Tag Archives: real estate

How To Preserve Your Assets During 1970’s Style Inflation?

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So times have changed, but inflation is back. In the 1970’s prices went up 10% year over year due to a few things – in my opinion OPEC and the departure from the gold standard were the biggest reasons. During that time period you would have made out quite well if you kept all your cash in energy stocks and real estate investments. You’d also make out like a bandit holding gold and silver.

During this period I think the same is true, however there’s a few differences.

  1. Energy stocks now should include “Green Energy” companies and not just comprise of typical fossil fuel producers/ refiners.
  2. I’d focus more on residential real estate instead of commercial real estate especially if the commercial REITS are heavily invested in traditional office buildings and property in large metropolises.
  3. Gold and silver now have competition – cryptocurrencies led by bitcoin and etherium. Altcoins offer large APY yields to those who risk holding them and “staking” them or participating in defi programs. Bank interest rates are still abhorrently low, and at the time of writing this the best interest you can get on a savings is basically 0.5% with Ally unless you are using some promotion or something that requires you go through hoops. Defi can easily get you closer to 20%.
  4. One sector I’m willing to keep cash in is food producing companies and food sellers. That means Lamb Weston, Conagra, Archer-Daniels Midlands for the food producers and Albertsons and Walmart for the retailers. These companies make money off of an inelastic good, and for those who took economics that means that people can’t really stop buying regardless of the price. When it comes to low level luxury goods price elasticity means that demand goes down when price goes up, and for some goods this effect is stronger than others.
  5. Another sector that sells goods that are partially inelastic is energy, that means energy companies and I’d throw in green energy companies into this mix. Fuel is needed for heating during the winter and essential transportation year round.
  6. One winner of inflation that wasn’t around during the 1970’s could be the internet and internet based businesses. As people are too poor to go out, pay for fuel, and dine out they may turn to internet based entertainment such as we saw during Covid in mid 2020.
  7. Regarding real-estate, we did see a huge surge in price in the past few years as people moved around the country with the ability to work from home and the newfound realization that their life is finite due to the pandemic – we may see real estate prices keep up with inflation or slow down a bit, I think a slowdown is more likely as homeowners feel the strain of inflation and sell-offs start to happen. This will benefit people and corporations who have the means to buy up these properties and rent them out.

What not to do:

  1. Nothing – don’t do nothing. Take action to preserve your value that you’ve worked hard to build.
  2. Bank CD – if you lock your money into these low yield fixed rate certificates of deposits you are effectively throwing your money away.
  3. Keep all your money in Consumer Discretionary and related businesses stock. That means Footlocker, Texas Roadhouse, etc.

Is inflation “transitory”

  • I don’t think so, I think it will slow down in the future but what you can buy for the dollar now will never buy you more in the future. I see inflation going up 5 to 10% for the next few years, and that is on the optimistic side.

Calculating Cash on Cash Return from Multiple Properties

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The gist of this exercise is to get data from Zillow, import it into excel using the “Zillow to Excel” Chrome extension, and then creating another custom tab on the Excel file to analyse the data. We take annual income minus expenses and divide that over our cash investment which consists of our downpayment and closing costs. If there is rehab or initial repair work that would also be in the denominator.

Watch for yourself and see if you can make your own cash return spreadsheet to find the best deal! If you wouldn’t mind I’ve love for you to subscribe to my YouTube channel while you’re at it by clicking on the video via the “Watch on Youtube” link and subscribing.

Let’s Talk about Bitcoin Versus Gold

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Bitcoin Versus Gold

The gist of this article is to explain in clear English why bitcoin has outperformed gold and makes a more viable currency. I’m not going to speculate on price movements rather the utility of the currency. If you’re an older reader pay closer attention, bitcoin is no longer just “an idea in a geek’s head”.

The Charts

BTC/USD

BTC/USD 1 Year to Jan 9, 2021

SPRD Gold Trust Price

SPRD Gold Trust Price 1 year history ending on Jan 9, 2021

Why has Bitcoin Outperformed?

So why has bitcoin outperformed gold in the past year? The charts above show bitcoin and a gold ETF side by side and as you can site bitcoin is the clear winner. My answer is in the form of a question.

“How would you use gold to buy what you buy in a given year?” How can you use gold to buy pizza, how can you use gold to order items online, and how can you use gold on the go anywhere you are?

The answers are clear, you can’t. If you do, you’ll probably lose value, for example you can give a store clerk a gold coin and he’ll pocket it and then pay from his pocket because he just ripped you off, but he won’t go through the rigamarole of checking the spot price of gold and empty out his cash register to make it a fair transaction. Regarding online orders, forget it. It’s really dangerous and stupid to be carrying gold coins with you everywhere you go.

