Diversification. What's Old is New

We got a press inquiry the other day from a reporter looking for new and non-traditional strategies to protect and grow your IRA. Right up our alley. Not sure if we'll make the final article, but our take on creating true diversification with self-directed IRAs is worth sharing. Are you truly diversified?

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The primary retirement strategy we're advising our clients to follow is tried and true...diversification. But we preach true diversification, not the diversification offered by most Wall Street institutions. True diversification involves spreading your risk among different asset classes, not just stocks and mutual funds. The best way to achieve true diversification is through a self-directed IRA. A self-directed IRA allows the investor to spread their risk into a wider range of asset classes such as commodities, private placements and our favorite, real estate.

All asset classes have taken a hit over the last three years, but we believe real estate offers the best way to protect and rebuild IRAs. On top of this being the best time to acquire investment property in a generation, real estate offers four different ways to earn a profit. Investors can make money via appreciation on the property, monthly cash flow, debt repayment and tax deductions. While you don't get the tax deductions when owing real estate in your IRA, you do get the other three. Real estate is the only investment class that allows an investor to achieve returns this many ways.

Anyone looking for new strategies to rebuild their retirement account just needs to consider going back to the basics and diversifying. But this time, don't solely invest in a mix of stocks and mutual funds. Take the time to understand true diversification and the advantages of owning real estate in a self-directed IRA.

Memphis Rated #1 for Foreclosure Investments

I spent some time in Memphis this week looking at investment opportunities. On the 2nd day of my trip, Realty Track reported that Memphis was the #1 market in the US to find a foreclosure bargain. The ranking was based on the discounts available for the properties, rising home prices over the last year and a stable job market. Another market we're excited about, Cleveland, was #4 on the list.

Finding out that Memphis was #1 was icing on an already mouthwatering cake. What I found in Memphis were solid neighborhoods, homes that have been properly remodeled, quality property management, a superstar real estate agent, one hell of a pulled pork sandwich and some great blues music. What can I say, my hotel was only 1 block off Beale St!

Our partner in Memphis is OCG Properties. OCG is based here in Southern California and run by Mathew Owens. OCG has purchased and renovated over 200 properties in the last few years and really knows the intricacies of the Memphis market. Besides being a real estate investor, Matt is also a CPA and specializes in the due diligence of each investment.

After a few negative experiences with property managers in Memphis, Matt decided to open up his own property management company. He hired his old friend Lester and set him up in a great place in Southern Memphis. Lester is on the ground and he and his team oversee all renovation and property management issues. Like I always say, any investment can go south quickly with poor property management. OCG has the right solution in place to protect thier clients' investments.

To see my photos of the properties in Memphis, click here. Be sure to check out the Statue of Liberty, Memphis style! I spent two days with Matt, Sean and Lester looking at a wide range of SFR investments. All of their properties are currently rented (a good sign) but one tenant did allow us inside to take a look at the interior renovations. They do sensible renovations that minimize costs to the investor while offering enough touches to help attract quality tenants. You can see the color scheme they use, the crown molding, the new hardware and lighting, new windows (when appropriate). Roof, plumbing, electrical...all major systems...all seemed newly renovated. We also explored a few new listings so I could walk through the "before" condition of some of these foreclosures. These properties are not that old and most of the renovations needed are cosmetic in nature.

Of course, I wouldn't be writing about this at all if the properties didn't offer solid returns. The price-to-rent ratio in Memphis is as good as any market you'll find in the US. And the discounted foreclosure prices that Realty Trac reported leads to great fix-and-flip opportunities, as well as longer term buy-and-hold deals.

Speaking of, the one part of the OCG system that I felt needed improvement was in liquidation of the fix-and-flip properties. OCG's focus when selling a newly renovated property is find another investor. While still turning a profit, the maximum return can be found in selling the property to an end user...a first time home buyer. To do that, we needed to find a local agent that specialized in selling homes, not just listing homes. I found that partner in Jennifer Carstensen with Keller Williams. Jen has built her business specializing in social media and digital marketing. She's smart, aggressive and implements marketing that matches how today's home buyers shop for homes. While I was in Memphis, I was fortunate to hear Jennifer speak on a panel about the state of the Memphis real estate market. Having her on our team is a key addition and allows for multiple exit strategies on each investment.

Like I always say, there's no "I" in real estate. Real estate investing is a team sport and I feel like the team that's assembled to handle investments in Memphis is a strong one. If you would like to learn more or see the returns on a specific property, please let me know.

Did Today Really Happen?

As I was working away today on an LLC investment for a client, I got an email alert from Google informing me that the DOW dropped 900 pts in a matter of minutes. With nothing online but a few headlines, I decided to see what CNN had to say. At the time, the media were still trying to figure out what caused the drop. Even Wall Street was trying to make sense of what was happening.

It's rumored that a trader accidentally put in an order to sell billions of P&G shares instead of a millions. (Millions of P&G, really?) This created an unexpected 30-40 pt drop in the P&G stock price, which combined with a protest in Greece that got out of hand, triggered a market free fall. Pre-set trading instructions were initiated by P&G's drop, which then caused the DOW to drop, which then caused other triggers to initiate, which then....well, you get the drift. This free fall caused the DOW to drop 700 pts in 15 minutes! The market recovered quickly, also propelled by automated instructions and ended with a more "manageable" loss of only 350 points for the day. While that still represents a 3.2% drop in value, most felt pretty relieved that the losses weren't even more staggering.

