of rapid adaptation to abrupt changes in the amount of contemporary comforts available.

What we do at Platinum Properties is not brain surgery.  There’s nothing in here that the average investor with an average head on his or her shoulders can’t comprehend.  The real trick, and the part where most people fail miserably, is to recognize what an amazing opportunity real estate ownership offers, especially in these tough economic times.

To be honest, we can’t stand the thieves on Wall Street, but there is one thing we learned – the real estate industry needs a good brokerage firm. That’s where we come in.  We aren’t self-anointed ‘gurus’ on an eternal mission to upsell you to the next product.  We sell education.  We don’t have a series of ever-more expensive seminars.  There’s only one and, while you might want to attend more than once to truly internalize the material, it’s not necessary.

We’re going to take you by the brain and show you step-by-step our Complete Solution For Real Estate Investors™.  This is our comprehensive guide to income property investing.  We’re going to show you a tried and true method to purchase property from the best builders in thriving local markets around the country.  How do we know it works?  We know because our own portfolios are built using this method.  It’s how company founder and CEO, Jason Hartman, made himself a millionaire while still in his twenties.

What’s the best way to become a millionaire?  A couple possibilities are to start with a billion dollars and start an airline, or start with two million dollars and buy stocks.  Another option is to use real estate to take advantage of leverage, cash flow, and appreciation as tools for steadily building wealth.  Let us teach you the investing secret that isn’t a secret – real estate.  It really works.

In the wake of the recent $50B Madoff ponzi-scandal that has left many affluent people absorbing massive investment losses, there has been a lot of attention paid to fraudulent pyramid schemes by the media.  However, this focus has been in exclusion of an astronomically larger pyramid scheme that is hurtling toward a dramatic collapse.

There are two very large forces that are pushing this ‘pyramid scheme’ toward collapse.  The first force to reckon with is the perpetually increasing amount of debt-financed consumption.  The second looming specter is the dramatic liability from government entitlement programs that will be revealed in the coming decades.

Let’s begin by discussing the trend of debt-financed consumption.  In and of itself, debt is not inherently good or bad . . . it is all a matter of what the debt is used to finance.  When money is borrowed at a fixed rate of interest for investment in long-term projects with a higher rate of return, it produces very good results.  When long-term money is borrowed to finance short-term consumption, it requires that future production be sacrificed to repay the obligation.  The intense problems come when the amount owed to finance short-term consumption grows so large that the interest cannot be paid from current income.  (This is true for both individuals and governments.)

The second large force in this pyramid scheme is the government entitlement liabilities from programs such as Social Security, Medicare, Medicaid, and subsidizing financial institutions.  The Department of the Treasury currently estimates the aggregate net entitlement liability at approximately $57 trillion dollars.  (This amount grows to $61T when state and local government liabilities are added-in, which represents over $500k per household.)

The most likely result of this pyramid scheme is that the treasury will ‘print money’ or de-value the currency by increasing the amount of dollars in circulation to finance the nominal obligations.  (Politicians have a noted tendency to terminally avoid decisions that involve dramatically raising taxes or dramatically cutting benefits.)  This will have a net effect of destroying the purchasing power for income and savings, while diminishing the net impact of outstanding debt obligations.

Best Wishes,

Doug

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Conventional wisdom has long held that the way to become wealthy over the long term is by compounded investment in the stock market.  The reason for this was quite clear when one looked at the chart of historical returns.  By making very modest investments at regular intervals over a long period of time, small investors could create very large amounts of wealth.  This line of thinking is what has prompted most employers to source their 401k retirement plans with mutual funds that invest in the stock market.

Unfortunately, the movement of stock market investment into the ‘main stream’ of America has caused it to become less of an investment vehicle and more of a gambling casino.  The primary purpose of the stock market is to provide companies with a means to raise capital for business investment by selling a partial ownership stake  (also known as a ‘share’ of ownership). Typically, investors were rewarded for their investment by the payment of dividends from the company profits.  Thus, stock market investing was originally based on the notion of finding a company that was likely to make sufficient profits to pay healthy dividends.

