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Sell US Real Estate, Buy Physical Gold and Physical Silver
Reality is the great antidote of hope. Whenever my
colleagues and friends ask me for my global economic outlook, by the time I’m
done, they always provide a cheeky response about the depressing nature of my outlook. However, the outlook doesn't have to be depressing at all for those willing to face reality and take a proactive stance. As a realist, if the outlook calls for
great pessimism, then great pessimism is what I will necessarily convey, even if it is not what the people want to hear. Though I’m an
optimist at heart (as any entrepreneur will tell you, one has to be an optimist
to survive as an entrepreneur), I separate this inherent personality trait of
mine from the realism of my wealth-consulting persona. When providing wealth
management consultations, anything but realism will harm your clients. The
wealth management industry is full of optimists, not realists. An optimist will
tell you that the market outlook is the best in a decade (in any market) when reality calls for a
mildly optimistic outlook, and that the market outlook is recovering and provides great
value when reality calls for a pessimistic, or even a strongly pessimistic,
outlook. A pessimist will tell you that the market is long overdue for a
correction in the middle of a long rally when fundamentals point to
sustainability, and that a crash is around the corner when fundamentals are
slightly negative. However, a realist will be pessimistic when conditions
justify pessimism and optimistic when conditions justify optimism.
Hope is a dangerous drug to willingly ingest in the
investment world or any type of world for that matter. Remember the below wildly popular
2008 campaign ad? What has hope done for Americans since then?
Given that hope is the most counter-productive emotion of
all next to greed and fear when it comes to investing, I’m amazed by how many people are
still clinging to the fragile, umbilical cord of hope, rather than facing
reality, when it comes to real estate markets in the United States. Since 2008,
economists and politicians in the US have been injecting false hope into the
veins of both residential and commercial real estate investors with nary a single
dose of realism. As recently as just last month, I’ve spoken to real estate
investors that refuse to sell their residential and/or commercial real estate
properties now in the hope that the US real estate market has bottomed and will
now rebound strongly. When I’ve probed the reasons that RE investors refuse to
sell out of their investment properties now, I seem to receive the same two
answers:
(1) Their properties have declined so much in price now that they can’t bear to sell into a depressed market now; and
(2) An unyielding HOPE the US real estate market has bottomed and will now begin to rise
in price.
However, as you can see from the chart above, courtesy of housingstory.net, the last three months yielded the lowest three
months of demand in nine years of residential housing sales dating back to 2001
despite the Federal Reserve’s QE measures. This is not a good sign. The reality
of the situation points to the strong possibility that we are still perhaps
several years away from the housing bottom. Furthermore, even if we are not
several years away from the housing bottom as I suspect we are, the recovery
mode in the US housing market will likely be very sluggish, contributing to the very real possibility that RE investors will not recoup their lost
equity for a decade or longer. If we look at the US commercial real estate
industry, provided that we look at the industry through the lens of realism,
the outlook is just as bleak if not bleaker. According to debt-analysis company
Trep LLC, more than half of the $1.4 trillion US commercial real estate
mortgages coming due by 2014 are under water.
Consequently, some of the largest US commercial real estate
companies have finally come to terms with the reality of the market and have
started to walk away from properties in their portfolio. Vornado, one of the
largest owners of offices and malls, stopped payments on, and walked away from an
$18 million mortgage on the Cannery at Del Monte Square mixed-use development
in San Francisco; Simon Property Group stopped payments on the Palm Beach Mall mortgage
in the wealthy community of West Palm Beach, Florida; and Macerich stopped
payments on a $135 million mortgage on Dallas's Valley View Center mall. Deutsche
Bank AG's RREEF, which manages $56 billion in real-estate investments, explained
the decision of these large US commercial real estate companies as follows:
Better to divert payments away from losing projects with dismal outlooks into
more lucrative projects or other uses with better returns on the investment. Though
commercial mortgages are easier to walk away from than residential mortgages
because they are typically nonrecourse, perhaps individual investors can learn
from the behavior of these large US commercial real estate companies by also diverting
money away from their private real estate portfolios into more productive
assets.
