Buying Stuff vs. Investing For The Future

Occasionally on LinkedIn, a social networking site for business, I will answer questions posed about real estate, or personal investing, or wealth management, etc. Recently someone asked about how to save money. I have had several emails and comments come to me from my response that I thought it worth revisiting here.

So what you will read first is the question as it was posed, and a clarification from the person seeking feedback, and then my response.

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"ARE YOU SAVING MONEY?

"The U.S. savings rate -- for reasons I have not been able to understand despite living in New York for 20 years -- was until very recently below zero. Are you now saving money? Why now? Why not before? What are you doing differently to find these funds?

Clarification added 8 days ago:
"OK, not to sound deliberately stupid, but saving -- to me -- means apportioning some of your income (not your home equity!) for the future, and especially for retirement. Other than Social Security (which some won't get) what else will people live on in old age? I do not get what exactly people are spending every single penny ON... "

I replied:

"I agree with xxxx. These numbers do not include pre-tax monies diverted to 401(k) plans, of which there are MANY. These numbers only look at money in bank savings accounts.

"Here are some ideas on saving -- Go out to eat less frequently. If you are planning to take the family out to the movies, and change your minds at the last minute, put those funds aside as if you HAD spent them at the movies. That is how you force yourself to save money. When you get your paycheck, pay yourself FiRST. Put 5 percent of your net pay into a savings account. If no other reason than for emergencies. But of those who don't save? What do they spend every penny on?

"Let me answer it another way. I have many people who tell me they wish they could get into investment real estate, but they never have any money. Yet they bring home all kinds of goodies and toys all the time. At the same time, I have people who ask me "who is your competition?" They expect me to name other large commercial/investment real estate advisers. They are surprised at my answer (which answers both questions): Wal-Mart, Panera Bread, Lexus, Harley-Davidson, Rolex, Best Buy, etc. Our culture is one of buying "stuff."

"It makes people feel good to have "stuff." Me? I would rather buy properties where my tenants' rent buys my stuff for me. But then...thats just me."

Food for thought.

The Vultures Are Coming Out

As the media and the incoming president continue their lockstep doom and gloom scenarios about real estate, the vultures are coming out. The fly-by-night gurus who hawk books with get-rich-quick schemes.

True, there are opportunities galore out there. But buying a book and following some of these strategies is a recipe for disaster unless you know what you're doing.

"Lock and Reassign" is the new catch phrase. Well, it isn't new, but it is what unsophisticated, first-time investors are latching on to as real opportunity. Only, while the get-rich-quick books and DVDs are still pushing flip straegies, those days are dead (hopefully). Essentially, the phrase means to lock in control of the property, then find another buyer -- reassign it -- before your original transaction closes. In theory and practice, you have two transactions, perhaps in a single day. Buy it cheap, resell it at a higher price. Pocket the difference.

Here's the other problem with that "great" approach. You are subjecting yourself to short-term capitals gains taxes -- the taxes that President-elect Obama says he is going to raise.

I will say this once more . . .

THE PATH TO WEALTH IS NOT TO FLIP. THAT ONLY PUTS SOME EXTRA CASH IN YOUR POCKET FOR THE SHORT TERM.

THE PATH TO WEALTH IS TO BUY AND HOLD, TAKING ADVANTAGE OF SEVERAL KEY ELEMENTS:

-- Income: Your renters (Office, Multifamily, Single Family, Warehouse, etc.) pay your bills for you.

-- Leverage: The bank does the heavy lifting

-- Appreciation: Investment properties will continue to appreciate

-- Tax Advantages: Deductions, depreciation/Cost-recovery

-- Hedge Against Inflation: Wealth forced upon property owner

-- Pull Money Out/Refinance: Tax free loan you never have to pay back (buy more property, take a trip, etc) because your tenants pay the note via their rent payments

-- Manageable, Controllable Risk: Which means no “flipping” (flipping is a way to part a fool from his money)

-- Mailbox Money: The investor uses low-cost, professional management to oversee the investment, and receives a check once a month or once a quarter. A truly passive investment that grows in equity and appreciation.

-- Group Ownership – Less upfront investment per person (100% Of Investment Goes Toward Property)

-- 1031 Tax Deferred Exchange: Trade up to larger properties with larger gross and net incomes, and pay NO Capital Gains Taxes indefinitely.

AFTER TAX RETURNS is what investors should be considering, but too many new investors aren't being made aware.

Right now, cash is king. Residential properties can be picked up for a song. Banks are finally starting to loosen up and shed inventory that has been forclosed. REOs ("Real Estate Owned" by the banks) have opportunity. And they can be found in neighborhoods of all income levels.

