Important Update – Making plans for the next three to four years; Some tough love for the doubters

To download the podcast – Right mouse click here (duration 40:07)

-Economic analysis and predictions for stocks, bonds, real estate and housing. What we need to do now.
The Age of Disorder – the new era for economics, politics and our way of life
Treasury Securities Operational Details
Tentative Schedule of FedTrade Agency Mortgage-Backed Securities (MBS) Operations for the periods from September 15, 2020 to September 28, 2020
Housing Market White Hot After Labor Day: Home Prices Up 13%, Pending Sales Up 27%
Dayton’s housing scene remains ‘incredibly hot’ through pandemic — here’s why

 

A warning to the bears; The US Fed has promised us another multiyear speculative opportunity

the Marriner S. Eccles Federal Reserve Board Building in D.C.; The face of humanity’s real enemy.
  • The Fed’s apparent new strategy centers on its willingness to allow inflation to run hot for a period of time to “make up” for the period of inflation that was below the central bank’s 2% target. This is called “average inflation targeting” by central bankers.
  • The Fed is using political correctness as cover to defend its new policies. The Fed is hoping that these new strategies will have greater benefits for groups like Blacks and Latinos, which historically have been relatively marginalized and punished during the COVID pandemic.
  • The Fed’s ostensible hope is that by letting inflation run hotter as the job market recovers, while suppressing interest rates for longer, the economically disenfranchised will benefit more.
  • We know that these new policy directions, with the promise of zero-rate policy for as long as 4-5 years, will only ensure an ever-greater economic and balance-sheet disparity, which is the true intention all along.
  • These new Fed policies will primarily help the income-generating asset owners at the expense of those it says it is claiming to want to help. The more of these assets investors own, the wealthier they will become.
  • Over the next few years, asset prices will begin to lose their moorings. Already, with respect to tech stocks, P/E and P/S ratios have taken a back seat. Investors are willing to pay up for the firms that benefit from this NWO dystopia.
  • For those who are under-invested in real estate, this winter may provide us with the last good opportunity to buy before we enter a rising second derivative phase.  Cap rates still make sense, but they should begin to gradually move lower as was the case in the mid-2000s.
  • The catalyst for the last RE bubble was the result of the Fed’s response to 9/11; another manufactured crisis. This one will be the result of the Fed’s response to COVID.
  • The Fed’s initial response to this latest crisis will allow the other central banks to maintain their dovish policies, and this should help keep the USDX from falling much further. If the dollar falls too much and its viability is in doubt, many overseas dollars will come back to the US and find its way into USD assets as well as the CPI. This will only be the case if the USD softens up versus the other currencies.
  • The difference between this new speculative cycle and the one established under Greenspan in the wake of 9/11 rests with the growing concern over the USD’s viability as the global reserve. This may mean that global investors may find USD-based assets cheaper than do the people in the U.S. This would imply that the working class will once again be shut out of opportunities to buy homes and stocks.
My estimates on how high residential real estate prices will move
In the mid-2000s, the HPI rose much higher than rents, which ultimately supports house prices. I predict this long-term suppression of interest rates will cause another bubble.
  • Several years of dovish Fed policy will result in another round of stock, bond, and real estate bubbles. Currently, we are in the earliest innings, and I would advise those willing to take the risk to invest as prices should move consistently higher.
  • The median price of a home sold in July rose 8.5% annually to $304,100.
  • If over the next few years the Rent CPI index value moves to 260 on the above chart, and the HPI overshoots Rents CPI by 34% like in the mid-2000s, we could see the HPI index value at 348. This would equate to a median home price of $383,303. [(348/260) x $304,000]. If rents move higher under an inflationary scenario, house prices could move up more than anticipated. Based on trend rent increases, this would mean prices rising by another 26% nationwide over the next four years.
  • Homes priced on the lower end performed much better than those on the higher tiers. This will continue as the working class swells with open borders and investors take over the sector. I would expect these homes to move up more than the 26% I estimate nationwide. These values could rise as much as 35% or more over the same time frame.
  • Anyone with a 20-25% down-payment would more than double his money under such a reasonable scenario. This doesn’t include rents.

I sold much of my real estate portfolio in late 2005, because cap rates dropped to about 3.5% on my condominiums and 3% on detached single family houses, while at the same time, the Fed began to embark on highly hawkish policies.

These same condos currently yield about 6.8% (down from their norm of 7.5% and 14% at the bottom of the market last decade). These same houses currently yield 6%, down from 8.5% at the market bottom.

If a condo that sells for $200,000 has a cap rate 6.8%, a 3.5% rate would imply a price of $388,571. If a house that sells for $300,000 has a cap rate of 6%, a 3% cap rate would imply a price of $600,000.