The psychological pain of a loss is often an enormous barrier
to overcome when convincing an investor to sell a losing asset. Thus, if I
encountered a US RE investor that purchased a portfolio of $6 million RE
properties that was now worth $4 million, the following are the two questions I
would ask him or her to get her to move in the right direction:
(1) If you had $4 million in cash in your bank account instead
of a $4 million RE property, would you go out today and buy the exact same
portfolio of properties that you own today?
The only way they could honestly answer yes to the above
question is if they believe that the investment will be profitable in the
near future. If they answered yes to this first question, then I would ask the
follow-up question:
(2) Do you believe that there is no other investment today that
will provide a better return in less amount of time than your current RE
portfolio?
If they answer no to either question, the task of convincing
such a person that selling today, even at a loss, is the best possible choice, becomes exponentially easier.
In the chart above, I’ve shown that in 2002, 3,952 troy ounces of
gold could buy a single $1,000,000 home. By August of 2010, with the rise in the price of gold, that EXACT same 3,952 troy
ounces of gold could buy FOUR $1,000,000 homes and ONE $500,000 home. This trend of the appreciation in gold outpacing the depreciation/appreciation in US real estate by leaps and bounds will likely
accelerate over the next ten years. Even if someone believes that the US real
estate market has bottomed, if he or she believes that another asset class will
rise more quickly than the rebound in real estate, then it makes zero sense to
remain invested in real estate today. Simply put, though the gold market will
likely experience another short-term very moderate dip again soon, sell your US
real estate and accept your lumps. And with the proceeds, I recommend you buy physical gold and silver.
About the author: JS Kim is the President and Chief Investment Strategist for SmartKnowledgeU, a fiercely independent wealth management company that also produces the monthly newsletter, Crisis Investment Opportunities.
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Smartknowledgeu: Your points are indeed very realistic. There is no doubt that a second dip in Real estate prices "tsunami" wave will sweep through the U.S. and can possibly be more devastating than the first wave. Your pissimism is correctly expressed. if this real estate collapse "tsunami" wave is only a short term phenomenon, The long term effect will surely be difficult to even imagine. I am afraid this double dip recession might trigger a complete meltdown of the real estate market. More often than not government intervention to help homeowners that are underwater will not get a bailout, President Obama tried an intervention and failed. They run out of bullets and will simply allow the banks/lenders to foreclose the assets. Homeowners will lose their homes, more newly foreclosed homes will be added to the glut of unsold homes in the alresdy depressed real estate market. This scenario is a perfect setup to turn into a self fulfilling real estate market meltdown. It's not a pretty picture. I am only refering to residential real estate market.
The rental real estate market may not be affected as much because foreclosed homeowners will need to find an apartment to rent after being evicted from their homes. It may survive the real estate market meltdown but may suffer a depressed rental real estate market prices due in general to the selloff of foreclosed real estate assets that will eventualy reappear in the depressed real estate market.
If people with revenue producing real estate assets acts on your contention to sell their revenue producing real estate assets and to convert into Gold, it will exacerbate the problem that will amplify the effects of the real estate market meltdown. Taking a loss now and get out while you still can may seems to be the rational response to the setuation as oppose to just hold and wait. If the revenue stream from the rental income can manage to service mortgage debts, taxes and maintenance costs. It one have more than one rental properties like three or more, it may be frugal to sell one unit to raise cash to make available a cash reserve to wait out the "tsunami" wave and towards the eventual economic recovery, may take years.