BUT, and this is a BIG BUT . . . investors need to think outside the box. There are plenty of investment opportunities besides single family residences, which continue to drop in price and value. It is definitely a good time to get in, but investors should not limit themselves to this single type of real estate. There are fantastic opportunities on multifamily, particularly in campus areas, small offices and more.

Tomorrow, I am going to write about cost segregation. I covered it in a rather simple way in an earlier post last year. I plan to go into far more detail about how this tool speeds up depreciation and puts additional after tax dollars in commercial/investment property owners' pockets every year.

The Looming Pension Implosion

The coming implosion of private and public pension funds may make the Fannie Mae/Freddie Mac boondoggle look like child's play.

A lot of people think their pension funds are safe. Well . . .

Anyway, this is worth reading. One of the reasons why commercial/investment real estate has been seeing a movement of pension and other retirement monies into well analyzed, properly managed investment properties.

The full story is at Reason magazine. Read it and pass it on.

Moving Up The Ranks

Business First of Columbus, a weekly business newspaper in Central Ohio, each year publishes something called the "Book of Lists." The book includes rankings of top businesses in a number of categories, such as financial planners, banks, insurance companies, etc.

The latest book is out, and our brokerage, Prudential CRES Commercial, has cracked the Top 10. We are ranked number nine. Last year we were ranked 16th. Actually we would be ranked higher now considering the growth we have experienced since the book went to print. The rankings are based on the number of licensed Central Ohio brokers and sales agents at the brokerage. Our growth is a testament, once again, to the late Bob White, whom I have written about a couple times recently. He knew how to bring in the best and brightest. And though he did not live to see our big jump up the rankings, he is responsible. Somewhere, he is smiling.

Also, a surprise. My colleague Nidal Saleh and I were named in the publication as the top agents in the company for 2008 in brokerage and leasing. A shock when you see your name in print and you had no idea ahead of time. A nice shock, though.

A Little Humor . . . 'What If?'

Time for a break from serious news and endless boo-hooing about the real estate mess. There are opportunities galore out there but you would never know it from the news coverage.

This is a vid that has been making the rounds on the internet. It brought back the memory of a sketch on SNL years ago ..... speculating on what the outcome might have been had Emperor Napoleon had at his disposal -- a B-52 bomber.

So I give you the story of one man's experience as the residential real estate bubble bursts around him . . .




Oh BTW, in case you are new to CASH ON CASH, you might want to know that I agree with the main character's opinion on flipping. I can't stand it. How many ways can you say the word "gambling?" Anyway, let this give you a grin.

Heard Today . . .

The following two songs were performed or played at the funeral service of my friend and colleague Bob White, a U.S. Army Special Forces veteran, respected commercial Realtor, and principal broker at my office.

A courageous, short-term battle against cancer, borne with great dignity. Not surprising from an old SF soldier who played the hand he was dealt and fought the good fight . . . as best he could, to the end. His last mission, self-imposed, was to live until Christmas. He made it and then some, by a few days. A hero for his country, a hero at home, a hero in the office, Bob will be laid to rest at Arlington National Cemetery.

Today I witnessed an incredibly moving tribute, to a humble man who never asked anything of me except how he could help.

The Ballad of the Green Beret

Fighting soldiers from the sky
Fearless men who jump and die
Men who mean just what they say
The brave men of the Green Beret

Silver wings upon their chest
These are men, America's best
One hundred men will test today
But only three win the Green Beret

Trained to live off nature's land
Trained in combat, hand-to-hand
Men who fight by night and day
Courage peak from the Green Berets

Silver wings upon their chest
These are men, America's best
One hundred men will test today
But only three win the Green Beret

Back at home a young wife waits
Her Green Beret has met his fate
He has died for those oppressed
Leaving her his last request

Put silver wings on my son's chest
Make him one of America's best
He'll be a man they'll test one day
Have him win the Green Beret.

American Soldier

I'm just trying to be a father,

Raise a daughter and a son,

Be a lover to their mother,

Everything to everyone.

Up and at 'em bright and early,

I'm all business in my suit,

Yeah, I'm dressed for success from my head down to my boots,

I don't do it for money, there's still bills that I can't pay,

I don't do it for the glory, I just do it anyway,

Providing for our future's my responsibility,

Yeah I'm real good under pressure, being all that I can be,

And I can't call in sick on Mondays when the weekend's been too strong,

I just work straight through the holidays,

And sometimes all night long.

You can bet that I stand ready when the wolf growls at the door,

Hey, I'm solid, hey I'm steady, hey I'm true down to the core,

And I will always do my duty, no matter what the price,

I've counted up the cost, I know the sacrifice,

Oh, and I don't want to die for you,

But if dying's asked of me,

I'll bear that cross with an honor,

'Cause freedom don't come free.

