A good friend of mine once said "if you are reading about an investment trend or hot stock in a major publication, the real investors have made their money already and you are late to the show." To a certain extent, I agree with his assessment because in reality by the time this CNN Money article,  "Investors bet on Detroit," hit "newstands" (do people even read print materials anymore?) hordes of investors both foreign and domestic had already culled through many of the choice opportunities that Detroit had to offer. That being said, what this article DOES highlight for me is the acknowledgement of and the movement towards investments rooted in sound financial principles and people taking action.

Personally, I am a cash flow investor. While I still maintain a certain percentage of my portfolio in the stock market, I have chosen to diversify my portfolio into mortgage positions and cash flow positive investment property. To me what is so compelling about this article is that with the recent housing and stock market bubbles and the trend towards savings and budgeting, people are taking a hard look at their investment portfolios, risk tolerance and time horizon and realizing that they MUST be much more involved in their investments in order to achieve any of their financial goals. For example, the word is out that people can self-direct their IRAs and invest in non-traditional assets such as real estate and businesses. These same people are looking for creative ways to partner with friends, family and loved ones to make investment decisions that they understand, share risk and reward and ensure that financial goals are achieved. I read recently that more and more people are choosing to be independent contractors instead of employees for the numerous tax writeoffs that they receive for doing so and are leveraging their business as hedges against these recent market fluctuations. More on these points in an upcoming post, but I digress...

I love this article regarding the opportunity that Detroit presents, not because I am a big believer in Detroit and its long term prospects. I don't mean to offend and as I mentioned, I am a cash flow investor and not a speculator, but because of the weather and the decline of the auto industry, I just don't see Detroit making a comeback any time soon. "Wait," you say, "that sounds like a speculator talking." I would counter that with, I invest in areas where I can invest for cash flow but where I believe their will be appreciation in the near or shorter term. Detroit's time horizon seems a little bit long for me, but that being said it is still an excellent cash flow play for those looking to collect rent, or for those with cash looking to partner with investors. Forgive the ruminations but I would consider lending money privately to investors in Detroit but I would probably not own investment property there myself. Not everyone shares my concern about the long term prospects of a Detroit rebound though, as both foreign and domestic investors are flocking to Detroit in droves. Investors are snapping up houses for under $10,000 with many investors buying in bulk i.e. the Californian who recently bought 178 properties. One investor, who works with the governmental Section 8 voucher program is quoted as saying "we shifted away from speculative investing to restoring affordable housing." These investors are providing quality affordable housing to Detroit residents, stabilizing neighborhoods while doing so, clearing foreclosed properties off the banks balance sheets and generating cash flow and tax writeoffs for themselves. The socially conscious or at least socially capitalistic aspects of this type of investment strategy are appealing as well from a humanistic perspective.

However, the real reason that I love this article is that it highlights the opportunity available and people taking action. Again, this investment model has been around since the dawn of time and can be applied no matter whether the town or city you are interested in is featured in CNN Money or not. The same model with similar numbers can be applied in Baltimore, Memphis, Jacksonville, Cleveland, Detroit etc. etc. etc. Finding the opportunities is not really the issue. The issue is finding the opportunities, being aware of how to take advantage of them i.e. having the resources, or actually the resourcefulness, to do something when you identify the right opportunity and then actually doing something.

I once received some sage advice, "do something, do anything even if it is the wrong thing." Now obviously when it comes to investing, you want to try like heck to avoid doing the wrong thing, which is why you do your own due diligence as well as partner with or hire people who have the tools, skills and expertise that you require i.e. contractors, business partners, attorneys, accountants etc. but what this quote highlights is how critical the willingness to take action is. My concern is that too many Americans are relying on their 401k (see my blog on the CBS 60 minute piece "The 401k Fallout"), pension plans (which don't really exist in America anymore) and social security [checkout this recent New York Times article Recession Drains Social Security and Medicare on the longevity or lack thereof of social security (expected to be exhausted in 2037 and medicare (expected to be exhausted in 2017)] hoping that their 401k, social security and medicare will provide for them when they are old and gray. I have seen that lifetime special unfold one to many times and it is not a pretty sight.

