Real Estate, Retirement and the IRA

Retirement Planning Meets Real Estate (And Really Hit it Off) You are never too young to start saving for retirement. On the other hand, only your specific life circumstances determine if you’re too old. Although earlier is best when it comes to retirement planning, later is still better than never. Whenever you choose to start, it is important to know your options and limitations.

It is difficult to find an employer that offers a consistent pension plan.  Those approaching retirement rely primarily on IRAs to assist in saving for retirement. However, most people never take control of their retirement accounts and passivity can be costly for your nest egg. The majority of IRA money in our country is invested in stocks, bonds and mutual funds. According to MSNMoney.com, about 97 percent of IRA money is dedicated to these traditional investments. That means only 3 percent of our IRA money is dedicated to alternative investments, such as real estate, that have the ability to produce higher returns.

The rules governing allowable investments by IRAs only exclude three classes of investments: collectibles (such as artwork, gems, antiques and most coins), life-insurance and S corporations. All other types of investments are permitted, which makes for seemingly endless investment options. One trend that is beginning to gain popularity is using IRA money to invest in real estate.

Investing in real estate through an IRA widens the range of alternative investments available for individuals planning their retirement. Introducing real estate into your retirement portfolio has obvious benefits. For one, it can act as a means to diversify your portfolio, which can help to hedge against the volatility in the stock market or government-backed investments. Also, for those who are experienced in real-estate investing, or those who seek help from a professional who is, real-estate investments have the potential to protect against principal loss. Real estate can also generate better-than-market-rate returns through income production and capital gains. With the help of a Registered Investment Advisor, your income and capital gains could also be stuffed back into your IRA either tax-deferred (as with a traditional IRA) or tax-free (as with a Roth IRA).

Arguably, the easiest way to incorporate real estate into your retirement plans is to have your IRA purchase the asset and you treat it strictly as an investment. This means you cannot use the property for personal reasons, which excludes the options of purchasing and frequenting a vacation home or purchasing property from relatives. There are no complex issues involved when you treat the asset only as an investment as long as your IRA pays cash for it. But, this is not a feasible option for everyone.

If you have to leverage a mortgage, things get a bit more complicated. For instance, you cannot personally guarantee a loan for your IRA. Also, your IRA will pay tax on something called Unrelated Debt Financed Income, which is the income that can be attributed to the leveraged portion of the loan. If you are not well-versed in real-estate investing, you can run into some major tax complications when trying to use your retirement accounts to purchase real estate. I highly recommend seeking the help of a professional for two specific reasons. First, a professional helps eliminate headaches and complexity. Second, he or she can help to ensure that your retirement account has the best chance to bloom and remain fruitful throughout your entire retirement.

To help simplify the complex process of introducing real-estate investments into your retirement plans, I have uploaded an e-book that you can download for free at www.ThePowellPerspective.com. Inside the “Real Estate Risk and Retirement Planning Pt. 1” e-book you will find:

– How to decide if real-estate investments are right for you right now

– Helpful guidance for introducing real-estate investments into your retirement plans

– How to navigate the different options you have when it comes to real-estate investing

– The importance of holding a diversified retirement portfolio

– How to use real-estate investments as a hedge against inflation 

I have compiled information from a variety of sources to create an e-book that can help readers take the unknown out of a complex topic. It is my hope with this two-part e-book, that readers will find the information they need to take control of their retirement planning and stop putting it off. Retirement can be filled with relaxation, travel and free time to complete a number of your life goals. There is no reason to be worried about your finances later on in life when you can easily take the right steps toward financial security today.

All My Best,

Thomas J. Powell

For the free eBook, please visit www.ThePowellPerspective.com 

Real Estate Wrap-Up and the RIA

Residential Real Estate  

There are dozens of reasons why the residential real estate market bubbled and exploded, causing the ensuing credit crisis and economic strife. The popularity of loans requiring no documentation, the easy access to sub-prime loans and the Federal Reserve’s decision to keep interest rates low all intertwined to fuel the housing crisis. The housing bubble was also inflated by Wall Street’s ability to package and sell mortgages in large pools. Now, after struggling to repair the housing market for more than a year, we are seeing improvements that are unveiling extraordinary investment opportunities in residential real estate.

It appears we have hit the bottom of the housing market trough. Housing prices found some stabilization, although the prices are still close to the lowest they have been all decade. But, the collapse took years to build and expecting a complete turnaround in 2009 is unrealistic. The real promise in housing is in the future. Getting your money into the market now is optimal because of low prices and reasonable mortgage rates. Plus, there will continue to be tax relief with the recent Obama-endorsed home-buyers’ tax credit extension—which is planned to be available for repeat buyers who have lived in their prior residence for at least five years.

The United States should see a gradual increase in home sales throughout 2010, but the residential market will most likely not witness a return to “normalcy” until 2011. According to Steve Bergsman, author of “After the Fall, Opportunities and Strategies for Real Estate Investing in the Coming Decade,” “When a bubble market bursts, left behind is a lot of carnage and it takes about three years for the markets just to get a handle on the mess.”[1]

The three-year anniversary of the housing collapse is fast approaching and a number of high-profile reports have been published this month that suggest the residential housing market is already improving. The Case-Shiller index, which tracks variations in the values of houses in 20 U.S. metropolitan areas, showed an increase of 2.9 percent in the second quarter of 2009. In the first quarter it was down 7.9 percent. Two reports released by the Commerce Department last week suggest that while the overall economy continues on a wobbly path toward recovery, the housing industry is experiencing a number of positive signs. For example, “The supply of new homes was at 7.5 months in September, down from 9.5 months in May.”

