Does the weak dollar make foreign real estate a bad investment? August 7, 2008
Posted by Jeff Nabers in Money, Self Directed IRA/401k, real estate.Tags: investment, real estate, invest, foreign, investing, inflation, currency, dollar, property, deflation, wealth, economy, protect, debasement, fed, collapse, recession, depression, international, properties, rent, rents
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In a recent meeting with a couple of real estate investors, I was posed with the question:
Doesn’t the weak dollar eat into the profit of foreign real estate investing?
Not at all; in fact, quite the contrary. A weak dollar makes spending dollars in foreign countries disadvantageous. I ran into this a few years ago in Sweden. I went to buy a t-shirt and it cost the equivalent of $85 USD. I asked my Swedish friend if this shirt was expensive, and he replied “no”. That’s when I learned firsthand that the plummeting dollar is making international vacationing more expensive for Americans.
Spending money on foreign real estate
The same does apply to real estate purchase for personal use. If you find a beautiful property in a foreign country that you’d like to buy for personal use, it’s going to cost a lot more today than it did 5 years ago. You’re spending US dollars and you’re going to have to spend a lot more now since they are worth less thanks to inflation.
Investing money in foreign real estate
Investment into real estate is done to accomplish one or both of the following objectives:
- Produce [Rental] Income - I believe this should be the primary objective of any investment. Income is more predicable and controllable than appreciation.
- Appreciation / Capital Gains - This is the focus of most novice investors.
When investing in foreign real estate, you convert the appropriate amount of US Dollars into local currency, and you will purchase the property in local currency. Regardless of whether you receive your return on investment from #1 above, #2 above or both… you will receive it in local currency. If you buy property in Sweden, you will receive rental income in kronor (Swedish crowns) and proceeds from the sale of the property will also be in Swedish crowns.
Scenario 1. If the dollar is weak (relative to its historic value), but its value remains constant during your ownership of the Swedish property, your return-on-investment (ROI) will be unaffected by the dollar’s weakness.
Scenario 2. If the dollar is weak, and it continues to weaken during your ownership of the Swedish property, your ROI in Swedish crowns will remain unaffected, but in USD your ROI will be increased.
Scenario 3. If the dollar is weak, but it rebounds and strengthens in value during your ownership of the Swedish property, in USD your ROI will suffer. The dollar can only bounce back if the Fed completely reverses its monetary policy. In this case, interest rates will go up to 13% - 20%, and the entire US economy will essentially crash. Here there will be so many opportunities that as long as you didn’t put your entire investment portfolio into the Swedish property, riding the bear market down in short positions will more than compensate for the lessened ROI on the Swedish property.
Weakening dollar makes domestic real estate investment a bad idea
The weakened dollar has hurt real estate in the last 2 years. During this time, inflation has been at 10% - 12%, while housing values have been stagnant or even declined in some localities. This means all our homes have decreased in actual value 10%+.
If you believe interest rates will remain low and that Fed will continue its inflationary policies, investing in U.S. real estate might not carry a very good ROI. If your property is returning you 12% annually, but inflation is at 12%… you have successfully stored and protected your wealth, but you have not grown it. The continued weakening dollar will hurt domestic real estate unless real estate appreciation outpaces inflation. Using the increasing money supply as a forecaster, inflation is heading towards 16%. I don’t think real estate values (or rents) will increase by 16% per year over the next few years, so this tells me that while our inflation continues, domestic real estate investment performance [in general] will suffer.
Summary
- The weakened dollar has made spending money in foreign countries expensive for Americans.
- The weakened dollar has not affected real estate investment into foreign countries.
- Should the dollar’s weakening/debasement continue, ROI in foreign investments will increase.
- Should Fed’s monetary policy reverse, we will experience deflation and an economic collapse. In this circumstance, there will be tremendous investment opportunities for anyone who has enough liquidity to take advantage of the moving markets.
Concepts to consider
- Reduce your exposure to the US Dollar now to protect your wealth
- Keep enough liquidity to enable you to react to the possibility of coming reversal in Fed’s monetary inflationary policies
- Hold that liquidity in assets denominated in a foreign currency - preferably a currency from a country whose monetary system is generally sound and stable such as Canada or Switzerland
Landlording your IRA LLC’s properties - Is it allowed? May 30, 2008
Posted by Jeff Nabers in Self Directed IRA/401k, real estate.Tags: investment, self directed, ira, 401k, real estate, property, prohibited transaction, llc, ira llc, tax, checkbook control, irs, dol, exemption, landlord, landlording, repair, house, condo, taxes, treasury, regulation, code
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A question I get all the time is “Can I personally mow the lawn, maintain, and/or repair properties owned by my IRA LLC?” My answer is “No” which usually creates the response “But another company said I could.”