This sentiment changed as the secondary market for trading stocks became more popular.  A ‘primary’ issue of stock happens when a company issues more ownership shares.

A ‘secondary’ stock transaction happens when one investor exchanges an existing ownership share with another investor.  This is where the stock market turns into a casino.  When the focus of investment shifts away from the ability of the company to viably pay dividends on a consistent basis toward the probability that the secondary market will pay more for the company stock at a future date, stock investment becomes much more akin to gambling.  When returns are primarily based on price appreciation, continued growth in market value requires a perpetual stream of new buyers.  This phenomenon is true for both stocks and real estate, and explains the recent booms/busts very thoroughly.

The only factor that can push up the entire stock market is if there is an aggregate increase in investment capital  (similar to how increases in the money supply from the Federal Reserve drive price inflation).  When corporate profits grow, it is natural to assume that more capital will be attracted to the market.  However, when market values rise faster than corporate profits, the only cause can be a net influx of investment capital.

In the United States, there were two ‘Sledge Hammer’ events that sparked a colossal 25-year bull market for stocks.  The first was the passage of the Employee Retirement Income Security Act (ERISA) in 1974, which created standards and stability for company-sponsored stock market investment plans that dramatically increased the supply of equity capital.  The second was the pairing of tax cuts in the 1980s and a significant reduction in the cost of debt capital that spurred a rapid growth in corporate profitability.  These two events combined to generate a massive increase in stock market investment that pushed values sky-high.

However, these massive gains came with a bit of a shadow.  This problem has been created as investors stopped directly buying stocks of individual companies and started investing in funds where a manager buys and sells the stocks.  Now these brokers and managers have control over incredible amounts of other people’s capital.  This control gives them the power to create or destroy tremendous amounts of value based on the decisions that they make.  It also channels market activity more and more toward ‘gambling’ as managers seek to maximize value appreciation.  (This set of incentives is very adverse to investor interests, as managers have incentives to take insane risks, since big gains mean tremendous bonuses and losses only mean that they get fired.)  Furthermore, most managers charge very hefty fees for their services, which cut into the net investor returns.  (Thus far, we have assumed that the fund managers are honest . . . when the ‘crook’ dynamic is factored in, the risks increase significantly.)

Fundamentally, there are four principal risks implicit in this kind of stock market investing:
1)  Your broker may be a crook.
2)  Your broker may be incompetent.
3)  Even if your broker is honest and competent, he will take a big slice of your profits in the form of fees and commissions.
4)  These problems are not limited to your brokers . . . all of the middlemen like stock promoters, CEOs, bankers, and all other flavors of hucksters or salesmen.

On top of all these risks, there is a bigger dynamic to consider.  Currently, corporate profits are taking a very steep tumble relative to their prior levels.  In addition to this, most of the working population is already invested in the stock market, so there is no large pool of capital to attract so that valuation can continue to inflate.  Finally, the current market Price/Earnings ratio is well above its historical average.  This means that the market is discounting-in a future increase in corporate earnings.  If that increase does not come, or takes longer than expected, it will most likely result in market values decreasing.

Finally, there is a longer-term risk of very average performance.  Even if the anticipated recovery happens as expected, there is no looming influx of capital to push the market up at explosive growth rates.  This means that future market appreciation will look very average by historical standards.  (Granted, nominal values will be pushed up by inflation, but real returns will still be very much in the ‘average’ category.)

Ultimately, the stock market is in the midst of a ‘return to reality’ from the large rates of return in prior years.  The fundamentals are pointing toward difficulty in maintaining prior growth rates out into the future, including the risk of more near-term price compression if the forecasted economic recovery does not materialize as expected.  Granted, there is a probability that the stock market will recover better than expected and produce favorable returns.  However, prudent investors should seek to diversify their investment activities into other emerging areas of opportunity to limit exposure to the stock market.

Situations such as prudent real estate investing with a small to negligible downside and significant to infinite upside are what economists call a ‘free option’ . . .principally because the investment volatility runs mostly in the ‘up’ direction because of the downside risk mitigation. Needless to say, these are the investments that we would like to create.