The place to own rental property is the Turk and Caicos islands, and probably Bermuda or Nassau, while you're at it. Very forgiving tax rates if you are willing to go through the process of renouncing your US Citizenship.
i recommend you not own rental property...in the usa. if you sell it they tax you. If you dont sell it they tax you. if they raise the tax rate there is little you can do and if you dont pay the tax they take it from you. the tennents can sue you. Hey, that rhymes. Then there is the risk of rent control, insurance premium increases, upkeep costs increasing, etc. It is difficult to imagine how rents can rise in the forseeable future with an excess supply of housing and high unemployment but easy to imagine that costs of ownership and upkeep can rise while you are receiving depreciating income in us dollars. If you are going to keep your money in real estate keep it out of the usa where it can be safe and productive. Keep everything out because nothing is really yours in the usa. I have learned this from experience from investing there.
For those of you advocating retention of rental property--what do you do if inflation hits and half your tenants have leases at a set price for the next year? AND if fed gov't declares retroactively that debt you assumed to buy your rental property must be repaid denominated in gold (Weimar Germany did that).
If you really believe things are about to get ultra-shitty...get out of debt and purchase PMs with cash (not necessarily in that order).
How about your local gov institutes rent control? Screw whatever fiat is used to pay rent. They will tell you how much you can charge for rent. Can't have too many tents in the city.
Geoff-UK: "if fed gov't declares retroactively that debt you assumed to buy your rental property must be repaid denominated in gold (Weimar Germany did that)."
Reference please? I don't think that's what happened. I think that mortgage balances were in fact wiped out due to ease of repayment in hyperinflationary terms. But then when a new stable currency was established, property taxes were assessed at new rates in this currency and some owners had to then take out new mortgages in order to cover their tax payment. At least that's what I recall readining somewhere.
Here's an interesting stat on Housing as a percentage of total cost of living during the Weimar hyperinflationary runup:
http://www.greenenergyinvestors.com/index.php?showtopic=7055
Housing/Rents as a Percentage of Household spending
WEIMAR - Living Costs, Family of Four
Weekly Cost : Total in Marks : - - - - Percentages - - - -
========== . . . . . . . . . . . : Food / Housing / Clothing
1914 (prewar) : ............ 21.5 : 46.5%/. 25.6% / .. 27.9%
January 1920 : .............. 164 : 52.4%/. 04.9% / .. 42.7%
January 1921 : .............. 218 : 63.8%/. 04.1% / .. 32.1%
January 1922 : .............. 396 : 64.8%/. 02.8% / .. 32.3%
July...... 1922 : ............ 1232 : 56.8%/. 01.1% / .. 42.0%
January 1923 : .......... 25,123 : 52.1%/. 01.2% / .. 46.7%
July...... 1923 : ........ 654,608 : 59.8%/. 00.4% / .. 39.8%
Nov. ..... 1923 : ... 14.408 Bn. : 64.9%/ 00.26% / .. 34.8%
http://www.foothilltech.org/ceulau/honorswh/hwhspdfs/WWII/hyperinflation...
Buy before the $600 reporting requirement goes into effect. I'm not a conspiracy nut, but since all the other conspiracy theories are turning out to be at least 1/2 true, you have to wonder why this provision is in the fine print of the HC Bill.
I said pay cash. As in coin shows. Any business (Gainesville, CA Numismatic, etc.) who refuses to sell for cash without a paper trail (and that's all of them) doesn't get my business.
I'm paying a premium at coin shows for this, but trust me--I don't mind. Uncle Sam has no choice to believe me when I tell him I liquidated my IRA to go to Vegas, and lost my ass. So sorry.
http://www.fisch.co.za/home.htm
I meant to include in my post above on coin shows but can't edit it once a comment references it: The Fisch bullion testers are worth their weight in...well, you know. These bullion testers check weight, diameter, and thickness to ensure you aren't getting robbed with lead/tungsten/etc.
Gold? What gold?
+ $1250 for above two posts!
Always pay cash for PMs. Geez, high premiums you are paying. My local dealer was having a "sale" today, premium for bars or coins, 50cents an oz.
The original post makes a good argument, but sell RE, buy PM seems too simplistic. I wouldn't go all-in on anything. Own a bit of each of RE, PMs, FRN's, diversified stocks, food, firearms and maybe farmland, but don't bet ranch on any single asset class.
