#55 – Packaging Your Commodities

Packaging your Commodities: Commodity Investing through Residential Real Estate

For most people, it is difficult to read through a financial newspaper or watch late night television without seeing repeated (possibly obnoxious) exhortations to invest in commodities such as gold or silver. The logic of these advertisements is frequently sound, since it is certainly true that government irresponsibility is leading toward a currency collapse and massive inflation. What frequently gets left out of the analysis is the other options available for investment that offer far greater prospects for return than gold or silver.

At the Financial Freedom Report, we are in absolute agreement over the prospect for commodity price inflation in the future. We are in absolute agreement over the massive deficits, crushing debt, and lax monetary policy of the government being a harbinger of runaway inflation over the coming decades. We are also in agreement over the dimming long-term prospects for the stock market, since there does not appear to be a new pool of investment capital to propel the stock market into an upward spiral like the one experienced over the last 25 years.

The strategy that we advocate at the financial freedom report is to use the attributes of rental real estate to invest in the commodities used for home construction. By following this strategy, we gain ownership of valuable commodities such as wood, concrete, petroleum products, and other building materials with the advantage of leverage from the bank and tax advantages from the government. We affectionately refer to this phenomenon as ‘packaged commodity’ investing because the commodity products are packaged into a residential home instead of sitting in a warehouse. The culmination of this strategy lies in the fact that commodities packaged into real estate investments can be rented to tenants. As an investor, this allows you to purchase commodity products while outsourcing the interest payments to a tenant and hedge against inflation with fixed rate debt, while delaying the payment of taxes through a section 1031 exchange.

*Theoretical example created through www.building-cost.net

The way that this strategy ultimately plays out is that the packaged commodities produce rental income through your property while inflation pushes up the cost of materials and the cost of labor. Over time, these increases in construction costs will generate a ‘rising tide’ that drives up market values. The cost of construction for new homes is split between materials and labor roughly even, with a contractor profit margin right around eleven percent of the construction cost. As the cost of materials and the cost of labor rises, it is likely to drive increases in replacement cost since the contractors do not have the ability to absorb large cost increases into their profit margins over an extended period of time. In practice, this will result in cost increases being passed along to the consumer in the form of higher prices.

Furthermore, it is important to consider the fact that many people need to be paid from the contractor profit margin on new construction. This makes home building an inherently volatile industry, since profit margins can expand or contract very dramatically, depending on the market cycle. Because of this, we advocate a strategy of purchasing attractive rental properties from somebody else instead of moving into the homebuilding business ourselves. This strategy allows us to ‘outsource’ the risks of new construction and focus on finding attractive deals.

*Theoretical example created through www.building-cost.net

An example of how this dynamic plays out is illustrated in the theoretical graph comparing market values against replacement costs. In an environment where the market value exceeds the replacement cost for new construction, it will trigger new housing starts by builders that recognize the opportunity for profits in excess of normal market conditions. In the case of a speculative bubble like the one that recently collapsed, huge amounts of resources pour into the home building industry to pursue the large profits. As this shift continues, the market will eventually become over-built with inventory, resulting in downward pricing pressure as bulders attempt to sell off their inventory at discounted prices.

Once the market value falls below the replacement cost in a given market, it will create a sharp decrease in new housing starts. The reason for this phenomenon is because people will be able to purchase existing homes for much less than the cost of construction from individuals that need to sell or from banks that are attempting to liquidate foreclosures. During this time, builders will find themselves in a terrible financial bind since the market prices will not be high enough to profitably build new houses. In many cases, bulders will have to operate at a loss for an extended period of time while they build out on permits and lots that have already been purchased in an attempt to recourp some of the costs. Over time, if the market values inflate back above the replacement cost, it will trigger another wave of building.

*Theoretical example of market prices and replacement costs

As this boom-bust cycle plays out, astute investors will have tremendous opportunities to profit. The most pronounced of these opportunities is to buy when prices are depressed and sell when prices are inflated. On the surface, this sounds very simple to do but it is an extremely difficult strategy to execute, because it requires prospective investors to move contrary to the prevailing market forces. During speculative booms or value rallies, the pressure on everybody is to buy and buy fast. When values are going up, up, up, there is no shortage of people who are willing to pay silly prices on the belief that they can always sell for a profit. Conversely, when values are depressed it can be very difficult to get the necessary investment capital for financing purchases. There will be more sellers than can possibly be imagined, but buyers will be extremely scarce.