While every market is different and the price points will vary, the overall results will be the same; higher prices.

Stock prices continue to move higher

I stated in the past that Dow 40,000 is a definite possibility over the longer-term, and if the current Fed mindset prevails over the next few years, we could easily see upside of another 13,000. This would equate to Dow 41,000. While this may sound remarkable, it only means a compounded 10% return for the next four years.

If the Dow rose as much as the Nasdaq has over the past 10 years, the Dow would be at about 39,400. So Dow 40,000 is almost a non-event.

Unfortunately, the Dow is quickly becoming an irrelevant index, and thus I tend to concentrate on the S&P 500 and Nasdaq COMP. The Dow is price weighted, and the stock selection process has now become more subjective, arbitrary, and politically correct. I offer this prediction, since many subscribers ask me about the Dow.

The COMP is up 394% over the past 10 years, and if this same return were afforded the DJIA, which is up “only” 166% over the same span, then the Dow would be about 39,400. [10,016 on 08/31/10 x 394%].

Barring a nuclear takeout of Washington DC, higher stock index numbers are coming. As for the S&P 500, we are much more likely to see 4,000 before 3,000. Since we are already trading at about 3,500, the intermediate bias is to the upside. Moreover, the S&P is the second major index to move higher than its pre-COVID high. The lagging Dow should eventually overtake its current historic highs, but by then the Nasdaq and S&P could be much higher.

S&P 500 PE ratios; While elevated, they have room to grow. With low rates, we could see a consistent rise over the next few years. The biggest firms benefit the most from deficit spending.

Please note that while the Fed-injected liquidity has provided a powerful upward force for stocks, the PE ratios of the S&P 500 have not risen nearly as high as the underlying stock prices. By function, a monetary system that supports and encourages the massive deficit-spending we have been observing is a “trickle-up” mechanism.

Understand this simple process; the money for these massive social spending campaigns is received by the masses, who quickly hand it over to the largest and most powerful firms, which only further strengthens the elite’s positioning over the unwashed and reprobate plebes. The elites control these firms and eventually capture all this spending as profit. At the same time, the impulsive and spendthrift proles are left nursing the debts. This necessitates more deficit spending to mollify the great unwashed who, in turn, spend the money like it is burning a hole in their pockets. The wealthiest are able to capture this money the most effectively, which is why I refer to trickle-down economics as trickle-up reality.

You can also stop using the Buffett Indicator as a gauge for a stock bubble. The Buffet Indicator is just the ratio of a country’s stock market capitalization to the overall GDP of the country. Through this four decade trickle-up reality campaign to enslave humanity, the S&P 500 has become the U.S. economy.

Final thoughts

If these disenfranchised youth really knew their real adversary, they would be burning down the Marriner S. Eccles Federal Reserve Board Building in Washington D.C. But the masses will never be able to make the connection, and in fact, are no longer capable.

For the investors who are being distracted with their daily IV drip of race riots, police brutality, COVID, political kayfabe, and Zerohedge, they will miss out on the final once-in-a-generation opportunity that could last a few more years. This opportunity should last as long as the Fed maintains its current stance, which will enable all the central banks to embark upon asset-friendly policies. While most of the middle class will be financially wiped out over the next several years, for those who understand the Fed and its owner’s real intentions, this is a time to move forward and make hay while the sun shines.

The seeds for the ongoing social unrest have been intentionally planted in the minds of the unwitting young folk by the corporate MSM, their rigged social media, and their Marxist educational conditioning. Many of these willfully ignorant sad sacks are finding it increasingly difficult to reconcile the cruel real-world reality with their Marxist ideological fantasy. If these disenfranchised youth really knew their real adversary, they would be burning down the Marriner S. Eccles Federal Reserve Board Building in Washington D.C. But the masses will never be able to make the connection, and in fact, are no longer capable.

At the top of this pyramid is the ongoing dovish Fed monetary policy, which will enable this massive new wealth to trickle up to the hands of the wealthiest. If you are to keep your head above water, it is still not too late to speculate.

When I see things turn, I will let you know.

08/26 Update – Big tech & interest rates, Small landlord issues, The biblical case for gun ownership, Vaccine issues

To download the podcast – Right mouse click here (duration 31:12)

Big tech, interest rates, and real estate

-Big tech has become the biggest pool of liquidity in this low interest rate environment. The Nasdaq 100 index value is now larger than the COMP. In the post-COVID NWO, large tech is the new pool to park money (that and real estate).
-The Fed has intimated another five years of 0%. I say the Fed funds rate may remain at 0%, while the other shorter-term rates move below zero.
-Rental investing; Why cash purchases make sense and how to set yourself up to make them. The best deals are still made via all cash. Once investors establish their portfolio, it pays to cash out first and pay for cash in the next transaction.