Now pose the same question with bitcoin. Well, in some foreign countries such as Japan I can buy pizza with bitcoin. The US is still catching on so most restaurants and stores will not accept bitcoin.  Many websites accept bitcoin, a long time WordPress started accepting bitcoin and others followed such as Steam, Reddit, Microsoft, AT&T. The biggest news of all I think is that Paypal will allow spending in local currencies with bitcoin. So you go anywhere in the world, imagine being able to spend in local currencies being converted out of bitcoin and a real-time rate. Amazing right? All you need is your phone, something undoubtedly you have either in your hand or pocket right now. Good luck bringing gold overseas, even locally TSA questions people that move gold around but if you go overseas you may be subject to paying a tariff to bring in gold.

What should I do if I have Gold?

Two People Debating

If you have gold don’t worry, I think gold prices will keep going up in the medium and long term. A short term fall is most likely institutions rebalancing as they add bitcoin to their portfolio. Institutions need to have bitcoin in reserve if they offer their customers the option to buy bitcoin on their platform. Gold does have a few benefits over bitcoin, including it’s time earned reputation as a store of value. A digital coin that’s been around for a little more than 10 years is not going to replace gold as the “gold standard”, and you are protecting yourself against inflation. Gold also has the title of being anonymous. As long as people aren’t writing down serial numbers of coins or bars they trade, gold can be untraceable. Bitcoin used to have that distinction but since it uses a public ledger if folks reuse their same bitcoin addresses its possible to trace down where addresses belong using some tricky sleuthing. Also, many people are keeping bitcoin on online wallets that are hosted by companies rather than keeping it in cold storage on hard drives. That means users don’t really own the wallets they are using a service to manage a wallet that then creates sudo wallets when transactions are performed.

You’ll want to make precautions to make sure you don’t get your gold lost or stolen, gold thankfully has elemental properties that prevent it from decaying or becoming dull over time. That being said, I feel it’s value as a currency are less than bitcoin so treat it more as a hard asset investment (much like real estate except without the power to cash flow). I’m going to get to preferred investments later.

What should I do if I have Bitcoin?

If you have bitcoin congratulations, you’ve probably already made a killer profit. That being said bitcoin is still growing as a currency and most folks that are older and less technology savvy may be less likely to “catch on”. However, the great thing about bitcoin is it is a deflationary currency meaning it has a hard supply cap and the mining becomes more difficult over time. Higher demand with limited supply will lead to higher prices, however a pullback from the recent price spike is very possible. What I would do if I did not already own real estate is sell enough bitcoin to make sure you own your primary residence. If you have a lot of bitcoin I’d also sell more to buy rental properties which pay back the mortgage and then some. Throughout time mankind has had great success in making fortunes from supplying housing to folks for a price. You are doing tenants a service by providing housing at a price they are willing to pay and they do not have to buy an entire house or deal with some struggles that come with owning properties such as maintenance, taxes, insurance. I wouldn’t sell it all though because during a rising period it’s hard to be certain how high bitcoin will go. Will it stop at $50,000 or continue it’s way to $1,000,000? With a max supply of 21 million coins a 1 trillion dollar total capitalization would mean each coin is worth $47,619. Does the world place that much value on this cryptocurrency? My guess is yes, and if bitcoin pulls back to less than $20,000 I will be dollar cost average purchasing more with each paycheck.

The Paycheck Conversion Plan

I learned of this when I lived in Malaysia. The Malaysia ringgit was getting hit hard with low oil prices and political issues, lines would form around all the currency traders (which were prevalent also because of lots of tourism). Locals would exchange their hard earned ringgit for either USD (US Dollars), SGD (Singapore Dollars), or RMB (Chinese Money). The reason for this was to prevent their money losing value as fast as it would otherwise. Also because they trusted the other currencies more.

I think it’s a great painless and stress free way of purchasing something your brain construes as “expensive” over time. Kind of like getting into the ocean inch by inch rather than taking a dive. Budget yourself, how much you need for your life and how much you use for investing. Divide your investing into stocks,real estate, and crypto. Divide your crypto into Bitcoin, Etherium, Litecoin, and any other coins you deem worthy (read the white papers and do so checking on how easy these coins are to mine and what they are already used for). After you come up with that percentage multiply it by your  wages (be it bi-weekly, monthly, etc) and then set a recurring purchase transaction on a website like Coinbase (join using this link to get $10 free bitcoin for you and me) for all the coins you’ve come up in your list.