While residential inventory appears to be slimming, foreclosure rates continue to mount in multiple areas across the country. With a significant number of Option ARMs set to reset over the next several months, many cities will continue to experience record-setting foreclosure levels.  

However, foreclosures are increasing in different cities than those affected in the last quarters of 2008.  Rates appear to be easing in the cities that were hit hardest by the housing collapse and rising in major metro areas in other states. This suggests that the cities previously overrun with foreclosures have found ways to combat the problem and are gradually making progress.

A continuing stream of foreclosures may keep the residential inventory plump, and prices could remain stable over the next couple quarters. But, as inventory shrinks, so too will the abundance of quality investment opportunities. With the residential real estate market now hovering around the bottom, now is the right time to invest.

Commercial Real Estate: No Reason to Panic

While it appears that we have already witnessed the worst of the residential real-estate collapse, we are preparing for the brunt of the crash in commercial real estate. The commercial real-estate industry has taken the place of residential real estate as the breeding ground for widespread fear. Daily reports suggest the commercial real estate storm will be more severe than the one that struck residential housing. Instead of causing another shipwreck, our economy’s commercial woes may prove to be more of an anchor that puts an imposing drag on our recovery.

The combination of job losses, store closings, rising vacancies and drastic cost-cutting measures puts commercial real estate in a serious bind. However, knowing their mortgages will soon come due or reset, owners and managers of office buildings, shopping centers, hotels and apartment complexes have had ample time to prepare for upcoming obstacles.

 Owners of commercial real estate are not backed into a corner. Banks prefer options that keep mortgage payments flowing. Therefore, banks are willing to work with borrowers to find solutions, even though bundled commercial mortgages will add to the difficulty of negotiations. Securing loan payments is not entirely the responsibility of banks or those who hold investments in pools of bundled loans. The owners of commercial buildings originally took on the responsibility and many of them are actively working to find solutions to keep their properties operating. Many property owners will continue to make their payments either because they have adapted their strategies to fit the difficult times, or because they have explored creative ways to bring in extra income. Of course, some number of defaults will be inevitable. Some of those property owners who are unable to acquire loan restructuring or extensions will view a loan default as their best option.

As with the residential real estate debacle, the government is sure to intervene in an attempt to keep our economy from falling into another dark hole. For example, the already-in-place Term Asset-Backed Securities Loan Facility (TALF) supports the issuance of asset-backed securities in order to help small businesses meet their credit needs. The TALF is one of a handful of sluggish government efforts that was created to help provide a crutch for the commercial real-estate industry.

Commercial real estate will continue to tug on recovery efforts, but it is not likely to cause the amount of damage we witnessed during the residential collapse. The time to invest is not when everyone shows interest in an asset. A staple to wise investing has always been buying low and selling high. The commercial real estate market has produced sound investments in the past and will once again flourish. Getting into the market in times of success is more costly, the opportunities are scarcer and the rewards are not as fruitful. The best time to invest is when the masses are fearful, and the masses are easily spooked by commercial real estate right now.

The Benefits of Hiring Professionals

As is the case when taking on any money-making venture, the waters are difficult to navigate alone. We all want to make investments that are conducive to both our current financial situation and our future goals. Investing with a Registered Investment Advisor (RIA) helps eliminate the series of headaches that come with making sound investment decisions.

Hiring a RIA has a number of benefits. For instance, a RIA can take on the following responsibilities:

• Provide objective investment and financial advice
• Set achievable financial and personal goals
• Take into account all of the factors that influence your current financial situation (your assets, liabilities, income, insurance, taxes, etc.) and provide a comprehensive analysis of where improvements can be made. Also, this helps to guide your investment plans and retirement goals
• Provide consistent investment consultation based on your fluctuating savings, investment selections and asset allocation

Before hiring a RIA, you should also be able to answer the following questions:

• What services do you need? Can your potential RIA deliver these services or are there any limitations on what they can deliver?
• What experience does the RIA have in dealing with investors in your situation?
• Has the RIA ever been disciplined by a government regulator for unethical behavior?
• What services are you paying for and how much do those services cost?
• How does the RIA plan on getting paid and are you comfortable with this payment method?
• RIAs are required to register with either the SEC or their state securities agency, depending on their size. It is imperative to ask for proof of their registration

There are a number of professionals who can provide guidance for your investment strategies. Hiring a RIA can help to take the frustration out of the investment process and help you avoid many of the common roadblocks. The true value of a RIA is their ability to thoroughly understand your overall financial goals and provide professional investment advice that is consistent with those goals.

 All My Best,

Thomas J. Powell

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[1] Bergsman, Steve. After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade. Wiley, 2009.

Take Advantage of the Future by Investing Now

              Investors at all levels have been tempted to stash their savings away in what they view as safe places: federally-insured banks, gold, their mattresses. But, as retirement creeps closer, or for some of you, continues on, it is difficult to protect the value of what you have. It is even more difficult to take what you have and get it to work for you. However, difficult does not mean impossible. There are tremendous opportunities in this economic climate and these opportunities can do wonders for your future.

              There is no direct financial path to retirement safety, but putting some basic concepts to work can give your investment portfolio a boost and start you in the right direction. A 60-year-old investor needs to plan for at least 30 years of financial security, so investing in the short-term is not sufficient. Planning for the long-term comes with one major obstacle: inflation. Shoving your cash into a large, everything-proof safe will ensure that the cash is always available, but inflation is resistant to safes and will still eat away at your value. Inflation adds to the puzzle of retirement planning, but keeping a stash of conservative investments can help save your portfolio from being deteriorated by inflation.