Chris,
If you say that leverage is the best way to earn more on your money, why do you pay cash for rentals?

J

Small landlord issues

My friend here in Coeur d’Alene owns a duplex. One of the units she lives in, the other, she rents out. She hasn’t been paid any rent since the shutdown back in March. She told me that the Idaho Housing and Finance Department just sent her a check this week for 3 months missed rent. She wants to now evict her renter who is still not paying but if that’s too big a problem, she’ll just sell the place.

Patti

-Why smaller landlords and RE investors usually lose out during these potentially trying times. The large REITs do much better with their tenants and collecting rents. I give the reasons.
Small landlords dip into savings as their tenants struggle to pay rent
-I give some recommendations on how small landlords can streamline their process.

The biblical case on why we should own guns and weapons of defense

-Why I am not concerned about the current rioting where I own properties and live.

And he said unto them, When I sent you without purse, and scrip, and shoes, lacked ye any thing? And they said, Nothing.

Then said he unto them, But now, he that hath a purse, let him take it, and likewise his scrip: and he that hath no sword, let him sell his garment, and buy one.

For I say unto you, that this that is written must yet be accomplished in me, And he was reckoned among the transgressors: for the things concerning me have an end.

And they said, Lord, behold, here are two swords. And he said unto them, It is enough.

Luke 22:35-38 KJV

-One of these swords was even referred to in Luke 22:50 (And one of them smote the servant of the high priest, and cut off his right ear.)
-The sound biblical case for the ownership of firearms and weapons of defense. Stay away from those who use the Bible to say we are not to own weapons of protection. These pastors were contaminated by the modern Christian church movement.
-You may wish to sacrifice your life if it is in danger, but we have a moral and Godly obligation to defend the lives of our loved ones and neighbors.

More thoughts of the vaccine issue

Hi Chris,
I particularly liked your insight into mark of the beast.  I got extremely irate back in March because I saw this coming. Now I am accepting that life may be over for those who don’t comply. Few people have enough knowledge to see the big picture regarding COVID and bible prophecy. Most pastors get it wrong because they don’t understand the Illuminati or even who they are, They believe the dialectic.

Alex

08/23 Update – Perils of penny stocks, Liberals view Chicomm as existential threat, Housing on fire, FOMC minutes, Eschatologists getting it wrong

To download the podcast – Right mouse click here (duration 34:32)

Penny stock case study 

-The perils of trading penny stocks; EMAN in focus. Though the Robinhood traders love the stock and the Feds have recently promised $40 million in award money (not purchases) to upgrade its manufacturing capabilities, a further study of the proxy statement revealed some longer-term balance sheet issues that I previously overlooked, which are now handicapping its price potential.
-Offshore entities and their affiliates, hidden via LLC shells, control over 50% of the shares outstanding, and have been accumulating common stock via conversion of convertible preferred holdings. These entities lend out at onerous terms and are equivalent to pay-day lenders for micro-caps. These lenders effectively gain control of the shares by shorting the stock to lock in profit for conversion in the future at suppressed prices. These convertibles are referred to as “death spirals” as the firm negotiated this borrowing several years ago, when the firm’s prospects were less promising.
-Now that many of these preferred shares have been converted, it would make sense for these LLCs to sell on every auspicious opportunity to lock in profit; hence EMAN’s recent price performance immediately after price spikes.

Growing bipartisan consensus that views the CCP as an existential threat

-I have been coming across more articles on the “liberal” outlets that have been warning that ChiComm China is an existential threat;
CNN: China’s Communist Party is a threat to the world, says former elite insider
Business Insider: Hundreds of Chinese fishing boats lurking off South America add to fears about a future war for fish
-This view is no longer exclusively a pro-Trump view. I suspect that regardless of who gains the presidency, this issue will grow and persist over time.
-Since there is absolutely no alternative to the USD at the present time, I have to suspect that a future conflict will lead to a change. We are being conditioned into the “inevitable.” The global supply chain will be redirected from China over time, which will infuriate ChiComm leadership. Here is the bottom line; a growing population refuses to trust ChiComm leadership.

The Fed’s FOMC minutes in review

-Subliminal contradiction; Though the Fed has engineered a collapse of the yield curve in record fashion, it claims that yield curve management is not in the cards. This form of conditioning allows the observer to view two contradictory findings as equally valid.
-The Fed also stated that it doesn’t anticipate any additional asset purchases above the $120 billion/mo already announced. This is easy to assume, since the Federal government has not come to any agreement on stepped up fiscal stimulus. The Fed will monetize any additional fiscal spending however, once the Federal government comes to terms on new programs.
-This ostensibly hawkish tone took gold down as much as $100 from Wednesday AM trading, and helped to relieve the growing pressure in the commodities market. It also helped the short-term support of the dollar, while at the same time, kept UST yields lower.