RE is hard to sell now. It will take a long time or there will be a large quick-sale discount if you must sell. RE has held up during times of inflation. The one reason to sell RE would be to eliminate debt. I wouldn't sell free and clear real estate right now if it is in a reasonably desirable market.
PMs are at record prices, transaction costs are high, there are risks of loss, theft, excessive taxation and perhaps someday confiscation. PM prices are volatile and scary.
The world is experiencing an Uncertainty Bubble. Prepare for the worst, but don't rule out the possibility of Catastrophic Success.
Said better then I tried to above.
Selling RE and buy gold is stupid because the Govt will subsidize/encourage RE ownership and will confiscate/penalize owning gold. Expect 10%/year tax on all gold holding under penalty of $10,000/oz and 10 years in prison for not accurate reporting on annual tax return. Gold bugs do not understand that He (govt) who has the gold makes the rules. This is a controlled economy. No one can hide their gold from big brother. They will tax it and eventually take it from you.
brilliant and rare as always...
as the old song goes - you have to know when to hold and know when to fold...and in today's world, the gambling analogy is most apt....casino fed and the fasb court jesters have made a mockery of markets and truth...
My rental properties have positive cash flows, and the rental market in my area seems to be tightening up. When I do have a vacancy, it's filled very fast with a simple Craigslist ad. I don't do credit checks (most renters credit sucks), only income verification.
If the entire economic system collapses, I guess I would just walk away from them. In the meantime, I will continue to collect rents and enjoy the cashflow.
I tend to think both PM's and multi-family properties are decent stores of value against the collapse of the currency. Both need to be a part of a post-dollar diversified portfolio. Selling office, retail, warehouse, etc. properties makes sense, especially since there is still a bid for well-rented properties from people trying to pick a bottom.
I own some PM's but realize there are some scenarios that do not include PM as a part of the currency in the immediate future. People will need food, shelter, etc. Those are the sectors to have some exposure...
well put, how exactly is gold going to generate any income? And as long as the government will subsidize rentals (Section 8, which has an alternate meaning for veterans). Gold is a dirty rock in the ground, better to own the ground.
One has always been able to swap gold for paper money so I don't understand the issue. As my gold continues to appreciate v. the dollar I can simply trade small amount of gold for cash each month and viola! Positive cash flow!
One persons loss is another persons gain.
I'm not sure that the institutions taking those defaulted properties back on their already crippled books would agree with that.
Rocky,
I have no, remorse for the lending institutions. Furthermore; I believe our economy would already be beginning to heal if in fact these institutions were held accountable for their actions.
Yes. My formerly good credit union joined the Borg a few years ago when they merged with another CU. They finally pushed me to my limit today, I almost did puke on the counter when I saw a flyer where they were pushing Goldman Sucks Bonds at 5% as a way to earn more interest on deposits!
I am, as we speak, seeking a new credit union now.
Since April 5th 1933, Roosevelt's Confiscation Act , allowing the US government to confiscate all the gold privately owned by the American citizens for the country's sake can be used at any moment .
Maybe they are waiting for the citizens to buy more gold at higher prices and the public debt to get deeper before using the Gold Confiscation Act .
Executive Order 6260 (revoked by Executive Order 11825, December 31, 1974)
Section 3. Returns.
- Within fifteen days from the date of this Order every person in possession of and every person owning gold coin, gold bullion, or gold certificates shall make under oath and file as hereinafter provided a return to the Secretary of the Treasury containing true and complete information relative thereto, including the name and address of the person making the return; the kind and amount of such coin, bullion, or certificates held and the location thereof; if held for another, the capacity in which held and the person for whom held, together with the post-office address of such person; and the nature of the transaction requiring the holding of such coin, bullion, or certificates and a statement explaining why such transaction cannot be carried out by the use of currency other than gold certificates; provided that no returns are required to be filed with respect to
(a) Gold coin, gold bullion, and gold certificates in an amount not exceeding in the aggregate $100 belonging to any one person; (b) Gold coin having a recognized special value to collectors of rare and unusual coin; (c) Gold coin, gold bullion, and gold certificates acquired or held under a license heretofore granted by or under authority of the Secretary of the Treasury; and (d) Gold coin, gold bullion, and gold certificates owned by Federal Reserve Banks.Section 4. Acquisition of Gold Coin and Gold Bullion.