              Investors do not have to fear that most conservative money-market funds or bonds issued by the federal government will lose their money. But, these are short-term protection strategies. The returns offered by these investments are likely not enough to stave off inflation. If the cost of living significantly rises, you are going to want your savings to do the same. Many investors are turning to TIPS (Treasury Inflation Protected Securities) for peace of mind. TIPS can be very helpful in side stepping inflation woes, but in a low-inflation environment, your returns will be lower than many other fixed-income securities. So, do not go overboard with TIPS.

              Your best weapon is diversification. Having a diverse mix of investments is a great strategy for both conservative and more risk-adverse investors. Diversification will always be your best hedge against inflation. Setting up a brief meeting with a registered investment adviser will help you to build a diverse portfolio that meets your needs. Playing it too safe now is not something you want to try and correct years after retirement. Running out of money later in life is something you can, and should, protect against now. And, again, this economic climate is filled with long-term investment opportunities. 

Living Vicariously Through Predictions

              Despite grim news reported for September that housing starts came in lower than expected, they rose from August rates. The tendency to be disappointed when expectations are not fulfilled adds to the bad news already being forced on us during these difficult times. When a report from the Commerce Department was released in Washington earlier this week, newspapers jumped at the chance to report that the glass was half empty. All predictions aside, housing starts still showed improvement.

              According to The Wall Street Journal, “The rise in housing starts came in at 0.5 percent, climbing to a seasonally adjusted 590,000 annual rate compared to the prior month.”[1]  Housing starts improved, but major media outlets pumped out headlines such as “Bummer for Housing Starts” (Forbes) and “Housing Starts Miss Expectations” (CNNMoney.com). The media ignored projections made by 76 economists in a Bloomberg survey. Their estimates predicted that housing starts would rise somewhere between a rate of 582,000 to 630,000. But, their estimates were made at a time when the August rate was thought to be 598,000. When a correction to the August figures brought the number down to 587,000, the predictions had already been made. If the numbers the economists were using were off by 11,000, then you could assume most of them would have lowered their expectations by the same amount. This would have made the average of the 76 predictions stand at 595,000; which is very close to the recently reported 590,000 figure.

              The point of all of this is that our economy still showed a humble sign of improvement. With the amount of slack still present in the housing industry, it is a small feat to break ground on any amount of new homes. Looking through rose-colored lenses will not do us any good, we need to be realistic. In that same vein, hammering out pessimistic stories when they are not realistic will only bring down the confidence upon which our markets rely. A group of surveyed economists who were making predictions based on false numbers should not have a drastic impact on our economic situation. As Charles Mackay wrote in his well-noted “Extraordinary Popular Delusions and the Madness of Crowds” in 1841: “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

              Negativity spreads quickly. We have enough to go mad over without becoming disappointed when a group of “experts” do not have their predictions come true. I think the real worry here should be in our experts’ ability to make accurate predictions. Instead of “Bummer for Housing Starts” how about “Experts off Again” or “The Facts the Experts Couldn’t See Coming”?  

Oh! I Didn’t See You There, Small Businesses

              Small-business advocates have criticized the White House for not giving more attention to small businesses. But, on Wednesday the Obama Administration announced that it would use funds leftover from the $700 billion bailout package to aid small businesses. Discussion of the new program came in response to dissatisfaction with the initial wave of bailouts that aimed at helping large financial firms and neglected small businesses. Many policy makers have argued for months that the $700 billion stimulus was only used to balance the books of large banks.

              The new plan, which is still nameless, will aim to increase lending at small, community-based banks. As was the case when individual states were dealt federal funds, the banks will be required to submit somewhat-detailed plans outlining how they plan on using the money. Since the new program will aim to get funds into the hands of small business owners, the banks’ plans will need to detail how they will play a part in this.

              After a number of meetings with community banks that will be scheduled through the end of the year, officials hope to determine the amount of capital that will be distributed. The funds are only to be available to small institutions with less than $1 billion in assets. 

              In his announcement in Washington on Wednesday, President Obama said he was prepared to “shift the government bailout efforts from larger banks to smaller banks because small business owners still have too little access to credit.”[2] Officials behind the new program hope that increasing credit to smaller institutions will energize job growth, which is something that has been reported on relentlessly, but has received little government attention.

              Although the exact amount of the remainder of the stimulus funds is unknown, federal officials agree it is enough to support this new initiative. Having the funds already available and not having to wait on them to be raised will help get the program off the ground. The life of many small businesses could depend on the government’s ability to act quickly. Taking months to consult community bankers may delay the program and inhibit small businesses from acquiring much-needed capital. Small businesses have been ignored thus far and, through innovation and flexibility, they have been able to survive.

Thomas J. Powell

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[1] See http://online.wsj.com/article/BT-CO-20091020-709265.html

[2] See http://www.reuters.com/article/governmentFilingsNews/idUSWAT01385420091021

 

The discussion of investment strategies in this article should not be considered an offer to buy or sell any investment. As always, consult an investment professional to assist you in meeting your investment goals. 

Reno’s ELP Capital Seeks OK for Investment Vehicles

BY JOHN SEELMEYER

ELP Capital Inc. of Reno seeks regulatory

approval for two investment funds that will

target well-heeled sophisticated individual

investors.

Thomas Powell, the chief executive officer

of ELP Capital Inc., says the funds mark an

effort to jump-start the northern Nevada economy

by channeling local investment dollars

into local projects.