Housing on fire

-There really isn’t any reason to add to the observations already proffered. The Fed’s ongoing mortgage purchase program has helped to narrow the gap between the 10-year UST and the 30-year conforming mortgage rate. It will continue, which is why we predicted real estate would be on fire over time.

Take a wild guess where you think this yield will move. Affordable housing investors (those who invest in properties below the market median) have been richly rewarded over all other forms of real estate.
Just to narrow the widening gap, the 30-year mortgage yield has to drop to about 2-2.25% from the current 2.9%. The Fed will ensure this and more as it continues their MBS purchases.

-I purchased a condo in late February for all cash, and it’s already up by about 20%.  Although I initially regretted laying out that much cash when I thought it was prudent to be liquid, once the Fed announced their programs in late March, I knew I made the right decision. The cap rate is still about 9%.
-Rochester NY real estate is on fire. Check out these two Realtor articles. Rochester is #3 and #9 in these articles.
Far From the Bright Lights of Big Cities, These Are America’s Hottest ZIP Codes in 2020
Comeback Kids: These Housing Markets Have Recovered the Most Since the Start of the Pandemic

Students of eschatology are still getting it wrong

-If what I think is correct, and the globalist noose is being placed around our necks, we will have onerous restrictions placed on our abilities to engage in commerce or hold down a job unless we get vaccinated.
-Based on the coalescing globalist narrative, futures vaccines will be mandatory and their administering will have to be proven. Thus, I see proven concepts via micro-needles injection with their luciferase biomarkers as the real mark of the beast. We will have to show our near-infrared readable marks to be allowed to do anything. Many globalist think-tank experts are already predicting that any new vaccines will have to alter our DNA sequences to produce the required antibodies. We will no longer be fully human.
-Thus, it is ever more imperative to grow our passive income. This will afford us more time as we adjust to the end times. As a remnant Christian, this is really why I recommend real estate investing over all others. We have more direct control over our decisions.
-Already, I am adjusting to a world in which I won’t be able to do many activities I once took for granted. Since I will never get vaccinated, I won’t eat out and do much shopping anymore. I also don’t rely on the government or employer for money. I receive rent from happy tenants, since I don’t charge full market.
-The globalists have the Bible prophecy students believing that a chip will be the mark. I am beginning to conclude that these vaccines with their bio-luminescent marks will be the real mark.
-When we are not raptured out of here, the demoralized Christians who believed the pre-tribulation pastors will throw in the towel when Jesus doesn’t appear. Recall that Jesus’s apostles were initially demoralized when Jesus died, but he appeared only a few days later. We will have to wait it out at least several years.
Quantum Dots Deliver Vaccines and Invisibly Encode Vaccination History in Skin
-The great leaps in 5G and wireless technologies circumvent the need for a microchip, while being much more effective via alterations to our body chemistry and DNA makeup.

08/15 Update – It’s a great time to be alive; Day trading and a stock tip, Investment opportunities, Housing fundamentals, Nationalism and more

To download podcast – Right mouse click here (duration 35:41)

Housing remains an excellent choice
-Discussion of a 8/15 MarketWatch article, Mortgage rates keep falling — will they finally drop to 0%?
-This blog was the only one that was consistently correct in its prediction of bond yield movements and the circumstances behind these drops.  We were so confident that we correctly predicted the best assets to accumulate.
-The three reasons why housing will continue to shine;
1) Ever-falling bond yields
2) A world awash in ever-softer dollars; This enhances values in the former Commonwealth, Europe, China, Russia, Eastern Europe, etc., which is why everyone needs to stay up on US Fed policy. Its policies provide the framework from which the other central banks can operate.
3) Powerful Western demographics; The United States population has grown by 84 million people since 1990 (more than two Canadas), and 51 million since 2000 (two Australias). Most of these people are lower-end segments and are creating constant demand for middle-income housing, which, of course, is no longer being built.