Platinum Properties Investor Network has a series of core concepts that we communicate to our investors.  One of these is to ‘Refi ‘Til Ya Die’ with your rental property portfolio.  While this description may sound a bit snarky, it is a very powerful strategy for multiplying your wealth over the long term.

The most unique part of this strategy is that it stands in stark contrast to the popular strategy of ‘flipping’ properties by buying and quickly re-selling them for quick profits.  The strategy that we recommend is the exact opposite of this.  At Platinum Properties, we advocate buying and holding prudent rental properties over a long period of time.  This enables investors to build real wealth, instead of constantly churning properties  (and creating taxable gains).

There is another very powerful force behind our strategy of buy and hold investing.  That power comes when the rents and value of your property increase over time.  Typically, an investment property will start with low cash flow, and will grow in profitability as tenant rents are increased.  This increase in revenues carries with it a tremendous tool for growing your wealth.

The way that you employ this tool is to refinance your property for more than your original purchase price, based on the increased cash flow.  This will allow you to re-invest the amount of your loan that exceeds the original purchase price. And here comes the kicker . . . these net proceeds are not taxed!!!

The reason that you will not owe taxes on the re-financing of your properties is because loans are not taxed.  Since you are taking out a loan instead of selling the property, no taxable transaction is triggered.  Granted, capital gains can be deferred via 1031 exchange, but you will still lose 5% to 6% of the property value off the top from realtor fees.  Thus, investors can ‘Refi ‘Til Ya Die’ and legally avoid paying taxes on the increased loan amount of their properties.  (In addition to this, the increased interest payments from your new loan will reduce the tax burden of your regular cash flow.)

These strategies can super-charge wealth creation by allowing investors to capture their equity growth for re-investment.  These perpetual re-investments accelerate the natural compounding of your investment portfolio.  It also carries the benefit of consistently increasing your use of fixed-rate debt as a shield against inflation.  Prudent investors realize the incredible power of this strategy, and should seek to capitalize on it to build their wealth during these increasingly difficult times.

Do your investments have termites? It may sound like an odd question. But if you’re like many Americans with the typical savings accounts and mutual fund/stock portfolios, then you are subjecting yourself to the ravages of a specific type of termite which is slowly, and clandestinely devouring away at your financial portfolio, taking away the prospects of a secure retirement with it.

What type of termite could do such a dastardly thing, you ask? This termite is called inflation and it is both the scourge of financial security and the product of our current monetary system.

Allow me to explain.  Most of us have been brought up to believe that saving and investing are good and getting into debt is bad. While I certainly agree with this general sentiment, it contains one important fallacy – it presumes that the money supply in our economy is static. The reality could not be further from the truth; the money supply is increasing at an ever-faster pace. You see, every dollar added into the economy cheapens those already in existence, and the Federal Reserve in conjunction with the government are increasing the supply of  dollars and credit at an alarming rate. This means that your savings and portfolio accounts are being reduced in value as the dollars they convert into buy progressively less and less. Sadly, this termite assault on your wealth is ongoing and relentless.

But, you ask, I heard on the radio that inflation was under control, that the CPI (Consumer Price Index) was relatively low… what gives? Suffice it to say that the CPI is sufficiently manipulated by the government to give the public a much more benign view of inflation than actually exists. To see just how ravaging this inflation termite is, simply look around you – oil, commodities, health care, education, housing, food and now even postage have been going up substantially in the last few years. These increases far eclipse the relatively modest gains in the stock market over the same time period.

Now, at this point, I presume you’re scratching your head and asking…  well, how do I eliminate this termite? How can I secure my financial house from this destructive insect?  The truth is that there is no Orkin man, no Terminix for this type of pest – that would require a major overhaul of our monetary  system. Alas, we are stuck with this troublesome termite for the foreseeable future.

However – and this is where it gets interesting – while you can’t eliminate this pestilence, you can use it to your own advantage to maintain and grow your wealth rather than have your wealth eaten away. How, you say? By properly turning the tables on our financial system and becoming a debtor.