At The Financial Freedom Report, we advocate a strategy of counter-cyclical buying for long term cash flow and appreciation. We prefer to target properties at prices below the replacement cost that generate attractive levels of cash flow. This produces a two-headed benefit of residual cash flows from rental income that can be used to pay for the mortgage, and a naturally low purchase price that is likely to become very attractive when market values eventually regress back toward the replacement cost. The key to this strategy lies in being able to ‘wait out’ the market gyrations with strong cash flow. By avoiding large amounts of negative cash flow, investors will remain solvent so that when inflation pushes up the replacement cost for their property and market values regress back to equilibrium, creating attractive gains in value.

It is unfortunate to think about the way in which the government has created speculative bubbles and inflation. We would all prefer to live with a responsible government, but that does not appear to be a realistic possibility at any point in the near or distant future. Because of this, prudent investors should position themselves to take advantage of government irresponsibility. The best way to accomplish this goal is by capturing attractive purchase prices from deflated bubbles, and by riding the wave of inflation as the cost of materials and the cost of labor push up the replacement costs for properties. By engaging in this strategy for wealth creation, it will place astute investors in control of real assets that produce real value for real people. Over time, this will allow you to side-step market manipulations and speculative bubbles while providing for the needs of yourself and the people you care about.

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#141 – Jason Hartman’s 30 Fatal Mistakes Investors Make – Part One

During turbulent economic times, people can become their own worst enemy.  The uncertainty of the stock market creates massive insecurity about our investment portfolios. These doubts are quite reasonable and it is time to stop trusting Wall Street and start being a direct investor by purchasing hard assets which are not subject to the greed, graft and manipulation of CEOs, investment bankers, fund managers and the government. Prudent investing is a prerequisite to The American Dream of financial freedom. Visit http://www.jasonhartman.com/radioshows/. Learn from the mistakes of others rather than “the school of hard knocks.” Tune in to this episode of The Creating Wealth Show as Jason reveals 30 fatal mistakes you must avoid in order to achieve financial independence and investing success. Upcoming shows will feature: Bradford B. Smart, author of Topgrading for Sales: World-Class Methods to Interview, Hire, and Coach Top Sales Representatives and Lisa Bromma, author of Wise Women Invest In Real Estate.

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#54 – Income Property Investment Myths

Income Property Investment Myths

Why aren’t more people investing in income properties when it’s the most lucrative, safest choice in history? Good question. Probably because people would rather watch television than improve their financial condition. Sure, everybody says they want to get rich but what are they actually doing about it besides flapping their gums?

Talking wistfully about something you have taken no action to achieve is called whining. Don’t go into the Green Parrot Bar in Key West with that attitude. It’s an official ‘no sniveling’ zone.

So let’s take a quick peek a some of the more common excuses people use to not get wealthy in real estate.

Reason #1 – “I don’t have enough cash.”

Sorry. Not a legitimate reason. Find a great deal and cash will find you. Negotiate the purchase price! Take equity out of your home – it’s losing value by the day in there anyway! Have you looked into the sweet $5,000 down deal Platinum Properties Investor Network has arranged in Atlanta? Next!

Reason #2 – “I don’t have any time.”

Sorry. Everybody’s got time. You need to prioritize. We’re talking about your financial future here. Surely, it’s more important than three hours of slumming in front of the television or computer. Toss the kids and spouse in the car on a Saturday afternoon and cruise the neighborhoods looking for ugly houses for sale.

Reason #3 – “Everyone says this stuff doesn’t work.”

Everyone? Ask Donald Trump, Jason Hartman, or Steve Wynn. True, you’re probably getting a skewed perception of reality if your primary source of information is late night tv. This stuff does work when you do it right.

To learn how to do real estate the right way, check out www.JasonHartman.com for The Complete Solution For Real Estate Investors™

Reason #4 – “Realtors are a difficult bunch.”

This is very NOT true when you work with Platinum Properties Investor Network. Our local area managers are real estate agents who LOVE to work with you. If they don’t, we quit sending them business and, believe us, they want our business.