Day trading tips and suggestions, a stock pick
-I add to my prior article on day trading, with a few more vital tips to abide by. We need to have iron-clad discipline. When we deviate, we lose.
-Keep track of earnings and never hold a large equity position (or any) in a day trade account into an earnings report. The chance for a major blowup is too great.
I received a YouTube video from a Canadian subscriber regarding the odds of making money in day trading.
Another stock pick; eMagin (EMAN: NYSE-AMEX). Excellent ground floor opportunity on a penny stock

Trump and nationalism
-Despite what the world is claiming, we are not about to go into the abyss. The alt-media Cassandras and MSM keep pounding home about riots and COVID deaths, but the stories are greatly exaggerated and have only been stumbling blocks for the fearful and unwashed.
-I largely support Trump’s platform and loved the nation that was, but that nation is no longer in existence. But, I am wasting my time contemplating about the kayfabe election outcome, except as it may pertain to my investments. Ultimately, we only have direct control over our personal choices, and if some choose to get worked up and depressed over this manufactured farce, that is up to them.
-Imagine if we didn’t act properly and saw this all unfold as predicted. I know I would be depressed being broke, but since the yield curve moves regardless of which puppet is in office, we need to act accordingly.
-If I played by the rules of the investment industry and had a slightly sociopathic mindset, I could be making a boatload in the investment community. I certainly would not be creating a need for someone in which they would buy a useless service or read a site like ZeroHedge.

08/09 Update – How to prepare if the U.S. dollar loses its reserve status; Trump as the dialectic change agent 

To download podcast – Right mouse click here (duration 48:44)

-We discuss the probable changes to Federal and state public finance and tax polices if the dollar loses its reserve status.
-Corporate income taxes as a percent of government revenue has been falling for decades. Government tax policies across the board have helped to enhance asset prices.
-Changes to tax policies such as the long-term fall in effective corporate income tax rates, the defined contribution plan that encouraged stock ownership, the large cap gain exclusions in owner-occupied real estate, and the 1031-tax free exchange of investment real estate, could all come under attack as the government attempts to increase tax revenue.
-The government will need to increase tax revenue, since the U.S. will need to begin relying more heavily on internal sources for funding. Many relying on passive income (myself) could lose out.
-Labor intensive employers lose out under the current tax regime, and find it profitable to offshore capacity. If the USD loses its status, this would need to change as employers would be forced to bring productive capacity home.

Look for a change if the dollar loses its reserve status

-While this would benefit many previously disenfranchised workers, these large employers will lobby the government to reduce their tax and cost burdens of hiring workers. Payroll taxes may fall, but the costs and responsibilities of the usual employer benefit menu of healthcare, child day care, retirement plans, tuition assistance, etc., will shift to the government.
-New Mexico already places a sales tax on services, and this could expand around the country as the states will need to increase their own revenue if the Feds can no longer easily transfer money to the local level. We could see Federal surcharges on all sorts of transactions.

An ever-increasing employer cost; If the USD loses its reserve status, look for a single-payer system to emerge, which just shifts healthcare burdens to the government. How else will labor intensive businesses make money back home?

-If the USD loses its status, look for taxes of all kinds to increase markedly. They would then be on par with the former Commonwealth nations and Britain; perhaps even as high as the EU. These revenue streams would fund all the social programs that used to be the “burden” of the employer.
-While we could see a reverse of the trend in the chart below, a sharp shift to socialism would effectively reduce the costs of hiring by the large employers.

-On the surface, if the USD lost its reserve status, stock prices would fall. Dollar-based assets would lose their allure as a way to park cash, but a weaker dollar could enhance the profits of firms with heavy exposure outside the U.S. Large firms around the world with large international exposure would be sought out as a way to mitigate currency fluctuations.
-Since overseas dollars would flow back home, many costs of life here will rise much higher. Price to income multiples of real estate and rent levels will rise to levels observed in the former Commonwealth. There would be little means for the U.S. to export its inflation.
-In the long run, the U.S. would be much better off if the dollar lost its reserve status. Its industries would be much more competitive and would hire more people domestically. The U.S. has effectively lost out with its currency being the global reserve. No other nation, including China, is willing to engage in the destructive policies that the U.S. needs to embark upon to make the USD the global reserve currency.
-Trump is the change agent that has served the globalists well. By conflating a polarizing and unstable man with nationalism, the elites have conditioned the demoralized population to “throw the baby out with the bath water” and elect a previously unelectable candidate team who will throw the nation under the bus. The demoralized people will rejoice as they burn the flag and the nation to the ground.

A subscriber asks: Real estate investing in an uncertain world

Chris:

What would you recommend about rental real estate in Minneapolis (or any similar city) at this time? I have a cousin there who just retired. Pointed him to your podcasts and we both listen then discuss your advice by email.

He wants me to go in on 2 or 3 rental houses in Minneapolis area. He used to own a barbershop and the small building it was in. In recent years the neighborhood got [worse]. Barbershops are one of the few businesses that do well in “diversity” neighborhoods, so he was offered a decent price to sell 18 months ago. He got enough for substantial downs on 2 or 3 modest rentals, but needs more for working capital.