I'm an American soldier, an American,

Beside my brothers and my sisters I will proudly take a stand,

When liberty's in jeopardy I will always do what's right,

I'm out here on the front lines, so sleep in peace tonight.

American soldier, I'm an American,

An American,

An American Soldier

RIP Bob White

Last night, a good man left this Earth.

Bob White was a quiet, unassuming man. Ex U.S. Special Forces, he led a hairy life in Vietnam. He only told me a few stories. Others he could not. After more than 20 years in the service, he retired with the rank of major and then broke into real estate. And never looked back.

A wonderful human being, a friend, a mentor, a truly gentle man, Bob -- principal broker of the Prudential CRES Commercial Real Estate practice based in Columbus -- passed away last night almost three months to the day after being given a 3-5 month life expectency from doctors, who diagnosed him with terminal cancer of the abdomen back in September.

I cannot even begin to share all this man has meant. But I can say this -- I would not be where I am today in the business were it not for him. As his pain increased, he carried it quietly. Oh, he would mention he was having pain but never let on just how much it was hurting him. The last two times we had real interaction (his visits to the office became sporadic in early November as he began to feel weaker) were at a regional Pru CRES meeting, and later, at his home. Despite his "discomfort," he never stopped working to help the agents in his office.

At the regional meeting, I gave a lead-off Best Practices presentation on exploiting bleeding edge technology for real estate marketing (blogs, video logs, podcasts, Twitter, etc.). I received a lot of positive feedback, but none of it more meaningful for me than from both Bob, and our company owner, David Mussari. Bob kept talking about it later on, and we took a moment after a special presentation of testimonial letters to him from colleagues past and present, to have a photo made together. It is pinned up at my home office. He is and will always be, an inspiration.

About a week and a half ago, I was at his house. He, I, and another ex military man, Ted Mosure, shared a beer. I never had the honor of serving, but I was honored to be in the company of these two men. Bob is a founding member of the Ohio Military Hall of Fame for Valor. He was doubly honored when those who determined who should be inducted into this hallowed hall chose him, and several others, to be the initial inductees. He later became one of the driving forces to keep this special recognition active, and has been instrumental in planning the annual recognition ceremonies. The OMHF ceremony held each May at the Ohio Statehouse is widely attended and is a highly moving and emotional service.

After Ted left, Bob and I,and his wife, Jody, had a long talk about business, life, what I want to do with my real estate practice, and so on. Knowing how little time he had left, here is this man feeling it is more important to keep instilling confidence in others, prodding all of us on, making sure we stayed positive when his life outlook was measured in days and weeks . . . and if he was lucky, months. He even recommended me to take his place on a particular Columbus city commission, though I don't know if that will come through. I may be the wrong political blood type. We will see.

That night I also got to closely inspect the 1954 MGTF he had lovingly been restoring for almost two years. He finally got to drive it in late November. Of that I am glad. He pored all his extra time into family, and his classic MGs.

In between the regional meeting and my visit to his home, Bob made sure to attend the Columbus Real Estate Exchangors holiday breakfast meeting on December 11. He had been busy the day before and was exhausted, I learned after. But he made made it a point to be there. Jody drove and actually, they were the first to arrive that icy, Thursday morning. I was glad to see them. Both, selfishly, for me . . . and because it was good to see him out, and not bed-ridden. As Jody noted in a wonderful comment to the post I wrote about the transition at CREE, he was glad I accepted the challenge of leading this dynamic organization for a year.

I still remember when I walked into the Prudential office a little over a year ago, and he said "Good Morning Mr. President." Seeing my blank stare back at him, he told me the CREE nominations committee was recommending me for president for 2008. My brilliant response was, "Nuh-uh!" Right. . . . really eloquent for a guy who usually has an opinion on everything. Still it was a great experience. And Bob was a cheerleader every step of the way.

He always had a grin on his face. Nothing seemed to get him down, even his illness. Forever the planner, he made his last remaining months one of making sure everything was taken care of so Jody wouldn't have more than her share to deal with, and meeting one-on-one with our office staff -- giving one final pep talk.

Bob, you built one hell of a team in the Columbus office from the ground up. From Day One you knew what, and who, you wanted. I was honored to be "Hire No. 3" among the agents and employees at our practice. We now have 19 agents and our commercial coordinator.

Even in his 70s, though he walked with a cane, I will bet he could still break someone in half with his bare hands. And yet, Bob White truly epitomzed the definition of a gentle man. All kidding aside, he will be missed.

The office has not been the same without you, Bob. I wish you well, my friend. You left a strong legacy down here in Suite 101 on Mound Street. I will do everything I can to make sure what you built continues to grow and prosper.

Just as you envisioned . . .