The company last week filed a notice with

the U.S. Securities and Exchange Commission

that it believes the two funds are exempt from

securities regulations because they will be sold

to a limited number of investors or to buyers

who meet the SEC’s standards for accredited

investors. (Those standards include net worth

and annual income for individual investors.)

The ELP Strategic Asset Fund LLC has

raised $450,000 so far, the company said in an

SEC filing. There’s no maximum size on the

fund, and minimum investments are set at

$250,000.

A second fund, ELP Opportunity Fund 1—

GBLL LLC, is planned to raised $2.3 million.

So far, $100,000 has been raised.Minimum

investment in the fund is $50,000.

ELP Capital, incorporated in 2004, has

managed debt and equity financing of real

estate. The company traces its beginnings to

IntoHomes LLC, a residential mortgage lender

launched by Powell in 1999.

Along with Powell, its board includes Jesse

Haw, president of Hawco Properties of Spanish

Springs, and Bob Barone, chairman of Ancora

West Trust Co. in Reno.

Powell, who’s also an author of books and

articles, has argued recently that private

investors can play a major role in getting the

construction and development markets moving

again if they’ll fund stalled quality projects.

“This recession … left a stockpile of quality

real-estate projects to collect dust.Without

proper funding, the projects remain undeveloped,

unproductive and severely underemployed.

Placing our private capital into quality

projects will bolster the number of available

jobs in our communities and get people

behind a meaningful cause,” he wrote in an

essay this month.

ELP Capital expects to charge an annual

management fee of 1 percent of the funds’

assets, and it also may collect a performance

fee.

Along with the two investment funds, ELP

Capital last week filed SEC paperwork for

exempt offerings of securities in two real estate

funds.

One of the filings covers ELP Mortgage

Fund III — The Ridges LLC. The company

said $2.1 million of the $2.5 million fund has

been sold to accredited investors.

The second filing covered ELP Acquisition

Fund—Citi Centre LLC, which has raised

about $3.28 million of a $4.5 million offering.

Too Big to Fail? Here We Go Again…

Today marks the one year anniversary of the collapse of Lehman Brothers, one of the worst financial disasters of our time, as it nearly brought down the international financial system. Yesterday I was reading an article about how the big banks are showing signs of life with their actions and things are starting to move, signalling a possible economic recovery. This makes me wonder about the adage of being “too big to fail.” What is the right decision in this situation?

It appears to me that after the latest cycle, quite possibly and hopefully the worst we will see in our lifetimes, people are hoping that this time things will be different. That once we actually do reach a point of recovery, we won’t make the same mistakes that were recently experienced. This cycle has been painful; it has been gut-wrenching; it has been a lesson I surely don’t want to repeat, as I get it and don’t need to learn it again.

I am very nervous about this thought process. As the saying goes, history repeats itself, and that did not become a quote we all use without good reason. For generations, for decades, for centuries, the animal in human nature causes us to make the same decisions and choose the same paths as before.

Some of our largest banks, which the government determined were too big to fail, received billions in taxpayer TARP funds. Our money kept these institutions afloat and I understand the reasoning behind keeping their doors open, especially using the Lehman example. I am dismayed, however, at the actions of these institutions. By receiving government funds, they are able to continually take on high degrees of risk, knowing there is a safety net underneath them. Prudent due diligence has gone by the wayside with the knowledge of someone is there to catch them. I liken this to the casino industry. If you could borrow $1 Million dollars and gamble it, knowing you would get it back if you lost it PLUS knowing you would get to keep any winnings you made, why wouldn’t you do it? This is exactly the system we have allowed to be established.

And, what about the outrageous salaries and bonus payments we still continue to hear about? I am all for the entrepreneur earning as much as he or she can based on value and return to society, but I am not about taking from you and me, putting a chokehold on getting capital back into circulation while cutting off small business, and then handsomely rewarding the big bank players in the process.

The veritas, the truth, as I see it, is that nothing has really changed, that we are repeating ourselves and that we will all pay the price of the failure to learn what could be a valuable and useful lesson. As we continue through this cycle, which I believe still has more pain to come, I hope for and have faith in the success of the small business, for the will of the entrepreneur, and for the recovery of our great land.

Too big to fail? Ok, I’ll give the government that. But what about keeping the backbone of American capitalism healthy? I’m not saying the answer is in government bailouts for small business, as anyone who knows me knows I believe in complete personal responsibility. I’m only asking for the same access to capital for small business so that it can keep its doors open, giving it time to make the changes and adjustments necessary for its own success. In short, allowing business to help itself.

I have thoughts on how I believe this can be done without the banks, allowing history to repeat itself in the manner I believe will lead to our recovery. I will write more in the coming days, but in short I believe in private capital + private enterprise = economic recovery.

I look forward to sharing more of my thoughts and receiving your feedback.