- The Secretary of the Treasury, subject to such further regulations as he may prescribe, shall issue licenses authorizing the acquisition of
(a) Gold coin or gold bullion which the Secretary is satisfied is required for a necessary and lawful transaction for which currency other than gold certificates cannot be used, by an applicant who establishes that since March 9, 1933, he has surrendered an equal amount of gold coin, gold bullion, or gold certificates to a banking institution in the continental United States or to the Treasurer of the United States; (b) Gold coin or gold bullion which the Secretary is satisfied is required by an applicant who holds a license to export such an amount of gold coin or gold bullion issued under subdivisions (c) or (d) of Section 6 hereof, and (c) Gold bullion which the Secretary, or such agency as he may designate, is satisfied is required for legitimate and customary use in industry, profession, or art by an applicant regularly engaged in such industry, profession, or art, or in the business of furnishing gold therefor.Section 5. Holding of Gold Coin, Gold Bullion, and Gold Certificates.
(a) Gold coin, gold bullion, and gold certificates, which the Secretary is satisfied are required by the person owning the same for necessary and lawful transactions for which currency, other than gold certificates, cannot be used;
(b) Gold bullion which the Secretary, or such agency as he may designate, is satisfied is required for legitimate and customary use in industry, profession, or art by a person regularly engaged in such industry, profession, or art or in the business of furnishing gold therefor;
(c) Gold coin and gold bullion earmarked or held in trust since before April 20, 1935, for a recognized foreign Government or foreign central bank or the Bank for International Settlements; and
(d) Gold coin and gold bullion imported for reexport or held pending action upon application for export licenses.
In all of this confusion it seems that you can hold up to 5 oz of gold by this order. Also it seems there are some exceptions for artists and collectors. Future acquisition looks to be at best regulated at worst impossible by this order. If this happens again, people will not care. The only people who will care are the tiny minority who have accumulated a lot of gold. I hope that the feds don't do it--but they could easily get away with it if they did.
(a) Gold coin, gold bullion, and gold certificates, which the Secretary is satisfied are required by the person owning the same for necessary and lawful transactions for which currency, other than gold certificates, cannot be used; (b) Gold bullion which the Secretary, or such agency as he may designate, is satisfied is required for legitimate and customary use in industry, profession, or art by a person regularly engaged in such industry, profession, or art or in the business of furnishing gold therefor; (c) Gold coin and gold bullion earmarked or held in trust since before April 20, 1935, for a recognized foreign Government or foreign central bank or the Bank for International Settlements; and (d) Gold coin and gold bullion imported for reexport or held pending action upon application for export licenses. Gold coin, gold bullion, and gold certificates, which the Secretary is satisfied are required by the person owning the same for necessary and lawful transactions for which currency, other than gold certificates, cannot be used; (b) Gold bullion which the Secretary, or such agency as he may designate, is satisfied is required for legitimate and customary use in industry, profession, or art by a person regularly engaged in such industry, profession, or art or in the business of furnishing gold therefor; (c) Gold coin and gold bullion earmarked or held in trust since before April 20, 1935, for a recognized foreign Government or foreign central bank or the Bank for International Settlements; and (d) Gold coin and gold bullion imported for reexport or held pending action upon application for export licenses.Yes, yes, Confiscation Act and all that. Yadda yadda yadda, been there, heard that, still yawning.
Two hints for you: (a) pay Gold in cash, do not leave a paper trail behind and (b) keep whatever Gold or Silver you buy at home, in your own personal safe.
Problem Solved! You are welcome.