Heretical, no? If you recoiled in disgust, I understand as it runs counter to the way many of us have been brought up. But allow me to elaborate. By debt, of course, I don’t mean going out and indulging yourself on fancy meals, cars and vacations. There is no long-term benefit of purchasing those items using debt. In contrast, by selectively purchasing tangible assets which throw off cash flow, and by buying these assets with the bank’s dollars in the form of a mortgage/loan, you achieve the financial equivalent of a double play. Long term, your asset most likely increases in price as more and more  dollars flood the economy, and, just as importantly, you are paying for that asset year after year in progressively worthless dollars thanks to the inflation termite eating away at the dollars you’re now repaying to the bank. Not only is this a shining example of leverage, it can also be thought of as a form of financial martial arts – you are harnessing the energy of your opponent (inflation) and using it against him.

Of course, one of the best asset classes with which to follow this path is investment real estate, a proven path to wealth for many and a good hedge against inflation. In the interim, your tenant helps pay your debt obligations while you allow the aforementioned economic forces to work their magic. Of course, you have to do your due diligence and choose your properties and loans carefully. Nevertheless, this is a powerful technique to build long-term financial wealth.

How ironic that the best defense against the termite of inflation is an investment property with a big mortgage!

When engaged in the business of living our lives, it is critically important to ‘know yourself’ in all things that you do.  In the context of personal relationships, we must learn about ourselves to develop healthy relationships with others.  Harmony requires that we be up-front and honest.  In an ideal situation, the strengths of one person in a relationship will compensate for the weaknesses of the other.

In the world of investing, knowledge of yourself is no less important. The most important thing that investors can know about themselves is the degree of risk and volatility that they are willing to accept.  Similarly, they must be honest about their willingness to take action and close a deal.  This principle is doubly important since most investment ‘systems’ focus exclusively on the academic side of deal analysis.  It is certainly important to find good deals, and analyze them quickly, but all of this can be for naught if the investor lacks the willingness to take action at the critical moment.  Things can also fall apart if the investor does not follow through sufficiently to see the deals through closure and into implementation.

The truth is that there are two types of investor.  One type is suited for assembling ‘deals’ that can generate tremendous returns.  The other is either uncomfortable with the risk and uncertainty implicit in assembling deals or is unwilling to take action at the critical moment.  This type of investor is typically better suited to steady compounding of investment returns over a long period of time to create wealth.  It is important to note that both investors can be very successful.  The path of the deal maker tends to achieve wealth more quickly than the ‘slow and steady’ investor, but either of them can realize tremendous amounts of success with the proper balance of analysis, discipline, and the willingness to act.

In the end, it is much more important that you know yourself than that you know how to execute a particular system or strategy.  Systems come and go . . . strategies constantly change with the business environment.  But knowledge of yourself is a priceless asset that will serve faithfully throughout the tenure of your life.

At times you hear people talk about the volatility of the real estate market. If you want volatility, try the Wall Street conspiracy.  They’ve got volatility.  Why?  Because they also have liquidity. . . instant liquidity.  Anyone can log onto their account and buy or sell a stock with the click of a mouse.

Real estate is a cat of a different color.

It is an illiquid asset. Even if you woke up one morning determined to sell a piece of property and there was a buyer equally set on the purchase, chances are it would still take two weeks or, more likely, a month before the deal could be closed.  It’s a much more complicated process. An offer must be made and accepted, financing arranged, third party inspections made, title search, etc., before an official transaction can ever be made.

This lack of liquidity is a good thing when it comes to investing.  It’s what makes real estate such a stable, appreciating asset.  It’s also why, if you’re living paycheck to paycheck, you shouldn’t use your lunch money to buy income property.  If the time comes that you need to get out of it quick, you might not be able to.  Investing in real estate should be done for the long term with money you don’t need for day-to-day survival.  Then you can leave it alone and watch it grow.