Reason #5 – “I might lose money.”

Real estate is way safer than the stock market. It’s funny. The pattern we’ve noticed over more than two decades in this business is, the more you education you get, the less risky real estate is. It’s a calculated risk, one you can control much better than Wall Street.

Reason #6 – “I don’t know what to do.”

You don’t need to know it all. You just need to know who to ask. Don’t let analysis paralysis get in the way of the rest of your life. It’s that important! Come to a Platinum Properties Investor Network seminar, then set up an appointment with one of our expert investment counselors and then do it. Pull the trigger. Buy your first property. We’ll hold your hand if needed and advise you every step of the way.

Had enough myth-busting for one day?

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#140 – Working in Your “Smart Zone” with Dr. Susan Fletcher

Each day is a struggle to deliver one’s best performance at all times. Susan Fletcher, Ph.D., a Licensed Psychologist, author and professional speaker, regularly promotes valuable information about productivity, change, relationships, parenting and as well as many clinical topics. Dr. Fletcher is a quoted expert in national print and broadcast media. Visit http://www.jasonhartman.com/radioshows/. Delivering a common sense approach to an age old challenge of how to balance our personal life with our work life, Fletcher’s latest book, Working in the Smart Zone, is a humorous and insightful manual for staying focused on the vision of personal and professional success. On this episode of The Creating Wealth Show, Jason and Susan discuss how you can stay at your best and maximize your performance. Upcoming shows will feature: “Jason’s 30 Fatal Mistakes Investors Make” and Bradford B. Smart, author of Topgrading for Sales: World-Class Methods to Interview, Hire, and Coach Top Sales Representatives.

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#53 – Fiscally Fit Financial Quiz

Fiscally Fit: A check-up for your financial fitness

1. What happens to home values when the replacement costs increase?

   1. The go up like a rocket

   2. They go down because nobody can afford to build

   3. They are pulled toward the cost of new construction

   4. They don’t change . . . construction costs don’t matter

2. What is happening to the economy now that the debt bubble has burst?

   1. The recovery going to happening, because Ben Bernake said so

   2. The government attempting to re-inflate the debt bubble in order to stimulate short-term demand

   3. It’s just like the great depression, only worse

   4. The recovery has already started . . . the government reporting agencies are just suppressing the information

3. What is happening to real unemployment?

   1. It is going up, contrary the manipulated numbers that are published

   2. Can’t you read? . . . it’s going down because the stimulus package is working

   3. It’s already higher than during the great depression

   4. It’s going to be back below five percent in no time

4. What happens when government spending becomes a bigger portion of total GDP?

   1. It gets the economy back on its feet

   2. It erodes long-term growth by displacing private investment capital

   3. It make people more equal by re-distributing income

   4. It makes the environment better because of government regulation

Answers: 1) c, 2) b, 3) a, 4) b

Explanation of Answers:

What happens to home values when the replacement costs increase?

Over time, home prices naturally converge toward the cost of construction. The reason for this is twofold. First, new housing starts tend to boom when prices are high, creating an increase in supply that generates more competition and usually lowers market prices toward equilibrium. Second, when prices are depressed and market values dip below the cost of construction, new housing starts will drop off precipitously. As an extended period of time passes with no new homes being built it will slowly pull prices up toward equilibrium. Thus, in all cases the cost of construction plus land is the approximate equilibrium point to which home prices naturally converge.

What is happening to the economy now that the debt bubble has burst?

The impact of the debt bubble bursting was a dramatic contraction in the availability of credit. This meant that many people who were previously spending on credit are no longer able to continue spending. In this kind of economic environment, many people begin ‘deleveraging’ or actively reducing their debt burden. However, in this economic cycle the government is attempting to stimulate short term demand with credit based spending, ostensibly re-inflating the debt bubble. The way that they are doing this is with tax credits for new home buyers or rebates for people that trade in old cards to purchase new ones. These programs are all encouraging increased indebtedness in an attempt to stimulate the economy. Unfortunately, sustained economic growth can only come from increases in production and productivity, and none of the government programs is addressing either fundamental factor of economic growth.

What is happening to real unemployment?