I came across a blog post from one of the many real estate investing, self-directed IRA and personal finance blogs that I subscribe to and I simply had to share. The blog is called www.mymoneyblog.com and the gentleman who writes it is quite creative and sound in his investment principles and practices. I don't always agree with what he has to say but he makes some extremely valid points....but I digress.

The point is that he is currently reading The Snowball: Warren Buffet and the Business of Life and came across an excerpt that I simply had to share. I fancy myself somewhat of a contrarian and out of the box thinker and I hope that this excerpt provides as much inspiration to you as it did to me. Warren Buffett's business partner, Charlie Munger (Vice-President of Berkshire Hathaway), was wealthy according to most standards from real estate investing, prior to even meeting Warren Buffett. In a quote from an interview with Warren Buffet, he shares the following:

"Charlie, as a very young lawyer, was probably getting $20 an hour. He thought to himself, "Who's my most valuable client?' And he decided it was himself. So he decided to sell himself an hour each day. He did it early in the morning, working on these construction projects and real estate deals. Everybody should do this, be the client, and then work for other people, too, and sell yourself an hour a day."

Charlie Munger goes on to share more about his desire for independence in the following quote:

"I had a considerable passion to get rich. Not because I wanted Ferraris - I wanted the independence. I desperately wanted it. I thought it was undignified to have to send invoices to other people. I don't know where I got that notion from, but I had it."

As an person that is seeking that same sense of independence and self-reliance this quote really resonated with me. I hope you find this excerpt as motivational as I do. I think that too often, we feel resigned to our situation and can't find the drive or motivation to take the next step and commit to whatever it is that we desire to pursue in life, so for me, these kinds of quotes and excerpts are invaluable in that they remind me that I am not alone in my aspirations.

I recently saw a 60 minutes video called The 401k Fallout on CBS news that I have to admit rattled my cage a little bit, really to the extent that it took me a few days to get my mind around commenting on it. The piece opens with some rather poignant and disconcerting stories of career fair attendees in New York City from middle managers to executive assistants who have seen significant declines in their investment portfolios, which coupled with unemployment has forced them to burn through liquid funds to sustain themselves. At one point a woman, 54 years of age, breaks down crying and a gentleman, 60 years old, explains that he has been to "afraid" to even look at this 401K statement. The piece goes on to detail other middle career to late career stories of job loss and retirement plans put on hold or done away with all together based on 401k losses.

While these were tear jerking and scary, I think what really made me sit stock still and upright in my chair were 1) correspondent Steve Kroft's conversation with David Wray, President of the Profit Sharing/401K Council of America and a lobbyist for the 401k industry and his subsequent conversation with Brooks Hamilton, a retirement plan specialist who has designed retirement plans some of the County's largest corporations and 2) the far reaching and inter-generational implications of what was illuminated in the banter between these 401k experts and the correspondent and the longer term implications of the 401k fallout.

David Wray asserts that the the "401k is the absolute best way people can save for retirement. They absolutely are the best retirement vehicle that we have." Kroft counters "How can you say it's the best available if it has let down tens of millions of people at the time they need the money the most?" To which Kroft responds, "that's not a 401k problem. That is our entire investment system. " Wray goes on to say that America is a society based on freedom and choice and personal responsibility. "We need to help them (people) understand these responsibilities and execute them the best they can. 401k is part of that. There are no guarantees. Wray's belief is that an individual, because they are responsible for their own retirement, should take responsibility for educating themselves on their investments and investing options. The challenge with that line of thinking is that people are not informed, or educated by the American educational system or by their companies on investments and making sound investment decisions.

Kroft goes on to point out in his conversation with Hamilton Brooks that the 401k option was designed as a SUPPLEMENT, initially, to pension plans and social security. "The three-legged stool, if you will, has gone to two legs and its wobbly. And that's the scary part and people are afraid" says Hamilton. 401k plans are so appealing to corporations because they are so much cheaper than pension plans, so naturally corporations stopped offering pension plans. The American worker has been shifted from defined benefit plans (pension plans) to defined contribution plans (401ks) without a thorough explanation of the implications. Pension plans meant guaranteed retirement funding...401ks mean...well, there is no guarantee that you wont out-live your money.