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How to Avoid Capital Gains Tax on Your Residence

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Selling Your House for a Profit? You May Qualify for an Exclusion on Capital Gains Tax

A lot of people have a false assumption they have to pay capital gains tax on their house if they make a profit on it. According to the IRS (as of January 5th, 2019), you may exclude up to $250,000 dollars of gain if you file single or up to $500,000 if you file joint with your spouse, as long as you meet their criteria which I will mention later.

That means if you buy, for example, a $250,000 house and sell it for $750,000 you can keep that gain in your pocket as long as you file joint with your spouse.

Now let’s get to the important part, the criteria.

IRS Section 121 Exclusion Criteria

You must have used the house as your main house for two of the past five years before the sale. That doesn’t mean you need to have owned it for five years, it just means you must have used it as your main home for two of the past five years before the sale date of the property.

It logically follows that you generally could not have claimed this exclusion on a different property less than two years prior to the sale date. <See IRS Publication 523>

This general rule does not apply to certain situations including government assignments (military, intelligence, etc) and they can extend that five year window out further to ten years.

How does the IRS determine your “main” home?

  • US Postal Service Address
  • Federal and State Tax Return Address
  • Drivers License Address

They may also consider other information including:

  • Where you work
  • Where you bank

Disqualifiers

  • You can not have acquired the property through a 1031 exchange. <See Investopedia for more information about 1031 exchanges>
  • You cannot be subject to expatriate tax. This is a tax on US citizens renouncing their citizenship.

Partial Exclusion

The IRS allows for partial exclusion under the following circumstances:

  • Work related moves
    • New work location more than 50 miles further from home
  • Health related moves
    • Move to take care of relative
    • Move based on doctor recommendation
  • Unforeseeable events
    • Disaster
    • Deaths
      • Of owner(s)
    • Birth of Two or more children
    • Home Destruction
    • Act of Terrorism on Property

Other Things to Remember

Even though this is a great exclusion written in the tax code, it could change! Make sure to double check the rules when you do end up selling your house for profit. Also, keep in mind that some of your closing costs in buying the property can go into the cost basis for the house – keep those records! Lastly, make sure to report the sale to the IRS – even though you may qualify for a complete exclusion.

Getting the ROI on Rental Properties

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Everyone knows that Real Estate is one of the major ways to make income. Like stocks, you have to put money in to get a return which will either be positive or negative. Unlike stocks, it isn’t so simple to figure out how much your return is. Online brokerages like Fidelity, Merrill Edge, and Charles Schwab have nifty graphs and reports that can tell you exactly how well you’re doing over a specified time frame.

If you have considered buying a real estate property, measuring your return is one of the most important factors to identify your successes and failures. I found a great video by BiggerPockets.com which goes through the process in a simple way that will help you manually compute your return on investment. Of course, as you build your real estate portfolio it is important to find a good way to keep all the information together which can be done using a myriad of tools out there.

 

Trump Stocks VS Hillary Stocks

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At this point it’s safe to say that unless something extraordinary happens either we will get a Donald Trump or Hillary Clinton presidency. While I could spend volumes discussing the economic implications of either win, at this point its more important to figure out what companies will benefit or lose from each presidency so you can take a gamble or get out before its too late.

Coal/Oil

Its safe to say that fossil fuel companies would continue to get hammered under a Clinton presidency. If Clinton is anything like Obama, we should see a few more coal stocks go bankrupt like Peabody Energy (Formerly PBU) and Arch Coal (Formerly ACI). Surviving coal companies include Cloud Peak Energy (NYSE:CLD), Westmoreland Coal Company (NASDAQ:WLB), and Alliance Resource Partners, L.P. (NASDAQ:ARLP). Oil companies face regulatory difficulties under a Clinton presidency, but most should be able to survive as oil maintains current price levels. The coal industry in my opinion is a bad investment at this time due to the very cheap price of steel and the lower demand from China and the United States.

Defense

One area that will most likely benefit from a Trump presidency is the defense manufacturing companies. Companies which would produce items for the military and navy include General Dynamics (NYSE:GD), BAE Systems PLC (LON: BA), and and array of other companies. You can also invest in Mutual Funds iShares Dow Jones US Aerospace & Def (ITA) or Fidelity® Select Defense & Aerospace Portfolio (FSDAX). Over the past year ITA has returned 18% and FSDAX has yielded 14%.