All my best,

Thomas J Powell

Taking Control of the Things We Can

Earlier this week, after wrestling with the spate of painful economic news provided by major media, I recognized that I had no immediate control over any of the massive economic concerns. The stock market zigged when I hoped it would zag. Unemployment numbers, often reported differently, moved at different paces in the undesirable direction. Our federal deficit grew, which increased our individual debt responsibility. The problems were not confined by the pages of the newspapers. When I peered through my office window I saw quality real-estate projects continuing to sit lifeless because they lacked funding. After a few moments of reflection, I recognized that I, and certainly the majority of us, am being forcibly weighed down by all of the negative. Instead of dwelling on the uncontrollable, we should be manifesting the positive by taking hold of the reins on those things in which we can have significant influence.
I decided to start anew with more refreshing thoughts. So, I turned to a medium in which I had some control over the information that was presented to me: Google. Two main pages topped the list when I searched for the words “Economy: We Are the Answer.” The first was an informal Yahoo Answer Board on which the following question was raised: “Is there hope for the American economy or should we just drastically change the way we live?” The user went on to define “drastically change” by giving up our private houses and cars. The second most-popular page that appeared was BarackObama.com, which suggests no one within Google’s reach really believes we the people have the capacity to be the answer to our economic problems. According to my Google search, the answer either rests in the hands of President Obama or we will all be forced to live in communal frat houses without automobiles.
When our economy is running smoothly, we all welcome the opportunities to be part of a do-it-yourself world. We bag our own groceries, scan our own documents, rent our own movies and print our own boarding passes. On a weekly basis, we all most likely take it upon ourselves to deposit, track, clean, swipe, dry, spray, refill, bus, organize, pour, dispense and scan in the presence of other do-it-yourselfers in the vast public. As long as the tasks are minimal and the goal is clearly in view, we are encouraged to do everything ourselves. The responsibilities we used to let others handle, we now do ourselves (I cooked my own meal at Melting Pot earlier in the month). About half of the times I visit a gas station, there is no reason for an attendant to be present—unless I am in Oregon or New Jersey, where state officials prohibit me from pumping my own gas. But, when an issue has options that are more complex than selecting diesel or regular, our individual accountability takes a vacation. Why do we turn our focus to other superpowers to take control and eliminate ourselves from the equation?
The Problem is Passivity
This economic downturn is nothing more than a collection of intertwined problems. Although financially painful and physically overwhelming, there is no reason for any of us to hide underneath our desks and wait for the shaking to end. Think about the steps we all take when trying to overcome a timely problem—for an example, a clogged drain. We take a short period of time to analyze the situation. We look at all the factors involved and ask ourselves crucial questions: Is the water draining at all? Is the clog causing the pipes to leak? How severe is the leak? Is it causing immediate damage? Next, inevitably, it is human instinct to search for the quickest fix. We switch on the garbage disposal and rub our lucky rabbit’s foot. When we are forced to take real action we must recognize the weapons we have to combat the problem (a plunger, a drain snake, Drain-O). After we extinguish our resources, we then consult the knowledge of an expert.
Now consider the enormity of our current economic struggles. The formula for dealing with the problem is much more complex, but it should still follow the basic fundamentals. Why then have droves of investors been complacent to listen to long-winded “experts” before analyzing their situation and deducing what it is that they can do for themselves? The formula is flip-flopped when we let ourselves believe that any given problem is too big or too complex. Remember the old adage, “We can only eat an elephant one bite at a time”? Many of the intricacies of this recession are out of our control, but the sooner we take control over the issues we can influence, the sooner the complex problems begin to untangle.
If the severity of the problem is directly proportionate to the amount of time we take to analyze it, then we only need a brief moment to stare into a clogged drain. In that same vein, our economic crisis is much more complex and has required a longer period for analysis. I argue we have passed this stage of the process and action is required now. This summer brought about a number of signs that suggest we are now slogging around somewhere near the bottom. With home-improvement projects, summer vacations and outdoor entertainment, consumers typically spend more in the summer months. We are now entering what is destined to be a difficult autumn. Unemployment will continue to strain on families, foreclosures will mount and consumers will tighten the belts they let momentarily loosen over the summer.
On the other hand, as the leaves turn and nature gets stripped of its color, a buckled economy will continue to present opportunities for us to take action. It is time for all of us to stop viewing ourselves as helpless observers and again consider ourselves part of the equation. In some ways we already are important variables, but we rely on the inadvertent action we take to be sufficient. How many times have you heard an angry citizen blurt out something along the lines of “I do my part, I’m a taxpayer”? The somewhat-passive action of paying taxes funds many integral economic systems in which our country balances itself. Just as we hire plumbers to help unclog our drains and keep them running smoothly we elect (read “hire”) officials to help unclog our economy and keep it running smoothly. With our plumbers, we are responsible for paying the bill to enable them to do their job. The same is true for the officials; by paying our taxes, we essentially all pick up our share of the bill and expect them to do their share of the work. Without our capital, their positions would not exist; but this hardly means we have positioned ourselves as active parts of the recovery.
Investing to Make a Difference
To be an important cog in the recovery machine, we must put our money to work. Our money does not do any good stuffed in a mattress or buried underneath the deck. Private capital built this country and there are few economic problems that private capital cannot solve, if allocated effectively. During the Great Depression, a time when the economy constricted and the majority of construction projects were put on hold, the entire construction of the Empire State Building was completed. Thanks to funding from its principle backer, an automobile tycoon aiming to one-up a major competitor, the Empire State Building was constructed with staggering momentum. During the Depression, building materials were cheaper and workers were eager to earn a wage, much like today. The construction put people and money back to work in dire times; not to mention the mystique the building has given our country for nearly eight decades.
A project as grand as the Empire State Building might only come around once a century, but that does not rule out the need for quality projects in our own communities. When private capital teams with quality-managed projects, the outcomes can be extraordinary. But, you need both. Whereas quality projects cannot get off the ground without capital, poorly-managed projects get ran back into the ground even with all the capital in the world.
This recession has torn through our communities and left a stockpile of quality real-estate projects to collect dust. Without proper funding, the projects remain undeveloped, unproductive and severely underemployed. Placing our private capital into quality projects will bolster the number of available jobs in our communities and get people behind a meaningful cause. There are loads of individuals that could be taking charge and becoming part of this recovery. We will show great resilience when we, on our own, come out of this strong, super-charged and feeling part of something.
We have to put the days of excuses behind us. We should be searching for any project that someone says “can’t be done” and aim to defy. When the newspapers have stopped reporting stories that highlight economic blemishes, our unemployment numbers are approaching all-time lows and our government takes a permanent vacation from bailouts; we will only vaguely remember our current doubts. We will, however, remember the period of time when we all did our part to restore communities. We will remember the turning point when we took action to pull ourselves from the painful times and regained our spot as part of the equation.

