The fundamentals of business apply in every business. I run into real estate investors who often focus on buying assets at a low price. That doesn't mean its a bargain. If the asset is a multi-unit residential building, the money is in the hands of the tenants. In order to create value, the money needs to transfer from the tenants bank account into your bank account.
The main factor affecting the flow of money from the tenants to the property owner is the balance of supply and demand. If demand exceeds supply, vacancy will be low, and rents will be high. If supply is high, and demand is low, then vacancy will be high and rents will be low. The market value associated with the asset is directly a function of the net earnings in the property, which is directly a function of supply and demand.
Rookie investors look for low price. I look for signs of white hot demand.
I'm reflecting on 2016 and putting detailed plans in place for 2017. This is an annual exercise for me. It consists of making commitments and scheduling them on the calendar, starting with the biggest and most important goals first. It's also a time of deep introspection. It starts with asking the right questions of myself. In the audio segment, I'm speaking with one of my coaches, Marc Von Musser. Marc is an amazing leader. He has worked for Tony Robbins for the past 5 years as his Director of Coaching. Marc has been instrumental in helping that part of Tony's business grow by 6700% over 5 years.
Marc is talking about the mindset of setting goals, and the art of reflecting on past accomplishments, and past failures. These 13 minutes are packed with value bombs. Check it out.
I had the privilege of talking with Mr. George Ross, Donald Trump's attorney and right hand man for most of the past 40 years. He knows the President Elect better than anyone else alive today. Listen to his reaction to the election result.
Are we in an inflationary environment? Some would say that inflation is low. The government is reporting the consumer price index increased 1.6% over the past year. So perhaps inflation is low.
I have a different view. Inflation is partly driven by rising prices. But in fact, the larger factor in allowing prices to rise is the availability of money. Let me ask you a simple question:
If your income doubled,
If you answered yes to any or all of the above, then your food costs went up, your automotive costs went up, and your housing costs went up. None of this was driven by increases in prices. It was driven by the increase in the money supply. When the government prints money, they're increasing the money supply. When banks print money through bank leverage, they're increasing the money supply.
When the balance of international trade is such that dollars accumulate overseas, that money remains outside our domestic economy. However, when enough of it accumulates, some of that wealth comes back into the economy. Foreigners buy companies in North America, and they buy real estate. When they do, prices in hot markets like Toronto, Vancouver, San Francisco, Portland have seen huge increases in real estate prices. That is a form of inflation.
What's the impact? Prices rise, values don't. The utility of the house hasn't changed. The increase in price means the appraised value will go up. The increase in price benefits the owner, not the lender, not the mortgage holder. Inflationary markets are like a game with a different set of rules. If you're playing the game to the wrong set of rules, you'll lose. If you're playing by the rules of an inflationary market you can win.
What happens when there is inflation? Savings are devalued. Debt is devalued. How would you structure your business differently if you knew the new rules?
I'm often asked about the economic cycle and what it means for investors. Are we headed for a downturn in the economy?
Economic downturns are characterized by excess inventory in durable goods. Manufacturers respond to the excess inventory by stopping production for weeks or months at a time in order to flush the excess inventory through their sales channel. I look for signs of unhealthy inventory as a leading indicator.
Today, Ford announced that it was halting production of the F150 pickup truck (the top selling car in North America) at several plants for a period of weeks. They're citing 92 days of inventory on dealer lots. The auto industry likes to keep 4 weeks of inventory on dealer lots.
The downturn in the oil industry last year had the same characteristic. Excess inventory of crude oil. I think we're approaching those market conditions. What do you think?
The assumption is that people will keep most of their money in the bank and only withdraw small amounts at a time. Banks are often permitted to loan the same deposits 10 times. For every dollar in deposits, they can lend $10. That's a good deal for the bank. They get to make the loan interest ten times for every dollar on deposit.
Instead of giving my company credit for the appraised value of the land against the borrower contribution, we were given $220,000 credit, not $360,000. This means that we had to write a check for $180,000 before the bank would fund the loan. The $180,000 is sitting in the bank's account as a deposit. We just gave the bank the ability to write $1,800,000 in loans against that $180,000 deposit.
Did I just fund my own loan? What do you think?