Healthcare

While I’m tempted to say the healthcare industry would continue well under a Democratic president, I can’t say for sure given the very cutthroat price increases which have made them a popular industry to attack from both Democrats and Republicans. If the Democrats end up further building up Obamacare it’s quite likely the pharmaceutical industry will be volatile. The TPP agreement pushed by Obama and Clinton will make people in 3rd world countries have to pay more for medicine, which may end up furthering profits in this sector. Time will tell. I’m not going to put any recommendations here.

Gold / Silver

If you’re a gold or silver investor, then the past year has been very kind to you. Especially if you’re into gold and silver mining stocks. Helca Mining company (NYSE:HL) surged 215% YTD and almost 200% in the past year, from under $2 to $6. Barrick Gold Corporation (NYSE:ABX), Goldcorp Inc. (NYSE:GG), and Silver Wheaton Corp. (NYSE:SLW) are all big players in this market. This is one of my favorite industries to make huge profits from moderate changes in base precious metal prices. It’s hard for me to say which candidate will cause these to go up further, it’s more dependant on the Federal Reserve interest rate policy and inflation. However based on the campaign talk It seems like a Clinton presidency would be better for precious metals. It’s always a good idea to have these as part of your portfolio to some degree.

Real Estate

Donald Trump made most of his money off of real estate – it’s always good to include this in your mix of assets. As the world population expands real estate will most likely continue to climb regardless of who makes president. A recession could certainly hit prices, but only temporarily.

Conclusion

I’d get out of coal, first of all. I’d put money into defense stocks as they should outperform the market under either presidency. I’d allocate some money into precious metal if only for an insurance policy on the dollar. I’d get some cash out of this frothy market and wait for the market to tumble before the election before strategically investing in under-priced high return on equity stocks.

What Explains the Chinese Stock Market Price Boom?

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The Chinese stock market boom has been scrutinized by the US mainstream media for it’s rapid ascendance. You will hear people mentioning that high school dropouts are now investing in large numbers without understanding the basic fundamentals of companies including but not limited to earnings. The Hang Seng (Hong Kong’s Market) has risen 60% this year having been opened up to sell shares to Chinese investors.

In all reality, small scale investors make up a small portion of actual market volume – and while it’s true that a large number of them are trying to get in on the action, the real reason for this steep rise is a law change which hampered real estate investment tactics. This included increasing the minimum down payment on a second property to 20% and increasing the capital gains tax on property sales to 20%. If you’ve lived in Asia you will find out that Chinese investors are big into real estate – and this spreads beyond China and Hong Kong into other ASEAN countries including Australia and New Zealand. Even less educated folks know the value of owning property, and many of them have been fortunate to make a reasonable amount of money in the past few decades as China has progressed to claim the world’s #2 spot economically speaking.

Stack the new property restrictions with two interest rate cuts by the central bank and a specter of a stimulus package down the road and you have the perfect environment for a stock market to flourish. This is similar to how the US stock market has reacted in the past few years to the Federal Reserve stimulus packages and extended periods of historically low interest rates.

Just this week, the Hang Seng market value rose above Japan’s Nikkei – an amazing feat but not unexpected given their market getting opened to Chinese mainland investors. Japan continues to stagnate as its fundamentals and workforce are burdened by a low growth rate and near zero immigration (due to strict immigration laws). The one bright side to the economy these days is higher tourism due to a stronger dollar against the Yen.

Some imagine the Chinese and Hong Kong bull markets will continue for awhile until free cash flow diminishes. Others are more skeptical, including most US pundits – they envision a large correction. I can foresee a huge catastrophe if the tax laws are changed regarding Chinese capital gains tax on stocks, but given the new restrictions on real estate trading this isn’t completely out of the question.

In hindsight, an American investor could have made a fair amount if he/she invested in Matthews China Fund Investor Class (MUTF:MCHFX), which has gone up 20.17% Year To Date. This fund specifically zoned in on Chinese stocks has outperformed one of the best American stocks Apple (Apple has gained 12.96% year to date) and NASDAQ (A piddly 4.57%). Investors can also consider investing in a broad array of Asian dividend stocks using the Matthews Asia Dividend Fund Investor Class (MUTF:MAPIX) which has gone up 12.95% YTD.

It goes without saying that the one who thinks there’s a serious bubble can always short these types of securities, but this is EXTREMELY risky. There is still more free cash flow as a percentage of the stock market capitalization in China than the US, meaning that they can pump a lot more money into the stock market before running short on liquidity. My expectation is that if the Chinese stock market is reaching bubble capacity and collapses, it’s quite likely to impact the US stock market. Even from a psychological perspective, seeing a bubbled stock market pop may cause people to rethink their investments.