All Forum Posts by: Roger Rouse

I've been working on a spreadsheet to perform a detailed analysis of investment deals. Feel free to check it out:

Property Analysis.xlsx

Feedback and constructive criticism is welcome, particularly if you see any errors in the formulas.

I'm in the process of buying one now. The property is really nice, and I'm getting it for about 55% of assessed value. I sort of got lucky because another buyer outbid me and then his deal fell through. I was next in line.

Cosmetic things, mostly. Paint and new carpeting can do wonders for a unit. Replace things that look worn out or dirty.

There is nothing to be fearful of if you understand what you are doing and have a long view of history:

1) The correction in the real estate market has refocused investors away from the greater fool theory ("I'll buy this property in hopes that someone will pay me more for it in a few years") and back to the fundamentals of investing -- that the intrinsic value of a rental property comes from the stream of income it produces over time.

2) Property values are falling because supply is greater than demand. When these two forces come back in balance, the housing market will be healthy again. The population continues to grow, and this will drive demand for many decades to come. The oversupply may take a year, or two, or five to draw down ... but it will happen.

3) The thesis that homes go up in value remains valid in the long run. As long as there is inflation (i.e. almost always, in a fiat currency situation) and population growth, the general trend will be upwards.

4) Don't try to catch a falling knife. None of us can accurately predict the bottom of the market. Buy when the returns look good, and time will take care of the rest. Real estate is a long-term investment.

I title them in my own name, with a hefty umbrella liability policy to protect me.

The main reason is financing. I am refinancing everything to 4.5% 30-year fixed mortgages. If they were titled to an LLC, the rate would be higher, there would be points, and I couldn't get fixed rates.

It depends on the manner in which is it done.

If done purely through austerity (spending cuts) there will be slower economic growth as the government expenditures will be subtracted from GDP. Unemployment will be higher, wages will stagnate, and there would be minimal upward pressure on property values and rents. Interest rates would stay low to promote growth.

If done purely through revenue (tax increase) your investment returns will be taxed at much high rates. This makes your assets much less valuable to future buyers, so it would depress property prices. Interest rates would rise, because savers would demand a larger return to compensate for higher taxes. Economic activity would slow, because why should people work hard just to have the government take it all from them.

If done by monetizing the debt (i.e. printing money to pay it off) there will be massive inflation and much higher interest rates. Any who holds dollars (i.e. savings account) is screwed.

The best we can hope for is a blend of these. Maybe raising some revenue by streamlining the tax code and closing loopholes while keep rates as low as possible. Cut some spending (preferable after the recession ends) and reform entitlements. And maybe a small dose of inflation (~5%) for a few years.

In any case, it will be a solution that everyone will have something to complain about.

The problem with currencies is that there is race to bottom right now. Nations are trying to devalue their money to deal with debt issues and boost exports.

China is not going to let their currency skyrocket vs. the others. Social stability in China depends on economic growth, which is coming from exports. An expensive currency will cause their exports to collapse, and that could take down the government.

I would consider just putting it into gold -- bullion (and maybe canned goods) if you are worried about the collapse of civilization, or a gold ETF if you want liquidity and trust someone else to hold onto it.

Another hedge against collapsing currencies is any sort of commodity. For example, the Prudhoe Bay oil trust (ticker:BPT) would give you an 8% dividend yield at recent oil prices. If the value of the dollar falls, it will take more of them to buy a barrel of oil and the nominal price of your shares will increase.

I've thought about this a lot over the years. Originally I really liked the flat tax idea, but I have warmed up to the idea that a (reasonable) progressive system of some sort is the best choice.

The reason is because of a phenomenon called "accumulated advantage".

As a person becomes wealthier, it becomes easier to accumulate more wealth. The first million is the hardest, as they say.

Once you start to do well, many new avenues open up to you. You start to meet the right people, business deals come to you, bankers return your calls, and your reputation gives you a leg up over your competitors.

These advantages may all be well-deserved, but it tends to crowd out the little guy who aspires to be like you, but can't get there because you have first dibs on all the good deals.

A progressive tax system does two things:

First, it helps prevent a situation where a handful of people from accumulate everything. I don't think anyone wants to return to the 1800's when a few people had all the wealth while everyone else worked 80 hours a week and still lived in squalor.

Second, it provides some resources (such as education) to those who would like to get ahead but otherwise don't have the means to do so.

That said, I certainly don't endorse confiscatory tax rates like we had before the 1980's. I don't think anyone should pay 60 cents out of every dollar they earn. But I do think Warren Buffett should pay a high tax rate than his secretary.

I think people should look at becoming rich as a process they enjoy, not as something they achieve. Otherwise, once you get there, you realize that it isn't that big of a deal and you start to ask "now what?"

Also, there are multiple problems with the word "rich".

First of all, rich is a relative term. Almost anyone in America, including our poor, are enormously better off than at least half the people in the world. Modern technology has provided comforts and conveniences for the average person that not even the wealthiest and most powerful people in history could obtain. Caesar couldn't call his family on the phone from Gaul. Napoleon had no air conditioning. JP Morgan couldn't hop on a jet to visit Europe.

Secondly, the word "rich" mixes two distinctly different things: high income, and high net worth. There are many high-income people who appear to be wealthy, but are not. There are also many people are very wealthy but live very average lifestyles.

In any case, many would argue that true wealth comes not from resources, but rather from relationships -- with your spouse, kids, family, and friends.

People do it, but it is unethical and triggers the "due on sale" clause on your note. Once you do this, your lender has the right to call the loan due. If you are lucky, they won't. If not, you will be forced to refinance at market interest rates.

With interest rates at a record low, lenders may have a powerful incentive to call these loans due in the future. If inflation rises above 5%, lenders will be losing money on these motgages. Forcing you to refinance some day at 10% might be an appealing option to them.

And if you think they will never find out, remember that they monitor your insurance policy every year to protect their collateral. A name change from you to an LLC on the insurance policy is how they would catch you.