The financial community promoted 401k's and was giddy with the prospect of trillions of dollars in the hands of unsophisticated investors. "The fact is that the typical 401k investor is a financial novice," says Hamilton. "They don't know a stock from a bond. And we give'em a list of 20 or 30 mutual funds with really, really powerful names, you know, they sound like, 'Gee, that's where I want to have my money,'" Hamilton says. Even the more savvy individual faces the challenge of choosing from mediocre and limited funds available in their plan options. Heaped on this insult is the injury of hidden fees and the lack of transparency in terms of how fund managers are paid and what fees are associated with your purchase of individual mutual funds. When pushed about why the financial services industry was opposed to fee transparency, Kroft responded "I mean, they're comfortable with the situation because they're making a ton of money or they have made a ton of money."

So as we look at this system, we have big business promoting reinvestment in itself through 401k funding assisted by the the financial services industry which has a vested interest in keeping the process as "clear as mud" to ensure maximum profitability. All the while, our educational system continues to churn out employees who are no more prepared to improve their investment performance than there parents  before them. I am concerned about the lack of transparency and the level of financial literacy in our society. I am saddened by the plight of the people interviewed for this 60 minutes piece but I am gravely concerned for their children.

The missing piece for me is the discussion of what is going to happen to the children of the parents whose entire 401k was in ENRON stock, or on paper in their 375K home that is now worth 250K and they owe 300K, or are currently unemployed, 60 years old and have recently seen their 401k halve? What happens to the children of those children? What happens to the sandwich generation who has to pay for their parents retirement AND college tuition (if they can afford it) AND their own retirement? What happens to the 22 year old who had 90K in debt from college and therefore it takes an extra 5-10 years to come up with downpayment money for their first home? These are all questions that I dwell on and while I don't have any hard and fast answers, I do know one thing for sure, if individuals don't take responsibility for their retirement planning, college funding, eldercare etc. by educating themselves on investing, they are going to find themselves in a similar plight as the folks interviewed in this 60 Minutes piece.

I just read a very telling article in the Washington Post titled: A Return to the Basics: Buy Low, Fix, Rent.  As I was reading, I was thinking to myself "aah, I am not the only one having this epiphany." The article, as you might surmise from the title, proposes a back to the basics of investment approach as folks navigate their retirement planning. I found this article particularly interesting and simultaneously disturbing. What I find so disturbing is that we, as a society, could have gotten soooo far away from fundamental investment principles like cash flow and come to believe that appreciation was essentially a right and not a privilege. See my earlier post Real Estate Investing: Financially Sound, Numbers Driven, Investment Principles Based Investing. The article speaks about the bubble and how speculators got away from long term investment principles (rents producing cash flow) while pursuing a quick return (appreciation producing capital gains). I spoke of this phenomenon in an earlier post Investors vs. Speculators and the Case for Cash flow Investing.

The Greens (the couple featured in the article), a couple in their 60s and rapidly approaching the golden years of retirement, are purchasing investment properties in an effort to provide steady retirement income. They have significant concerns about the stock market and its ability to produce the kinds of returns they will need to fund their retirement so they have chosen real estate as another viable option. They have employed a low end theory strategy by targeting properties in Washington DC, Northern Virginia markets as well as Memphis, Tennessee based on their purchase price and the rents they can receive after renovation.

Owing investment real estate affords certain advantages and disadvantages. Some of the advantages are 1) the ability to right off mortgage interest and property taxes 2) as well as the tax deductibility of maintenance on the home, marketing for tenants etc. etc. 3) potential for appreciation which would allow for refinancing or sale for a profit. Some of the glaring disadvantages are 1) locating property and purchasing at the appropriate price point to ensure cash flow 2) the ability to complete the rehab at a reasonable cost while being mindful of all City and County codes 3) ongoing maintenance of the property i.e. clogged toilets and other associated headaches as well as collecting rents.

One of the huge upsides of real estate investment, and one that I believe is on the cusp of finding its way to the masses is the ability to invest in the asset class without the majority of the associated headaches that come with finding it, negotiating to purchase it, purchasing and rehabbing it, screening and placing the tenant in it and managing its upkeep and the collecting of rents over time. Individuals who do not want all of the associated headaches of real estate investing can personally provide financing to investors who do and earn a significant rate of return.