Treasury Signals Pull Out, Good News for Entreprenuers

In a recent USA Today post, Rhonda Abrams compared entrepreneurship to whitewater rafting.  My favorite tip is number six, “keep paddling…you’ve got to navigate your way through tough challenges.”  In a recession like this one, you must navigate your own course.  We cannot rely on the government to get us out of this mess

Policy makers are beginning to signal the same sentiment. The Treasury Department announced today that it would be scaling back government intervention in the financial markets. They’re sending an important message- mainly, the bail-out will not last forever- just long enough to stabilize lending so the markets can take over.

Though Treasury warns of continued lack-luster performance in the short-term, today’s news isn’t all bad.  Oil production is to remain constant and trade data shows growth in both imports and exports as demand increases on international stimulus spending.  Remember, the stimulus spending is a temporary fix.  The real rebound will come from the private sector, the entrepreneur. 

So I agree with Abrams, make your own plan, get the advice you need, and hold on in troubled times.

Thomas J. Powell – Reasonable Regulation: That’s Allstate’s Stand

Reasonable Regulation: That’s Allstate’s Stand

            Many companies involved in financial services cower when an official of any stature mentions the threat of national regulation, but Allstate has decided to embrace it. Since late April, Allstate has been pushing an advertising campaign that is rooted in support for creating a national regulation agency for all players in the financial industry, including insurance companies. Each ad in the four-part series, which runs in major magazines such as The Atlantic, touts the common theme of calling on “Congress to act boldly and quickly in drafting strong, comprehensive and clear federal regulation.”[1]

             Under the current system, insurance companies are regulated on a state-by-state basis, something that Allstate CEO Tom Wilson thinks needs be changed. In a national press release, Wilson argued:

 The American consumer is burdened with a patchwork of insurance regulatory systems that are cumbersome and ineffective in managing risks in an era of rapid change and innovation. American families need better protection from systemic risks and access to products and services that will help better manage their financial futures.[2]

 

            Allstate’s push for a national regulation system is bold. The campaign appears to be having an impact as the Obama administration has started tackling a number of vital decisions that could ultimately lead to national regulation for all financial services. President Obama himself may not have been directly affected by Allstate’s campaign, but according to PRnewswire.com at least one Congressperson has received more than $20,000 in campaign contributions from Allstate over the past four years. Clearly Allstate has identified the potential benefits that would come bundled with national regulation.

            One group that stands to be trapped and bound by the regulatory net of a national system is the stock brokers on Wall Street. The Obama administration has proposed a plan that would hold brokers to the stricter fiduciary standards of registered investment advisors. Under this plan, brokers would be required by law to act in their clients’ best interests, not their own. Also, with each piece of investment advice, brokers would be obligated to disclose what they stand to gain personally. A plan to implement a complete regulation overhaul is sure to be cumbersome and will take time to be implemented effectively. The Obama administration would be wise to have patience with this reform and comb through all of the complexities before attempting to have anything signed into law.

 At the end of the day, the federal regulatory overhaul will aim to force those in the financial system to be more transparent, something the Allstate campaign clearly addresses: “Only when there is transparency around valuing the risk in the financial system—including the role of insurance to help mitigate that risk—will we regain confidence in the economy.”[3]           

To view all of the Allstate advertisements in their entirety, visit allstate.com/fedreg.

 

 

Commercial Real Estate’s Role in the Next Bailout

            Banks have had little to celebrate over the past 20 plus months. Still dizzy from the debacle caused by residential real estate, banks nationwide fear the devastation that could soon be unleashed by the rising number of foreclosures in commercial real estate.

            The banks which provided the money to build endless numbers of commercial buildings originally did so because they, like so many others, believed occupancy and rent rates would always consistently rise. But, many owners of commercial buildings are now fueling another wave of foreclosures because they are not able to generate enough cash from tenants to cover their principal and interest payments. Because the loans have also been bundled and sold on Wall Street as commercial-backed mortgage securities (CMBS), the foreclosed buildings spark a ripple effect. Anticipating the severe consequences this could have on our economy, the Federal Reserve is struggling to contain the situation and prevent the need for a second wave of bank bailouts.

            According to Deutsche Bank, about $153 billion in loans that make up CMBS will come due by the end of 2012. The vast majority of these will not be eligible for refinancing through their lenders because the values of the properties have dropped so dramatically.[4] The losses will potentially cripple not only the owners of the commercial properties, but also anyone holding CMBS. Furthermore, because CMBS typically help drive pension and hedge funds, the pain will be widely spread.

            The only positive side of this mess will be the number of affordable investment opportunities for those looking to get into commercial real estate. Commercial real estate does perform in the long haul. But, because of the onslaught of new commercial buildings that sprouted in recent years, we are now experiencing an uncomfortable rebalancing of the industry. Loans that were made on loose credit and then bundled by Wall Street into dicey investment vehicles are all being exposed. However, the underlying properties are not rotten; they still make for sound investments.