First, let’s summarize that the accountholder/participant of a retirement plan generally can’t have a transaction between themselves and their retirement plan. This includes the furnishing of services, sale of property, lending of money, and extension of credit between a plan and disqualified person (such as the accountholder). Next, let’s establish that active landlording means mowing the lawn, repairing, and fixing up properties, while passive landlording means collecting rent, paying mortgages/taxes/insurance, and contracting out the more active tasks to non-disqualified-persons. So is active landlording allowed? No, and I’ll provide two answers - the technical and the layman’s.
The Technical Answer
The argument for why active landlording for your IRA LLC’s property is not a prohibited transaction goes something like this…
As a general rule, the Internal Revenue Code provides (more…)
Borrowing money from your Solo 401(k) May 22, 2008
Posted by Jeff Nabers in Self Directed IRA/401k, real estate.Tags: 401k, investment, ira, loan, participant, property, real estate, self directed
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Solo 401(k)’s most touted feature is its uniquely large annual contribution limits ($46k - $102k). A lesser known feature may be just as useful for some: participant loans.
What is a participant loan?
A Solo 401(k) participant can borrow up to either $50,000 or 50% of their account value with the following terms:
- To be repaid over an amortization schedule of 5 years or less
- Regular payments no less frequently than quarterly
- At a reasonable rate of interest… generally interpreted as prime rate + 1%
Such a loan may only be made in accordance with the Solo 401(k) plan documents. While most plan documents disallow this type of loan, the Unlimited® 401k offered by my company does allow it.
Under what conditions is this allowed?
Any. As long as the plan documents allow for it & the proper loan documents are prepared and executed, a participant loan can be made for any reason.
When is this useful?
This can be useful when (more…)
Loaning money to your IRA/401(k) May 20, 2008
Posted by Jeff Nabers in Self Directed IRA/401k, real estate.Tags: self directed, ira, 401k, real estate, mortgage, property, cash flow, prohibited transaction, nonrecourse, plan, foreclosure, non-recourse, loan, negative, exemption
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Do you have an IRA/401k-owned investment property that has a mortgage and negative cash flow?
Something I’ve been running into lately is Self Directed plan investors who speculatively bought a house or condo in previously hot markets (think Vegas, Florida, Phoenix, etc). Some of these areas have experienced declining values and declining rental income for short term rental properties.
If your plan (IRA or 401k) bought a house & obtained a non-recourse mortgage loan qualified based on short term rental income that has declined, you probably have negative cash flow. How can you avoid foreclosure? Loan money to your IRA/401k.
Loaning money to your IRA or 401k
A little known (more…)
Beating the Bubble Mentality May 8, 2008
Posted by Jeff Nabers in Money, real estate.Tags: 401k, bubble, cash flow, dealer, gambler, housing, income, investing, investor, ira, property, real estate, residential, returns, self directed
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I recently talked to a real estate investor friend online who I have known for about 4 years. He started investing in the height of the housing bubble, and now I think he’s finding it difficult to shed the “bubble mentality”. In our conversation I did my best to cause him to question his perspective and his investing strategy.
I’ve pasted our Instant Message conversation below (with the screen names changed for privacy). I didn’t correct capitalization, punctuation or spelling errors, so you’ve been forewarned.
I thought this would be a useful post because of how tightly this gentleman seemed to grip onto his investment strategy he’d been using since 2004. How tightly are you gripping onto your investment strategy?
[19:00] re_investor: HI Jeff
[19:00] re_investor: How are you buddy?
[19:00] jeff_nabers: Hey there
[19:01] jeff_nabers: I’m doing good. How are you?
[19:01] re_investor: How have you been doing?
[19:01] re_investor: Im alright!
[19:01] jeff_nabers: How’s the RE market up there?
[19:01] re_investor: OH its tight!!
[19:01] re_investor: Its flat and declined over the pervious 6 months
[19:01] re_investor: TOUGH
[19:02] jeff_nabers: what about cash flow?