The way that government statistics track unemployment is to remove ‘discouraged workers’ from the pool by only tracking people that are actively seeking work. Fundamentally, this means that people who stop looking for work (and are not employed) are removed from the pool for counting the statistics. This means that the total number of jobless people can actually go up, while the unemployment rate goes down like what happened in July’09. Furthermore, the official numbers count people who are under-employed in part time work but would like to work full time as fully employed. It also counts people who work in commissioned sales like Real Estate or Insurance as being employed, even though they may not have earned a commission check for quite some time. When analyzing the strength of the economy, it is important to not only look at the published statistics, but the underlying assumptions.

What happens when government spending becomes a bigger portion of total GDP?

The important to thing to consider when talking about government spending is that the government cannot spend a single dime without taking it away from somebody else first. This comes from direct taxation, borrowing in the credit markets (displacing private capital), and printing money (devaluing the savings and equity of all people who hold dollar-denominated assets). As the government grows larger, it must necessarily displace or destroy private investment and spending to finance its operations. Since government operations are necessarily politically motivated, it naturally follows that the real output of government spending will result in substantially less production and productivity improvement than if that same capital had been deployed though private channels. As the government seizes control over more and more of the economy, it pushes more decisions onto the desk of politicians and neutralizes the market forces that create economic growth.

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#52 – Double Dip Recession

Double Dip Recession

The recent financial news has been abuzz with exhortations over the anticipation of an end to the recent financial calamity. The stock market has already discounted this optimism into its valuation, as current market values represent a multiple of forecasted earnings per share well in excess of historical trends. The conventional wisdom is that the economy will get “back on track” in the next few months and resume its previous trajectory of long term growth. The factor that nobody seems to be considering is the fact that the previous ‘track’ the economy had been traveling down is the express route to collapse that generated this whole financial meltdown in the first place.

It is not a secret that the explosive economic growth experienced during recent years was largely caused by debt financed consumption artificially increasing demand for goods and services. Unfortunately, this debt bubble inflated beyond the capacity of many people and financial institutions to carry. When the bubble eventually burst, it created a cascading devaluation of financial instruments, which triggered forced deleveraging, which further depressed values, which triggered more forced deleveraging.

Now that the government is throwing money away at an unprecedented, breakneck speed there is additional stress on the system since the overspending is being financed with the undertaking of additional debt and monetary expansion by the Federal Reserve. These irresponsible actions will eventually have the impact of raising interest rates, and may push the economy back into recession.

The most likely way that this scenario will unfold is that the Federal Reserve will either contract the money supply in response to inflationary pressure or allow the currency to inflate until investors refuse to purchase bonds at face value and demand higher coupon rates. Thus, the ‘front door’ for interest rate increases is controlled by the Federal Reserve since they can contract the money supply, which will force up short-term interest rates and incentivize long-term bondholders to sell and buy short-term notes with higher yields. The “back door” for interest rate increases occurs when investors lose confidence in the ability of the government to meet its debt obligations without devaluing the currency and refuse to purchase bonds unless they are discounted by the treasury.

These interest rate increases will have two significant impacts on the economy. The first is in relation to long-term interest rates, which serve as the basis for fixed rate mortgages. When mortgage rates are forced up in conjunction with long-term bonds, it will immediately slow whatever housing recovery may be under way as it increases the cost of borrowing to purchasers. This will have the net effect of decreasing the amount of house that can be purchased per dollar of monthly payment. The impact of this phenomenon will be a downward shift in the range of home prices that people can afford, which will ultimately stall the housing recovery.

When these effects eventually spill over to short term rate increases when the Federal Reserve eventually begins a campaign to fight inflation, the impact will travel further downstream in the economy. The reason for this downstream impact is the fact that short term interest rates influenced by the Federal Reserve are the basis for revolving credit account and lines of credit that many consumers have been using to finance their consumption spending. When the short term interest rates increase, it will initiate an upward shift in the amount of interest owed on consumer debt and will also increase the required payments. This will have the net effect of reducing the amount of income available for consumption spending.

As these two effects compound on top of one another, they create a very real possibility of a ‘double dip’ recession that continues downward after a brief period of stabilization. The ultimate reason for this phenomenon is a continued campaign of market manipulation by the government to ‘stimulate’ the economy in absence of market fundamentals that are supportive of sustained long term growth. Unfortunately, this boom-bust cycle will continue indefinitely until the focus eventually returns to creating the necessary market fundamental for long term growth instead of sponsoring government programs to stimulate demand with borrowed money, but make no changes in the incentives that guide investment decisions.