This article speaks to what I believe will be a growing trend; both back to the basics of investing i.e. for cash flow and not appreciation but also as more and more individuals, families and partnerships come together to provide financing to buy and hold investors if they elect not to employ the strategy themselves.

I heard recently that 98% of IRA funds (anywhere from 5 to 14 TRILLION) dollars are invested in the stock market with 2% of that market share being invested in non-traditional assets i.e. mortgage positions, tax liens, startup companies etc. With the global markets melting down, I am curious as to why more people aren’t investing their funds in self-directed IRAs. I think it goes beyond the mere fact that….well….people have no idea that they actually can invest in non-traditional asset classes if they work with a self-directed IRA company (See my earlier post Why Don’t More People Self-Direct IRAs into Real Estate?)

Although that is a HUGE component, I think its more the symptom and not necessarily the disease. Beyond that huge hurdle is “Ok…great…Mr. or Mrs. Self-Directed IRA person, I get that I can self direct my IRA but can you recommend an investment for me to invest IN once I roll my old 401K over to your organization?” The answer is indubitably and definitively no! Why, you ask? Because, self-directed IRA companies are forbidden from providing investment advice. This is an interesting and cruel twist of fate for the population en mass, the self-directed IRA companies that hope to serve them and the real estate investor (and other kinds of investors) who would like to work with said individuals rolling over 401ks. Big business essentially has a monopoly on 401K monies (when was the last time you worked at large corporate organization X and went to HR and said “I would love to invest my money in an individual mortgage position in a local market and have the borrower personally guarantee to pay me back or I’ll foreclose and seize the asset and file a deficiency judgment against the borrower.” I am guessing not often.)

So you see, even if you knew that you could self-direct you still might not know how to invest or what in. At the end of the day, you should invest in something that makes sense to you, allows you to sleep at night and provides you some protections.  

Just the thoughts of one man who recently watched his stock market investment account half in value.

Rich or poor, suburban, urban, anal-rententive or foot loose and fancy free, we are all facing the same financial challenges. Stock markets are roiling, home equity has evaporated, college costs are on the rise, incomes have stagnated while costs of living, healthcare, eldercare and life insurance continue to rise and to top it all off in 1974 that same ERISA Act that brought the opportunity to invest in 401ks and IRAs (defined contribution plans) also effectively eliminated the pension plan (defined benefit plan.) In 1974, it was determined that businesses no longer had to provide life retirement benefits to employees and that individuals were responsible for their retirement planning.  

What that means is that we are all investors, not by choice or desire but by sheer necessity and default. So whether or not you feel inclined, interested or prepared is irrelevant as the government has indicated it feels confident that you are ready to take on this daunting task. Coupling that tall order with the paradigm shift we face in investing and one can feel down right overwhelmed. In 1971, President Nixon took the US off the gold standard which means that our dollar bills are no longer backed by gold. Money no longer holds its value based on this fact and due to inflation and recent stock market and housing turmoil the stark realization is that money must be invested in real property, paper-based assets, commodities or businesses that optimally provide income (primarily) and appreciate in value (secondarily). Cash stashed in savings account or a mattress is in effect losing purchasing power everyday and saving in the traditional sense of the word cannot keep pace with the short and long term needs of the modern American family.
The keys to success and survival are active engagement, education and true diversification. It takes an investment of time and a true commitment to learn and feel knowledgeable about investing and investment strategies. Epiphany Management and Development was founded to empower people to make informed decisions through consulting and helping to inform its clients. I feel strongly about the importance of being diversified in stocks, bonds, mutual funds etc., however the current markets have shown that owning paper-based assets and one's own home is not enough to be truly diversified. Global markets offer significant opportunity especially now that investments can be purchased at significant discounts, but I also believe that targeted investments in local markets provide significant opportunities, especially when based on sound fundamental economic principles and not on speculation and emotion.

This is a question that I have been mulling over for the past 10 months, of course that was when I found out that it was actually possible. Interestingly enough, not long after I caught wind of this option, I had a friend approach me one day with an interesting story about self-directing her IRA. She approached a faculty member at a business school (at a major university) about the potential of self-directing her IRA. The conversation went something like this:

My friend: “I wanted to get your take on my potentially setting up a self-directed IRA to invest in real estate.”
Finance Faculty Member: “Why would you want to do that? You can just call Charles Schwab and they can set up an account for you with stocks, bond, mutual funds and REITS?”
My friend (awkwardly): “Uhh…thanks. I appreciate the advice.”