            Like the residential market, the commercial real-estate industry was saturated with quick deals that turned sour because they were not thought through. Now, because the consequences stretched so far, the commercial real-estate industry has to be turned upside down and untangled. Although the untangling process will be turbulent, it will also be exposing an array of investment possibilities. Commercial real estate provides the venues for consumer spending. As the economy slowly recovers, so too will the demand for prime commercial real estate—something that will be readily available and reasonably priced in the immediate future.  

 

Keep Health Care in Our “Best Interest”

            I have been reluctant to bring the argument of national health-care reform to the Powell Perspective because it does not necessarily pertain to real estate, finance or investing. But, national health-care reform has the potential to have drastic impact on our economy, and for this reason I believe it deserves attention here.

            I have been convinced to raise this issue after overhearing a 20-something at the gas pump discuss the issue with someone of similar age. “Man, the whole thing is no big deal, I mean how often do we really go to the doctor anyway?” he said. As I drove off, I realized that the young man, healthy and probably feeling somewhat resilient, was simply not interested in the topic. He wanted to be able to disregard the topic so he could have more attention to focus on the issues that had a more immediate impact on him.

            This week will bring an important turn in the debate over national health-care reform. The Obama administration has committed itself to rethinking the plan before the President is scheduled to address Congress on September 9^th. President Obama is now going to be leading the arguments that he has been able to mostly sidestep thus far. What has me concerned is that the administration will recognize what I did while pumping my gas: The youth do not care. If the Obama administration addresses this and rebrands the issue to somehow get the youth behind it, then the approval rating for health-care reform could skyrocket. The same demographic that helped the President win the office, could now help direct a national issue that they may not be truly interested in for another 20 years. On the other hand, maybe it is time to address the demographic who will still be paying for this change long after we are gone. After all, the people that currently have a vested interest are at a standstill after becoming equally heated on both sides of the issue.

            Since its appearance in the Obama administration’s limelight, health-care reform has done nothing but become more complex. The plan is unclear. No one knows what it will look like, we only know what the media reports: We’re currently 37^th in the world in health-care quality. Death panels will dictate how long we live. The President will personally pull the plug on our grandma. If there are details to this administration’s plan, then they have all been shadowed by heated talk show hosts’ attempts to get the public screaming about something no one knows about.

            On September 9^th President Obama is going to be forced to add some structure to his administration’s plan. Thus far, no one has been able to dissect and discredit the plan because it has only taken shape through various town hall meetings and informal gatherings. In his first address to Congress since February, President Obama will be talking exclusively about health care. This national issue is going to take rigid leadership from the President. If he wants to make any progress he is going to have to involve the nation by getting the young to care and the old to stop shouting at one another and listen.

           

 

 

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[1] See http://www.allstate.com/about/advoc-insurance-fed-charter.aspx

[2] See http://allstate.com/content/refresh-attachments/Advoc_FedCharter.pdf

[3] See http://www.allstate.com/content/refresh-attachments/FedREg_Pool.pdf

[4] See http://online.wsj.com/article/SB125167422962070925.html?mod=rss_whats_news_us

Thomas J. Powell – Be bold while others are being scared! It’s time to load up on alternative investments

In today’s Wall Street Journal there is a great article about thinking differently about your portfolio.  In it, the article talks about the traditional 60-40 stock to bond split and how the traditional investment idea is yesterday’s thinking.  As we all know, stocks have been battered, and the chances for recovery at any time in the near future is slim.  Many of the experts in the article are recommending bonds in your portfolio, but also now being frequently mentioned is the alternative asset class.  In our case, as you know, that class is real estate.

Why real estate, and why now?  I believe it’s time for you be bold while others are being scared.  Everywhere we look, the press is telling us the economic situation in our country is scary and the sky is falling.  However, I believe that if you act decisively now with confidence, you will come out surviving and thriving, as I say in my book Standing In The Rain.  I am encouraged by the articles in the press that are supporting ELP Capital’s beliefs in recovery:  Forbes says there is still a fortune to be made in real estate, housing numbers are starting to creep up, Business Week is telling you to rethink your retirement. 

I would like you to consider the contrarian view real estate investing offers at this point.  The stock market has daily volatility and uncertainty.  Real estate, while under performing the past couple of years, performs at a steady appreciation rate when on trend.  Private investing in real estate, as offered through ELP Capital, is less susceptible to daily market fluctuation.  In addition, it offers transparency, a tangible asset, and it increases your control and piece of mind when having a group of professional managers and experts behind the investment.

I hope you consider adding alternative investments to your portfolio and the benefits associated with the real estate class.  Now is the time to be bold when others are being scared.

I look forward to your comments and feedback.

All my best,

Thomas J. Powell

The Powell Perspective, by Thomas J. Powell – Stats Won’t Save Us

Stats Won’t Save Us

            Every day, and every minute somewhere on the Web, another statistic that hints at an economic recovery is reported, copied, translated, manipulated and reevaluated. It seems for every positive up tick in economic numbers, there is also a negative. We have been experiencing shaky times for the past 20 months. Every sector is not going to at once join together on an all-knowing graph somewhere and move together as one gradually-rising black arrow.

            Stats are meant to give us market indication. “Experts” on the economy make sense of the stats by attaching other positive attributes to them without any solid proof. In social psychology, it is similar to how the halo effect works: If I see Bob Somebody helping an old lady cross a busy intersection, then I automatically believe Bob to be a good person; without having any solid proof. Helping the elderly in dangerous situations is good, I saw Bob do that, so Bob must be good. Similarly, the media tells us recessions are scary and bad, positive things do not happen in recessions; therefore a positive up tick in one sector must mean we are out of the bad recession and into the good recovery. Experts link good news with other good news without any solid proof.