As astute investors, it is important to be wary of market sentiment that amounts to ‘wishful thinking’ for an economic recovery in the absence of supporting fundamentals. Recognizing these boom-bust trends and the propensity for government entities to manipulate the financial markets is a key tool for investors that are looking to protect their wealth and prosperity. At the Financial Freedom Report, we advocate investment in real assets that are secured by fixed-rate debt and rented out to tenants as the optimal strategy for fighting this campaign of market manipulation by the government.

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#138 – Special Low-Down Financing Rental Property Opportunity In Saint Robert, Missouri

Saint Robert is known as the “business hub” of Missouri’s Pulaski County. The city is relatively young, however it has achieved more than most cities since its birth, living up to its motto “Grow With Us.” On this episode of The Creating Wealth Show, Jason Hartman talks with our Local Market Specialist (LMS)™ in St. Robert about the many reasons to invest in this Missouri investment market. Visit http://www.jasonhartman.com/radioshows/. Zach informs Creating Wealth listeners that the city of St. Robert has experienced rapid growth in the last five years. The city also serves a far greater population base which includes Fort Leonard Wood (Population 28,937) and Waynesville (Population 3,507). As an investor, growth is one of the most important factors when choosing an investment market. As St. Robert continues to grow and prosper, investors are taking notice of its prudent investment opportunities. Tune in as Jason discusses Platinum Properties Investor Network’s latest special financing rental property opportunity. Upcoming shows will feature: Loral Langemeier, one of today’s most dynamic and pioneering financial strategists and the importance of emotional intelligence with Dr. Susan Fletcher, author of Working in the Smart Zone.

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#51 – Creating Wealth Show Stars

Talking with the Stars . . . Jason’s marquee guests on the Creating Wealth Show

In the last few months, Jason has had some big name guests on the Creating Wealth Show. Some of Jason’s recent guests of note are Pat Buchannan, Robert Kiyosaki, and Catherine Austin Fitts.

Pat Buchannan is well known in the United States as an outspoken conservative voice in favor of limited government, and less globalization. In his Jason’s interview with Pat, they discussed the prospect for large amounts of inflation in the near future. Pat commented that the US debt would be floated away on a sea of inflation. At the Financial Freedom Report, we couldn’t agree more with this sentiment, and advocate that investors defend their financial wellbeing with income producing assets that are financed with fixed-rate debt.

Robert Kiyosaki is the author of the noted “Rich Dad” series of books, games, and videos. In his interview with Jason, he discussed the importance of financial education in achieving success. They also discussed the importance of passive income to financial success, and the impact of dynamic investment strategies. Robert rightly pointed out that it is possible to make money in any kind of investment, and also possible to lose your shirt in any kind of investment. The key is always to become educated. At the Financial Freedom Report, we couldn’t agree more with this sentiment.

Catherine Austin Fitts is the founder of the Solari report, and is a renowned thinker in the financial world. She advocates for a decoupling from the centralized banking model that channels influence toward the dominant industry players and government. Put another way, she is an advocate of free markets but the current system is nothing even remotely resembling a free market. We advocate direct ownership of investment property as a way to help circumvent the systemic bias toward institutional players.

The Creating Wealth show will continue to seek cutting-edge thinkers that help provide insight into investing and the economy. We firmly believe in the importance of becoming educated, and the best source of education is frequently to seek advice from experts. This does not necessarily mean that we agree with everything that all of our guests say . . . what it means is that we believe there is always something that can be learned.

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#50 – The Creating Wealth Show 114

Economic deliberation with Britain’s financial author and Journalist of the Year – Gillian Tett.

Jason Hartman’s Creating wealth show has had a wide variety of notable guests over the last few months. One of Jason’s recent guests was Gillian Tett, a British journalist, whose recent book Fool’s Gold confronts the current banking and financial crisis. In March 2009, Dr. Tett was named the Journalist of the year at the British Press Awards. During her interview with Jason, she spoke at length about the systemic problems of the current system, and potential solutions.