Wants me to invest 50-50 with him. (I’d be totally passive investor with separate LLC on each house.)

He says house prices in Minneapolis suburbs are dropping fast — due to recent “events” there. Is now a good time to buy? Or wait? If wait, then wait until what? What will be the signal to buy in cities like that? After the election, maybe?

Thank you.

P

It’s all about the numbers

Our purchase/sale decisions regarding rental real estate should be very straightforward. Essentially, if the numbers make sense then we can tune out all the other distractions via friends and family, politics, and the media. By focusing on the numbers, our investment decisions become much easier and less stressful to make. By using the numbers, you won’t have to do a whole lot of guessing when trying to spot opportunities.

So, which numbers matter? Although residential housing differs from all other forms of real estate, because of the emotional factor, we can still use basic commercial real estate math to determine whether or not a prospective purchase makes sense.

Here are two formulas I use all the time. They are easy to calculate, since their spreadsheets are freely available on the internet:

Capitalization Rate:
The capitalization rate, also just called the cap rate, is used by many investors to quickly determine what a property is worth, or to measure the performance of a property they already own. The advantage of the cap rate is that it takes into account vacancy, credit losses, other income, and operating expenses. It also doesn’t require a multi-period projection of cash flows like the internal rate of return (IRR). The disadvantages of the cap rate are that 1) It only looks at the first year of operating data, 2) It doesn’t take into account debt financing.

Example: We can determine the cap rate of a house

Purchase price and upfront costs to get rented: $250,000
Gross annual rent (going market rate): $1,650 x 12 = $19,800
Vacancy rate: 5%
Effective gross rent = $18,810
Annual taxes and insurance = $3,800
Annual operating expenses = $1,000
Annual net rental (operating)  income = $14,010
Cap rate = 5.6%

If the historic cap rate for this property and surrounding neighborhood is consistent with what you would derive at the current purchase price then I would say the investment makes sense. On the other hand, if the historic cap rates were say, 7.5%, then I would perhaps try to get a better price or look elsewhere.

Personally, I look for the best neighborhood in which I can achieve a cap rate of 7.5% on my prospective purchases, including up front costs for any rehab work. Any rehab work on your end has the potential to save a lot of money, and since you will be buying to hold, you will be able to “season” your title to get the best returns, as opposed to flipping. In this mature market it is incumbent to find the best value and cheapest financing. Though the cap rate does not take financing into account, the next formula (IRR) does as it only includes the up front money you spend, including down-payment.

Internal Rate of Return (IRR):
The internal rate of return is the discount rate that is used in project analysis, capital budgeting, or real estate investing over a defined period that makes the net present value (NPV) of future cash flows exactly zero. In the IRR calculation, we set the net present value equal to zero then we solve for the discount rate. Remember that the discount rate is the rate of return we could expect from alternative projects; therefore, when comparing similar projects, it is generally more desirable to undertake the project with the higher IRR given other common parameters. Thus, the higher a rental property’s IRR, the more attractive it will be as an investment, all other things being equal.

We can also think of the IRR as the expected compound rate of return of a project. While the cash flows may vary, you only have one IRR per property, because here we are calculating a discount rate that is the same for each year.

  • IRR is the annual rate of growth an investment is expected to generate over the period in question.
  • IRR is calculated using the same concept as NPV, except it sets the NPV equal to zero.
  • IRR is ideal for analyzing a rough annual growth rate from any income-generating asset or project, and a rental property fits here.

Here is a link to an IRR calculator using a five-year time horizon (the industry standard)

Internal Rate of Return (IRR) Calculator

Keep in mind that the “year 5” cash flow includes your net proceeds from the theoretical sale. The IRR takes your financing into account, because the investor will calculate the return based on the out-of-pocket cash as his initial investment. The disposition proceeds are net of any loan payoff. The higher your loan-to-value, or the less cash up front as your initial investment, the higher your IRR, as long as prices and rents remain stable or move higher over time.