            Earlier this month, Newsweek ran a cover that pictured a big red balloon which read “The Recession is Over!” The cover and its related story caused a small uproar that resulted in criticism from President Obama. Although the cover story was meant primarily to sell magazines, the author did make a solid point: “… when economists proclaim a recession over, they’re celebrating a technicality: they mean economic output has stopped contracting.”[1] When the economy stops contracting, it does not simultaneously return to the rising rates we experienced in the years prior to this recession.

            The reporting of numbers, percentages, graphs and ratios should only be taken for face value. We use them as indicators, as ways to gauge where we are and the possibilities of where we could be heading. Be aware that we are approaching a period that is sure to be overflowing with economists eager to be the first to accurately predict the recovery by accident. Statistics will punctuate every news story you ingest. A small increase over a quarter is no reason to speculate and sink loads of savings into any financial market. The recovery will come. As we work towards it, I encourage you to stick with the basics. Own stocks that make sense. Consider incorporating alternative investments such as real estate into your portfolio not only because of their soundness, but also because they work as a wonderful hedge against inflation. Pay off debt. Adapt to the times. And, most importantly, focus on those things in your life that you care about the most.

Tangled in the Reins of Negative Equity

            Recent housing numbers indicate that first-time home buyers are being attracted to the market via low home prices and the $8,000 federal tax credit. But, the tax credit is scheduled to be pulled before the end of the year and declining home prices are leaving more and more home owners with the burden of negative equity.

            This month, The Wall Street Journal reported that 16 million Americans owed more on their mortgages than their house was worth, up from 10 million this time last year.[2] Furthermore, Deutsche Bank estimated that 48 percent of U.S. homeowners will be “underwater” by the end of the first quarter of 2011, as unemployment rises and house prices remain low. A prediction similar to this appears frightening, but what place does negative equity have among the gory stories of today’s economy? I see three major implications.

            For starters, if somewhere between 20 and 50 percent of all homeowners have negative equity over the next 2 years, then default rates will continue to plague the housing industry. True, not every residential mortgage with negative equity will default. But, having negative equity is frustrating for owners and the more underwater they become, the better chance they have of defaulting. 

            Next, this recession has placed a new taboo on debt, causing those that have lots of it to feel guiltier than during times of rampant overextended credit. Those with heavy debt burdens, such as negative equity in their largest assets, are less likely to spend. Our gross domestic product relies heavily on consumers to purchase. A sustained decline in consumption will further constrain our GDP growth and further ail our economy.

            Lastly, a large population of home owners with negative equity translates to a large number of houses waiting to be sold. Because no one wants to take a large loss on their home, the majority of owners looking to sell are holding on to their homes. Do not get me wrong, this is not a bad thing if the owner is looking to hold on to the home as a long-term investment or to serve as a primary residence. However, a portion of the huge supply of homes waiting to be sold will be flushed into the market every time there is a bump in prices. Each time, this will dilute the market, bring down prices and elongate the downturn. Consequently, this ever-appearing inventory will also put a damper on the demand for new construction.

            From state to state, local markets will continue to be choked by a high percentage of home owners with negative equity. Not surprisingly, the states with the greatest percentages of home owners with negative equity are primarily the states whose real estate markets were demolished by the housing burst. Nevada leads all states with 40 percent, Arizona follows close behind with 37 percent, California falls in third place with 30 percent and Colorado and Michigan round out the top five with 31 percent and 29 percent, respectively.[3]

Speaking Real Estate Today

            As it becomes more popular for investors to include real estate as an active player in their portfolios, the asset class is being talked about differently. Left behind are the days of talking about real estate as an integral part of the next speculative boom. Banks are no longer willing to take the responsibility of the loan off the shoulders of the borrower by offering zero-down mortgages. Lending is tighter, though not unreasonable, and borrowers are more educated about the risks involved with taking on a mortgage.

            The housing burst exposed the problems involved with treating real estate as a short-term investment. Unsurprisingly, investors today approach real estate differently. Dave Kansas of The Wall Street Journal recently wrote that investors are more cautious and “focused on real estate as something they can use: a solid place to live or play…”[4] Going along with Kansas’ article, investors cannot enjoy a family barbeque in the front yard of their stock portfolio or be awe struck by the view off the back porch of their bonds.

            Many investors are irritated with the roller-coaster ride of the stock market. These investors are on the hunt for alternative assets to occupy a larger percentage of their portfolio; making it long-term and balanced, with little need for sporadic buying and selling. On the other hand, some investors feel the impulse to be over active and are reluctant to leave the stock market.

            Including an alternative asset such as real estate into your portfolio allows your entire investment livelihood to not solely rely on the stock market. Alternative investments are typically not correlated with stocks, which means when the stock market is taking a dive, alternative investments are likely to be stable or even rising. Including an alternative investment such a real estate into your portfolio can also significantly lessen the impact of inflation, which is currently a concern of many investors. With the steep drop in home prices and mortgage rates hovering near record lows, a number of signs are suggesting that now is the right time to invest in real estate.

 

All my best, Thomas J. Powell

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[1] See http://www.newsweek.com/id/208633

[2] See http://blogs.wsj.com/developments/2009/08/05/more-homeowners-upside-down-on-mortgages/

[3] Ibid.

[4] See http://online.wsj.com/article/SB10001424052970204271104574290650401076352.html