The principal problem inherent in the current banking system is that free market forces are not allowed to prevail, as demonstrated by the government efforts to bail out failing banks. The problem created by this system is that when financial institutions are protected from failure by the government, it incentivizes them to take extremely large business risks since their upside is vast, and their downside is covered by the government. In response to this upside-down set of incentives, many have called for increased regulation of banks. One of the difficulties discussed was the fact that some of the problems that precipitated the credit collapse were the direct result of regulations imposed on the banks by public authorities.

Ultimately, the principal source of the problems for financial institutions is the fallacious notion that risk can be eliminated. By perpetually shifting risks onto counterparties, the financial world devolves into a large game of ‘hot potato’ where everybody tries to toss the hot potato to somebody else before the timer expires and the ticking bomb explodes. An example of this phenomenon is the practice of securitizing mortgage products into collateralized debt obligations. As these products were combined with one another, it became more and more difficult to ascertain the risk profile of a given security. When the credit crisis emerged, these became ‘hot potato’s’ as investors tried to offload the securities onto one another before the values collapsed.

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#49 – San Antonio, TX – Platinum Properties Investor Network Analysis

In this video, discover the properties investment opportunities available in San Antonio, TX.  Jason Hartman’s Platinum Properties Investor Network provides analysis of the demographics, real estate market and business climate. http://JasonHartman.com http://CreatingWealthPodcast.com

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#48 – Orlando, FL – Platinum Properties Investor Network Analysis

In this video, discover the properties investment opportunities available in Orlando, FL.  Jason Hartman’s Platinum Properties Investor Network provides analysis of the demographics, real estate market and business climate. http://JasonHartman.com http://CreatingWealthPodcast.com

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#137 – ROTH IRA Changes – Bypass Tough Lending Regulations – Invest in Real Estate Using Your IRA / 401k

The lending regulations have changed drastically within the past two years, causing investors quite a head ache when attempting to buy America’s most tax-favored investment, income properties. With a self-directed IRA or real estate IRA you can be in control by investing your retirement funds when, where, and how you want. On this episode of The Creating Wealth Show Jason talks with an expert from The Entrust Group about the current investing opportunities with your IRA and 401k. Visit http://www.jasonhartman.com/radioshows/. Don’t miss the latest 2010 Roth IRA conversion changes and cutting-edge strategies to invest in real estate! Upcoming shows will feature: Wise Women Invest In Real Estate, Lisa Bromma and Loral Langemeier, one of today’s most dynamic and pioneering financial strategists.

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#47 – Kansas City, MO – Platinum Properties Investor Network Analysis

In this video, discover the properties investment opportunities available in Kansas City, MO.  Jason Hartman’s Platinum Properties Investor Network provides analysis of the demographics, real estate market and business climate. http://JasonHartman.com http://CreatingWealthPodcast.com

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#46 – Houston, TX – Platinum Properties Investor Network Analysis

In this video, discover the properties investment opportunities available in Houston, TX.  Jason Hartman’s Platinum Properties Investor Network provides analysis of the demographics, real estate market and business climate. http://JasonHartman.com http://CreatingWealthPodcast.com

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#136 – Catapult Your Marketing Campaign to the Next Level with Video Branding Expert Lou Bortone

Internet marketers are getting more creative with web 2.0 and web 3.0 technologies every day. If you are the least bit familiar with YouTube and its vast potential to capture an audience, you know the power of video is BIG and a great way to market your company’s message to people. Our guest, Lou Bortone, is a long-time marketing consultant and video branding pro who helps entrepreneurs build breakthrough brands on the Internet. Visit http://www.jasonhartman.com/radioshows/ . As an online video branding specialist and award-winning marketer, Lou provides services such as video production, brand development, creative support and web copywriting. Lou is a former television executive who worked for E! Entertainment Television and later served as the Senior Vice President of Marketing & Advertising for Fox Family Worldwide, a division of Fox in Los Angeles. Lou is an author and ghostwriter of six business books and Certified Guerrilla Marketer. Tune in to this episode of The Creating Wealth Show as your host Jason Hartman and Lou Bortone talk about the latest video branding techniques needed catapult your marketing campaign to the next level. Upcoming shows will feature: New 2010 Roth IRA opportunities to invest in real estate from Orange County’s Entrust representative and author of Wise Women Invest In Real Estate, Lisa Bromma.

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