Example 1: A rental purchase for $250k with a sale at the end of year-5 for $300k. (Assume all cash and no loan)

Purchase Price: $250,000
Annual net rental income cash flows:
Year 1: $15,000,
Year 2: $16,000,
Year 3: $17,000,
Year 4: $18,000,
Year 5: $19,000+$300,000 (disposition)
IRR: 10.0%

Example 2: (This time we assume a 20% down-payment for the $250,000 house)
Initial investment: $50,000
Annual net rental income cash flows (while your mortgage P&I is deducted from your annual net rental income, the rent you receive that is devoted to your amortized principal pay-down is considered income for tax purposes and reduces the loan balance. Thus, it will be included in your IRR calculation at the end of year 5, when you sell. Your escrow component is for your taxes and insurance and is an expense whether you finance or not.):
Year 1: $2,000
Year 2: $3,000
Year 3: $4,000
Year 4: $5,000
Year 5: $6,000 + $120,000 proceeds*
IRR = 24.4%
* proceeds of $120,000 is derived by the sale at $300,000 less the mortgage balance of $180,000 ($200,ooo initial loan balance minus $20,000 principal paydown)

These are very reasonable scenarios for this rental property and if a purchase is handled appropriately and you can build up equity through your labors, these IRRs could be even higher.

For those with the experience to spot bargains and value in real estate, we can achieve rates of return that are superior to any other forms of investment, which is why I tend to recommend rental investing for the average person. When you throw in all the extra tax benefits of owning rentals, I think the choice is clear.

Look for IRRs that offer a compelling reason to buy. Rental investing does come with risks and opportunity costs, so make sure you pay yourself enough money to make it worth your while. Any rental investment with an all-cash IRR in the single digits, especially assuming appreciation, should be avoided. As the above example illustrates; if you can obtain superior financing, you have the potential for a rate of return or IRR that rises a lot.

Advice for those using partners in real estate

As a rule of thumb, whenever I use partners, I establish title via a multi-member LLC domiciled in the state where the properties are located. These LLCs are constructed differently than single-member LLCs (or disregarded entities) and receive their own TIN for federal and state income tax purposes. Single-member LLCs use the principal member’s SS# and all the income/losses pass through to the individual.

Since you plan on investing with your cousin, I would recommend placing all three properties into one multi-member LLC, since your percentage of ownership will be the same.  This makes even more sense if you employ leverage and have little money out of pocket up front. Generally speaking, multi-member LLCs are much more difficult to pierce from lawsuits against a partner than single member LLCs, and are thus afforded more protection. Please consult an attorney in Minnesota who is familiar with real estate when you establish your LLC. You want to make sure you set it up correctly. Once this is achieved, there is little need to use an attorney on an ongoing basis and you can directly use your title company to consummate your transactions.

If you establish an LLC for each property, you will have to file a federal and state tax return for each LLC, as well as file an annual report for each LLC with the state. Depending on your circumstances, this could cost you an additional couple thousand dollars a year. I would only establish another multi-member LLC if titling interest is different.

Here is an idea for you and your cousin to think about. Perhaps you could establish a 50%/50% interest in the LLC, but the LLC operating agreement could stipulate that the LLC pays your cousin an ongoing management fee as consideration for his hands-on management.

I hope this helps.

A response to a subscriber; Thoughts on BLM and advice on day trading

Hi Chris,

To those who don’t understand the conspiracy for global government, our manufactured reality can be scary

Thank you for your recent podcast. I always enjoy listening to your perspective on things. The protesting and BLM movement is so insane to me. I am a black woman and there is almost no one to speak to in the black community to express how stupid everyone is! If you even look like you don’t support BLM you are shunned out of existence! Lol! My husband and my mother are about the only 2 black people I know that see what an absolute fraud this all is! I just don’t even talk to people about it and I leave the environment when I hear them getting stirred up over it. These people are literally losing sleep over this and I pray for them that God will take the scales off of their eyes so they can see they’ve been duped!

I also wanted to ask you if you have any advice on how to start with day trading? My nephew has been talking to me about it and he seems pretty excited about it. I have plenty of time now to research and read up on things since we are on summer break. Where would you recommend I start as a beginner who knows nothing about stocks and who wants to understand day trading?

I appreciate your time in reading this and I pray God continue to give you wisdom and understanding in these days!

S.P.

Here was my response (edited for grammar):

Hi S.P.,

Manufactured scams help the central banks

I sincerely apologize for not getting back sooner. I was out of commission for a month and didn’t answer any emails, and just came across yours. Let me think how to respond about the things you talk about.

My friend spoke with her college friend, and her friend’s partner is an ER doctor. He was telling her that the whole virus thing is a scam. While he said it was political, and to some extent it has been painted that way, we know there is much more to it. He works in the ER full time and said there has been no real uptick in any of the stuff the media is claiming. So, I ask, why is this being pushed so hard? I think we talk about it on the blog.

It’s so sad to see this country falling into the abyss while the average folk have their concerns redirected into other subjects. This is not by chance. There is a guiding hand in all this and I am just amazed how it has all unfolded. So quickly, too.