My take away from this interaction is two fold (1) and I mean no disrespect when I say this because I work at a university but here goes…just because you have a degree in business with a focus in finance that does not necessarily mean you are aware of all the investing options available. Granted, my friend came with a very specific question about a very niche topic but the faculty member, who by educational background is an “expert” in finance, had no frame of reference to respond to her inquiry. (2) People don’t know what they don’t know and it is hard to make educated and informed investment decisions if you simply don’t have all the information. I’ll bet you didn’t know that in 1974 the Employee Retirement Income Security Act (ERISA) established Individual Retirement Accounts (IRAs) AND the ability for people to self-direct them into real estate, private businesses etc. It was news (welcome at that) to me. Check out this great article on msn moneycentral by Jeff Schnepper about the use of self-directed IRAs for retirement planning.

The point being, this is not a very well known and an even less publicized fact. Most employers will offer 1 to 2 options in terms of retirement plans but those are 100% invested in the stock market allowing little in the way of true diversification. Due to time constraints i.e. work and family obligations, I would say that if you polled most employees, they don’t spend a great deal of time pouring over their 401k options and they spend even less time managing them once selected. For your average American, the only other “investment” they have in their portfolio is their primary residence and we all know what has happened to home equity in the past few years. These last two points are quite alarming to me based on the fact that Uncle Sam has basically said “We want YOU!...to be responsible for your own retirement planning,” but what has gone undiscussed is the fact that in our educational system, no one is really taught how to go about taking ownership of their retirement planning or at least told all of the options that are available to them. See my upcoming post on financial issues we all face and what they mean.

It’s crucial that real estate investors in their evaluation of the purchase of property understand intimately the numbers of the deal and have multiple exit strategies that have been thoroughly mapped out prior to the negotiation of the purchase price of a house. Essentially, he who has the most exit strategies and produces the most cash flow effectively wins. My partners and I at The Gilliard Group are firm proponents of this cash flow approach to investing. Our business model, based on low end theory investment principles that maximize cash flow, affords us 3 exit strategies per investment property:

   1. Purchase and rehab with private funds and refinance or keep the private money in place to hold it as a cash flow investment property in a corporate portfolio
   2. Purchase and rehab with private funds and sell to an investor buyer as a cash flow investment property
   3. Sell to a first time homebuyer.

These strategies afford the most opportunities to exit the property based on its cash flow and price point and based on our model if we cannot purchase a property at a price point that fits our investment criteria, we simply move on. The ability to work with private lenders affords us the flexibility to close quickly and provides our sellers exactly what they need, which is typically a quick closing, so they can move on. Removing emotion from the equation and focusing on the numbers provides the real estate investor consistent returns without the worry of whether or not the property will sell for retail. The key is having multiple exit strategies.

Being a real estate investor, during the past few years has meant a lot of different things to a lot of different people. We have seen a housing boom and bust and we have also seen a large number of “investors” take significant losses due to investment decision making based on emotion and a follow the heard mentality. I think the Oracle from Omaha put it best when he said "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insight, or inside information.  What's needed is a sound intellectual framework for decisions and the ability to keep emotions from corroding that framework." (Warren Buffet)

Unfortunately what was much more prevalent during the housing run up and what probably typifies the vast majority of booms and busts of market cycles are greed….and speculation….and greed and speculation…and greed and speculuationandgreedandspeculation. These forces, or emotional motivations really, spiraled out of control and led many in markets like Southern California, Phoenix, Miami and other parts of South Florida to deviate from the one requisite principle of a sound real estate investment strategy…..drum roll please….invest for cashflow. Investment in outer markets that allow for cash flow investing provide the opportunity for almost 2 to 1 rent to mortgage ratios and multiple exit strategies for their investors. Cities like Baltimore, some areas of Philadelphia, Trenton, Charlotte, Jacksonville etc. offer opportunities for investors to purchase homes for cheap that are cash flow positive upon rehabilitation. Migration trends, City plans and geographic locations of Cities like Baltimore afford the upside and appreciation potential that should be considered the icing on the cake and not a rationale for purchasing a “investment.”