Why the Best Deal Isn’t Always (From the JasonHartman.com blog)

I came across an article recently that illuminated exactly why we believe our strategy of having local property managers in various areas around the country saves Platinum Properties Investor Network clients from similar tales of woe.  It’s all about micro-targeting location before you EVER pull the trigger on a real estate deal.  Is micro-targeting important?  Only if you want to avoid having a great $1,000 positive cash flow deal turn into a $30,000 legal hassle.

Gather ‘round the campfire kids, and learn why you have to look further into the ‘great’ deal before you buy it.  In this example, the buyers were in the early days of their income property career and got starry-eyed over the prospect of a no-money-down deal.  Who wouldn’t want terms like that?  Talk about leverage! Problem was, in their haste to not miss out on this ‘deal of the year’, they didn’t check out the local area thoroughly.

What sorts of problems?  To start out, the entire block was occupied by an army of drug users and dealers, plus a host of other nefarious characters.  No matter how nicely that property was fixed up, think a stable renter is going to want to move his or her family into that war zone? With crumbling ruins flanking it?  Next, our intrepid investors were enmeshed in court with fire code violations and a property manager up for manslaughter.  Gulp.

Bet they wish they had been getting their real estate recommendations from Platinum Properties!  That’s why we have local managers with feet on the ground and an intimate knowledge of the neighborhood.

In the midst of financial collapse, massive government deficits, high unemployment, bailouts, and inflationary spending, there is a rising tide of people who are becoming skeptical about the prospects for continued economic growth in the near future.  There are many people who are sounding the alarms of doom, but there are precious few who are offering viable strategies for individuals to prosper in such an environment.  One of the places where these strategies live is Holistic Survival.

Holistic Survival is an initiative created by Jason Hartman to address the needs of people to protect their wealth, family, and property from the economic turmoil that is expected to come.  As the castle of debt created by the government through fiat currency and runaway spending begins to collapse, there will be tremendous disruptions to the lifestyle that people have come to expect.  This ‘prosperity collapse’ is expected to have many repercussions throughout the economy.

As inflation comes about from the massive monetary expansion of world governments, sharp price increases are expected to hit the poor dramatically.  Some people expect that these price spikes will spur riots and looting, which in turn could result in martial law and government price controls or rationing.  In this case, people will need to know how to survive in a world where the supermarket is not always open for business.  Extended periods of time with no food available may become normal.

As the currency continues to collapse, it is also likely that barter and trade will begin to replace traditional monetary commerce.  It is also likely that many of the products that are currently purchased at the grocery store may need to be acquired through the ‘black market’ in goods that are price-controlled or rationed.  This will require people to adapt very quickly in order to avoid very dire circumstances.  These are not pleasant thoughts to have, but there is a chance that they will become a part of normal life for many millions of people throughout the world.

There is a famous saying that luck favors the prepared.  At Holistic Survival, we couldn’t agree more.  We desperately hope that the expected economic catastrophe does not transpire.  We remain hopeful that the free market will eventually prevail and return the country back to a path of growth.  Nonetheless, it is prudent to be aware of the possibilities and prepared to exist in the world that may exist after the prosperity collapse. Find out more at  www.HolisticSurvival.com.

The cacophony of advice about where to put your money coming at you from all sides can sometimes be deafening.  We know that. That’s why we try to be the Joe Friday of investing. Remember the character from Dragnet?  ‘Just the facts, ma’am.’

At Platinum Properties, we’re big on facts and when it comes to investing, the facts tell us there is no better place to be than real estate.  One of the multitude of reasons we believe this relates to the title of this entry.  When you buy a piece of income property, taking out a mortgage in the process, you actually DO get paid to borrow money.  At least, that has been the case historically and there seems to be no reason for it to change.

The reason we say you get paid to borrow rests in the reality of inflation, pure and simple.  In inflationary times, your best shield against the declining value of the dollar is high-quality, long-term, investment-grade, fixed-rate debt tied to a piece of rental property.