[19:02] re_investor: Its cashing …
[19:02] re_investor: but, its still tight. I actually was in the process of buying another one
[19:02] re_investor: I stoped canceled the purchase/sale
[19:03] jeff_nabers: how did your previous investments turn out?
[19:03] re_investor: Oh great actually..
[19:03] re_investor: I sold the one in Fairview park
[19:03] re_investor: I got a cash buyer
[19:03] re_investor: The other three are turning out fine
[19:04] re_investor: The one house I have I have 67K in equity right now
[19:04] re_investor: I am currently renting it for 1K
[19:04] re_investor: but, I cant do anything with it until the maket comes back
[19:04] jeff_nabers: Sounds decent
[19:04] jeff_nabers: how’s the cash flow return?
[19:04] re_investor: Its about 300 dollars
[19:04] jeff_nabers: renting it at $1k what do you net per year?
[19:04] jeff_nabers: i see so 6k per year
[19:05] jeff_nabers: how much money did you put into it?
[19:05] re_investor: I was just in the process of refinancing it
[19:05] re_investor: and the mtg company I was using closed up
[19:05] re_investor: so the refi stoped
[19:05] jeff_nabers: how much money did you put in tha tone?
[19:06] re_investor: I was bummed out
[19:06] re_investor: I put in 15K
[19:06] re_investor: to fix it up
[19:06] jeff_nabers: and the down payment was?
[19:06] re_investor: It was alot
[19:06] re_investor: I cant remember…
[19:07] re_investor: I am trying to do something with the equity.. but, I dont know what
[19:07] re_investor: There is not much I can do
[19:07] jeff_nabers: you don’t remember how much you put down?
[19:08] re_investor: why are you wanting to no such details?
[19:08] jeff_nabers: i’m curious what your return is
[19:08] jeff_nabers: cashing out would only decrease your cashflow
[19:08] re_investor: I got into it on no money down
[19:08] re_investor: I had good credit
[19:08] jeff_nabers: well then i would never refi it and never sell it
[19:09] jeff_nabers: you are making a 40% annualized return on the cash you put in
[19:09] re_investor: yeah. Its only worth so much you know
[19:09] jeff_nabers: why would you ever want to take an asset like that off your books?
[19:09] re_investor: To use the equity in the house
[19:09] jeff_nabers: with 10 - 15 of those you’d never have to work again
[19:09] jeff_nabers: to use the equity to do what? continue working real estate like a job?
[19:10] re_investor: right. I just need 9 - 14 more of them
[19:10] jeff_nabers: do your other properties cash flow like this one? (more…)
Forced Appreciation April 28, 2008
Posted by Jeff Nabers in Self Directed IRA/401k, real estate.Tags: 401k, appreciation, cap rate, cash flow, commercial, flip, income, investment, ira, NOI, profit, property, real estate, residential, self directed, stragegy
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There’s a questionnaire that I go through with my new customers over the phone, and in it I ask if forced appreciation is part of their investment strategy. Often I hear a response of “huh?”
Forced appreciation belongs mostly to the world of commercial real estate. It’s natural for the new real estate investor to gravitate towards residential because everyone understands it. We all live in a home and pay a mortgage or rent payment. Prices fluctuate due to supply and demand, and we understand this. What many don’t understand is that commercial property is the investor’s preferred real estate. Why do I say this? I thought you’d never ask…
Property prices are always truly decided by the buyer and seller. But market value can be determined by a property appraisal. Here’s where residential and commercial RE appear to come from different planets. Residential property is almost always appraised by comparable sales. In other words, the market value is whatever everyone else is paying in that area for that type of property in that type of condition. The purpose of residential property ownership is living space. So “type of condition” means the physical condition of the structure & its fixtures. Bank lending plays an important role in how appraised value and actual purchase price interact. Most residential property is purchased with mortgage financing. Residential appraisals are based on what others are paying for similar properties, and the lender ends up only lending if the purchase price of the subject property (which is the loan collateral) isn’t much higher than the appraised value. So, when you are in the market to buy or sell, you’ll generally need to buy or sell for a price close the the appraised value.
When investing, the two things that indicate the performance of your property owned are cash flow and gains or losses upon liquidation. In residential real estate, your gain or loss upon liquidation is determined almost entirely by what other people are paying for similar properties at that time. So what’s wrong with that? Well, for starters (more…)
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