We theorized that there would be one crisis after another, and that each time, the yield curve would sink lower. Imagine what type of crisis it will take to get the US 10-year yield to 0% or below. I shiver at the thought. The engineers of this end-time conspiracy we discuss are the true conquerors of the people. If the people really knew who their true enemy was, all this would just go away, but the scales are not coming off their eyes anytime soon. I try not to get too sad about it, but according to the Bible, they are not meant to know.

I know that my response was not timely, but if your nephew is still interested, I can help him. I have a few pointers to get him going in the right direction (e.g. not to make the massive mistakes that can literally wipe out an account’s equity while he learns how to trade based on his psychology).

  • I identify 35-40 stocks that interest me and other traders, and that I can understand their trading action.
  • I always scale into a position when the stock is down and quiet.
  • I always scale out of at least some if not all of the position as it rises, especially on news.
  • Never deviate from the plan. NEVER. As a rule, I do not buy into a position immediately after a run up. There are many stocks that I am tempted to gamble on, but that would mean deviating from the game plan.
  • If I deviate from the game plan, I have less than 50% chance of success. When I stick to my rigid guidelines I have about a 70-75% chance of success, and any losses will be small.
  • One bad mistake can wipe out 10 good trades.
  • I tend to have about 6-7 trades open at a time and whenever one pops, I unload. I try not to keep massive positions overnight, since we never know what can happen after hours. This is especially true of the stocks that are popular with Robinhood traders.
  • Keep the positions reasonable in size versus the account equity.
  • Day trading accounts must be treated differently than accounts with longer-term holdings. I always recommend two different accounts. Most of the stocks I day trade I know little to nothing about other than the reason they’re moving at the time.
  • Very frequently, I am all cash in my day trading account, especially when I am away from my screens for an extended period of time.
  • Despite what many say, it pays to be near the trading screens most of the time. Only those who are trying to sell you a trading service will tell you otherwise. There are many opportunities during the day when it pays to dump a position on a random price spike and being at the screen affords us the opportunity to profit.
  • I normally do not recommend standing stop limits, stop loss orders, etc., since I suggest we be more active in our trading.

Once again, I apologize for not getting back sooner. and I thank you for your continued interest.

Chris

Here is one more thought. There are many good books out there, but I do not recommend relying on a trading service. Successful traders also do not rely on those who post on the message boards. However, the message boards can be useful to us as they can help us gauge trader sentiment. Don’t become subjectively involved with these posting boards, since there are many scammers out there.

08/02 Update  – Subscriber Q&A Part 2; Stocks to own, Post-election concerns, Thinking outside the box

To download the podcast – Right mouse click here (duration 40:08)

-What I think will happen in the U.S. post-election.
-Investing based on a weaker dollar. Investing in alternative assets and businesses.
-The dynamics of this dollar system in a post-election environment. My concerns about government actions in the wake of the election. A post-dollar world is being entertained as a vote against nationalism. Don’t wish for something too hard, you may just get it.
-The stocks that I would look to hold regardless of the dollar’s situation.
-Financial planners and investment managers suffer from an inherent conflict of interest. They will always recommend investments that they can control. Overcoming social proof is essential to successful investing.
The typical advice articles in the business press deter us from owning assets that cannot be professionally managed.
-The obsession over racism; the average person in the world senses something is terribly wrong, but is in complete denial and suffers from misplaced frustration and fear. These folk are stuck in the first phase of the Kubler-Ross Model. They are proceeding through the five stages of grief and are completely unaware of their circumstances.
-You must separate yourself from the rest of humanity as they are slowly going insane. They are mourning the deaths of their former lives and aspirations, but don’t yet know it. That is gone forever.
-More than any other period in our lifetimes, we must think outside the box and develop other ways to make money. If you are unwilling to climb out of your comfort zone, I can’t help you. There is no easy way around this. It will only get worse over time.

08/01 Update – Q&A with subscriber emails; The dollar, asset prices, bail-ins and asset confiscation

To download the podcast – Right mouse click here (duration 32:39)

-We contemplate a scenario where the US dollar loses its reserve status. What would happen to the prices of the assets in the US? What would happen to stock and bond prices? What would happen to real estate? What would happen to the cost of living? Tax policies would definitely change and the nation would drift further into outright socialism to compensate for the spiraling costs of daily life.
IMF – Currency Composition of Official Foreign Exchange Reserves (COFER)
-A discussion of all the current alternatives to the USD and what would have to happen for the USD to lose its reserve and transaction status. A discussion of why the USD is different than all the other current alternatives and why shaking the world of its dollar habit will be very difficult.
-The IMF’s SDR and its shortcomings. The drawbacks of gold.
-How asset prices respond to a dollar collapse.
-The idea of asset confiscations and “bail-ins” revisited. The reasons why we have not heard of these topics for several years.