If you muddled your way through that last convoluted, hyphenated sentence, the payoff is this simple statement – the right kind of debt is good.  Here’s why and how it works.  Let’s assume a dollar was worth a dollar and you bought a house in 1972.  Over the next 30 years, continuing inflation driven by near-imbecilic government economic policy drove the value of a dollar down to $0.24 when compared to the 1972 version.  It’s all about purchasing power.  By taking out a loan that doesn’t come due for those 30 years, you have effectively saved yourself money by paying off the note in cheaper dollars than what you borrowed with.

You just got paid to borrow money, bubs.

The recent stock market rally has inspired a rising tide of hope and optimism within the investor community.  Evidence of this is seen in the gentle step-up in market values from the floor of their recent decline.

This optimism seems to be discounted into the Price to Earnings ratio of the S&P 500 Index as well, since the current price of $921.23 represents a P/E ratio of 31.2 times the next four quarters of forecasted earnings per share for the index.  Since the historical valuation for this index is significantly below the current level, it stands to reason that the investor community collectively believes that the government initiatives will create a market recovery in the near term.

At the Financial Freedom Report, we are not yet convinced that the fundamentals of the market justify such an optimistic valuation.

To those who have learned how to read the economic trends, it has been painfully obvious for quite some time that significant inflation is on the horizon.  Platinum Properties Investor Network has long supported a strategy of fighting inflation through rental real estate that is financed with fixed-rate debt.  The advantage of this strategy is that the debt payments will stay the same throughout the inflationary period as prices are pushed higher.  While this is happening, the rents paid by the tenants will be consistently increasing as the scourge of inflation is eroding the value of the dollars that are being used to repay the mortgage.

All of the people who have read Jason’s blogs or listened to his Creating Wealth show for a significant period of time are well acquainted with this phenomenon.  The piece that is now important to internalize is the fact that this ‘door of opportunity’ will close at some point in the near future.  The reason for this is because of the chain reaction that the inevitable inflation will unleash.

Once the impact of inflation begins to unfold, it will result in more investors selling bonds to avoid seeing their wealth destroyed.  This will place upward pressure on bond yields as investors will no longer be willing to accept rock-bottom interest rates for government treasuries.  As the treasury yields are pushed up higher and higher, there will be a ripple effect to mortgages that are indexed to these treasury notes.  This increase in mortgage interest will increase the ‘effective’ price of real estate since the same monthly payment will not buy as much house as in previous years.  As this stall in purchasing power ripples through the market, it will place downward pressure on prices and appreciation.  At this point, buying in to the real estate market will become a much more tenuous matter since interest rates will be higher, creating increased mortgage payments and lower cash flow to owners.  During this time, the investors who locked down low fixed rate mortgages will be watching their profits expand while their costs stay flat.

The bottom line is that this tremendous opportunity will not persist forever.  Once the rocks begin to fall, it is likely that the avalanche will quickly follow.  Prudent investors should seek to be ahead of the masses, and lock down their investments while rates are still low, prices are still depressed, and opportunities are still plentiful.

1) When is debt good?
a. When I feel like spending money
b. When I am buying something that I can see and touch
c. When I am buying something like a house or car
d. When I am buying an asset that produces income

2) When is debt bad?
a. When it causes you to be highly leveraged on an investment
b. When it is used to finance consumption
c. When you use your credit card
d. Debt is always bad

3) What causes inflation?
a. Evil businesses raising prices on the little guy
b. The federal reserve increasing the supply of available money
c. OPEC constricting output to push up prices
d. A tri-lateral conspiracy between George Bush, the Illuminati, and the Vanderbilt Family

4) What is the result of inflation?
a. It destroys the value of savings, equity, and debt
b. It creates jobs by increasing the amount of money in people’s pockets
c. It makes me more wealthy by increasing the value of my house
d. It makes me more wealthy by increasing the value of my 401k

5) What happens when the government increases spending?
a. It means that I get free money in my mailbox
b. It means that those rich people will finally have to pay their fair share
c. It means that the government must extract more resources from the private economy through   taxes, borrowing, and inflation
d. It means that the country starts to run better, because the government always does things more efficiently than the private market

1) When is debt good?