Seriously: the US$ has been off the gold-standard since the 70s. Nobody cares about us gold bugs anymore. Get over that moldy Confiscation Act already. You are talking nonsense.
True. To confiscate gold would require a run at it basically from scratch. That would be highly reported by the brain-dead media and focus on the reasons for owning gold. TPTB would not want that. And gold doesn't (yet) back our currency so what's the reason?
Question #3 - Do you have a snowball's chance in hell of making good on the loans you took out against those properties?
And here we have the real problem: The refusal to realize that all those swinging dicks who thought RE prices never go down, are actually welfare cases.
Smarts words. I like the simple math, showing right directions.
But be aware, do not buy any suspicious ETFs, if you must, buy at least one in Switzerland.
I give an example of Xetra-Gold, main gold derivate on german market.
One phrase from the emisions prospect:
I'm not sure what that mean, but it sound terrible for me :-)
The article is leaving many angles out. Why sell a property that is self sustaing? Why sell a property at the lowest pricies in history? Food, Clothing and Shelter are the basics. You can not take a dump or sleep inside a bar of gold. If I loose my full time job I will kick one of my tenents out and live in my own apartment building. No dishonor in that. I actually think semi precious gems are better then gold. How do you buy a loaf of bread with a gold bar/coin. A good cut of Tanzanite or Emerald will cost less , weigh less and can be traded for bread or beer.
How can Joe Sixpack differentiate between your "good" cut of Tanzanite and a piece of worthless purple glass? i doubt he'd sell you anything for that.
Yet gold coins can be Fisched; and pre-64 dimes haven't been counterfeited in large amts, if at all.
I'm not junking your post. That would mean that your post is inappropriate or off topic, etc. Being wrong does not constitute a junk in my book. I will state, however, that your logic is less than sound. Saying that "you can't eat" gold and silver, yet one can eat a stone is rather illogical. Having a bias against gold for some reason is OK, but don't use the same logic to dis it that you do to tout a similar asset. Also, the article advocated selling real estate that is non-performing in some manner and that the cash flow situation would advocate moving to another asset class. Nothing wrong with that approach.
John Exter will be spinning in his grave.
What planet did you just beam down from?
Planet Pricies of course!
naanuuu naanuuu
The house of cards looks more stable... after your daily dose of hopium.
PONZIBAMA
http://williambanzai7.blogspot.com/2010/09/ponzibama.html
"Simon Property Group stopped payments on the Palm Beach Mall mortgage in the wealthy community of West Palm Beach, Florida"
This statement is absolutely misleading.. WPB may have a large wealthly population, but this mall is a "ghetto mall" and has been for years. This is definitely not the mall the rich visit to spend their money.
ncontrol is absolutely correct! I've been to that mall, it and the clientele were very sleazy.
gold coins prices are going through the roof.
I have a nice amout of Leopold II 20Bfr gold coins of which I bought most of them at arround 128€ in june.
Now, these coins already go for 197,88€ in just a few months!
http://www.bullionuk.com/products/gold/coins/belgium
I can't even buy them in my own country anymore, all sold out. I had to order some more from the UK last week.
I't like when it are collection coins, their value in weight is hedged.
Silver coins for example are also already +- 40% since june.
There's more here:
http://www.numismaster.com/ta/numis/Article.jsp?ad=article&ArticleId=13766
I agree that selling developed property might be a safe move (except probably at a loss now). Undeveloped property though is another story. Large tracts of undeveloped land is probably a safe bet (depending on location) for future appreciation.
Large tracts of raw land are always a good place to protect long-term value. Then you factor in any commodity extraction (from your land) potential, whether energy, minerals, metals, or agricultural in nature.
Naturally, it is all about location and price, but you get a tangible piece of something while watching the fiat currency blow up.
Gold is relative.
Everything is relative.
including your reply.
:D
Indeed. Everything will deflate massively in physical gold, not dollars.
And we've barely gotten started. The Price of Gold is Arbitrary