The way that debt can work to your benefit is if it is used to finance an income-producing asset that pays your interest costs.  The most typical example of this is rental real estate.  As the owner, you take out a fixed-rate loan on the house, the tenant pays you rent, and you pay the applicable tax, insurance, and mortgage expenses.

Over time, inflation will increase the value of the house and the rents paid by your tenant.  However, the amount you owe on the house will stay flat because of the fixed-rate debt.  This will result in your profits increasing.

2) When is debt bad?

Generally speaking, debt will work against you when it is used to purchase anything that doesn’t produce income.  The reason for this is because the interest for debt that is used to make these purchases must be paid out of your income.  Furthermore, as the amount of debt goes up, it consumes more and more of your income.  By concentrating debt in assets that produce income, you can escape this ‘debt spiral’ trap that keep many people confined in financial prison.

3) What causes inflation?

As tempting as conspiracy theories can be, the money supply is the principal factor that drives inflation for the overall economy.  Supply and demand can create price spikes and drops in specific products like oil or corn, but the only way to make everything more expensive at the same time is to increase the amount of money in circulation while the amounts of goods and services stays flat or decreases.  This phenomenon is known as ‘more money chasing less goods.’

4) What is the result of inflation?

Inflation erodes the purchasing power of all things that are denominated in dollars.  When the prices of everything you buy go up, but your savings account only grows at 0.2% per year, it results in a negative ‘real’ rate of return since the savings will now buy less than it did before.  In practical terms, this means that dollar-denominated assets, like home equity, savings, and CDs, along with liabilities like debt, will all have their value destroyed by inflation.  Because of this, the optimal strategy is to have your assets denominated in physical things and your liabilities denominated in dollar-based debt.

5) What happens when the government increases spending?

The government does not have the capacity to produce anything.  The only way that it can spend anything is to first take it from somebody else.  Sometimes this is done directly through taxes, and other times it is done indirectly through borrowing or inflation.  The way that borrowing takes money is by displacing private debt with government borrowing, effectively reducing the amount of capital available.  The way that inflation takes money is by eroding the purchasing power of people’s salary, savings, and home equity to finance government spending.

Because of this phenomenon, it logically follows that any time the government decides to do something that the private sector could do more effectively, it drags down the overall economy by displacing private economic activity.  (Granted, the government frequently enacts arbitrary laws & regulations that artificially hamper the efficiency of private industry, thereby creating a perception that the private market is broken, when the problems are all a direct result of government fiat.)  The adverse incentives implicit in this balance is that politicians derive their power from the amount of money that government spends.  Because of this, politicians have an incentive to make government bigger, regardless of how much it erodes the economy, because it will result in them becoming more powerful and important.

The market is currently in a period of great uncertainty and volatility.  Some believe that there is a budding stock market rally developing, while others believe that the recent economic problems are merely the first of many disruptions that will shake the foundations of America over the coming years and possibly for decades.  Our belief is that there are many forces pushing against a return to the rapid economic expansion that many have come to expect over the past 25 years.

The first force is the dramatic government spending obligations that are being financed by inflating the US Dollar.  This will indirectly ‘tax’ economic output by eroding the purchasing power of the currency.  The second major force is the inevitable increase of interest rates and tightening of credit standards.  This will increase the cost of capital for business activities in the midst of rapid price inflation.  The most likely result of these two forces will be a dramatic slowdown in the growth rate for the US Economy.

This will create tremendous opportunities for investors that position themselves to take advantage of the upcoming demographic shift of people out of the homeowner pool, moving into the rental pool.  As millions of Americans adjust their expectations for the standard of living that they can reasonably afford, they will be paying rent while this transition takes place.  Prudent investors should place themselves in a situation to take advantage of this shift.

Direct investment in rental real estate continues to represent the best way to take advantage of this trend by allowing investors to collect regular cash flow and ‘outsource’ their fixed-rate debt to the renters.  Over time, inflation will push up the rents and values of properties while the mortgage payments stay flat.  This will generate tremendous wealth for astute investors who place themselves in a position to realize gains from the coming shifts and disruptions.