The 1000 point drop in the DOW, or nearly 10% of its value, happened and then recovered in a matter of hours. That is a breathtaking display of the market's volatility and reminded me of one the attributes that I like most about real estate. Real estate is a slow moving index. In fact, it's near-impossible for real estate to drop, or rise, quickly or unexpectedly. Even when the bubble burst in 2007 and real estate in some markets lost 40+%, it happened over a period of years, not hours. Conversely, real estate will also take years to recover, while the stock market might make up today's losses in a matter of minutes tomorrow morning. Again, the stock market is far more volatile.

When we recommend using real estate to diversify a retirement portfolio, we're attempting to hedge against more than the direction in which different markets move. We're also trying to hedge against the speed in which different markets move. Real estate is methodical, lumbering, glacial. Stocks are comets streaking across the investment horizon. Real estate helps to keep a retirement portfolio grounded and can help limit the radical swings.

For example, if you had a retirement portfolio that was worth $100K and was split evenly between real estate and stocks, today's 3.2% drop would have merely been a 1.6% hiccup. And if you factor that the real estate actually earned money today due to rent payments and a days worth of appreciation, the decline is slightly less. Again, holding real estate also limits the upside growth when a big day in the market happens. But diversification is about limiting the losses not maximizing the gains. Real estate fills that role ideally within most retirement portfolios.

Stock prices are measured by the minute for a reason. So the next time the DOW, the S&P or the NASDAQ makes a radical movement and the volatility has your stomach twisted into knots, think about shifting some of your holdings into real estate. It may be boring and staid, but it's also proven and stable.

You Can Own Real Estate in your Retirement Account. Really

Not many people know that you can own real estate in your retirement account, even though it’s been possible since 1974 when IRAs and 401(k)s were first created. Wall Street seized the custodian role of these account early in their lifecycle and has had control…and the blind faith of most Americans…ever since. But that faith is eroding and many are moving into real estate to save and protect their retirement savings.

Why real estate? Real estate is a proven method for building wealth and has made more individuals wealthy than any other asset class in the history of mankind. Long-term real estate ownership has proven to be a strong vehicle yielding high appreciation, far superior to other retirement asset choices. Real estate is also an EXCELLENT investment to hold within a retirement account and the antidote to the mutual fund blues. Here are my top five reasons why real estate is ideal for your retirement account.

1. Tax Free Cash Flow: Real estate investments provide monthly cash flow to help grow your retirement in addition to any appreciation. Since the asset is held within a tax-free environment, there are no taxes to pay (in most cases) until you withdraw money from your IRA. And if you own the asset in a Roth IRA, the monthly cash flow and capital gains can we withdrawn at retirement completely TAX FREE!

2. Create Leverage: Your IRA can borrow money and create leverage allowing you to expand your holdings. You could also borrow money from another IRA holder since the law also allows IRAs to lend money.

3. Control: Want to improve the value of your investment? Add a new roof. Put in carpet. Update the kitchen. All of these improvements can increase monthly cash flow and ultimately improve the value of your asset. These costs have to be paid out of your IRA, but name another investment that you can improve with your own free will.

4. Less Volatility: All investments are cyclical and have their ups and downs, but real estate is more predictable and less volatile than the stock market. Ever see the value of real estate tracked by week, day or minute? You haven’t because it just doesn’t move that fast. Timing the peaks and valleys of real estate is an easier task than timing other asset classes, especially market based investments.

5. Diversification: Real estate offers a great way to diversify your portfolio. How many people had their ENTIRE retirement portfolio in the stock market? Nearly 80%. Use real estate to balance your portfolio, along with other asset classes, so retirement doesn’t get postponed due to a bear market.

The first step towards owning real estate in your retirement account is to set up a self-directed IRA or 401(k). Once the new account is established, funds are transferred from the old IRA to the new IRA, You can then start looking for real estate opportunities. Freedom Growth specializes in all aspects of owning real estate in a retirement account and guides each client through the process. Check out our website to learn more.

Maybe the '70s Weren't So Bad

I have to admit, the passage of health care was a bittersweet moment for me. On one hand, I'm glad we've finally passed legislation that will provide medical coverage to so many Americans. Being a self-employed, small business owner paying too much for coverage, having family members with pre-existing conditions and being a proud dad with kids that will be graduating college in the blink of an eye, this bill positively affects me and my family. And almost as important, having universal health care is what the mightiest civilization in the history of mankind should do...protect their own.

But on the other hand, I wonder if politics may have prevented an even better piece of legislation. Instead of two opposing points of view meeting in the middle and working together, this bill was instantly sensationalized and isolated as the dividing line for the 2010 mid-term elections. Instead of coming together and solving a problem that EVERYONE agrees exists, a bitter game of politics threatens this bill as lawsuits mount and positions become firmly entrenched.

It made me curious to learn more about how a piece of legislation that deeply affects my daily life, ERISA, came to be. Passed in 1974, ERISA is the birth of the IRA and 401(k) and transitioned us from a "pension" society where companies were responsible for an employee's retirement into the "401(k)" society we are today. ERISA was a major piece of legislation that has been amended and modified along the way and still is the law of the land governing retirement accounts. And it has quite a bit in common with the current health care bill.

The problem America was facing in 1974, according to the speech President Gerald Ford's gave prior to signing the bill, was too big to ignore. "From 1960 to 1970, private pension coverage increased from 21.2 million employees to approximately 30 million workers. During this same period, assets of these private plans increased from $52 billion to $138 billion. And they are now increasing at a rate of $12-15 billion a year. It will not be long before such assets become the largest source of capital in our economy."

"Yet, this same growth in pension plans has brought with it a host of new problems. Many workers have ultimately lost their benefits – even after relatively long service – because when they left jobs, they thereby gave up rights to hard-earned pension benefits. Others have sustained hardships because their companies folded with insufficient funds in the pension plan to pay promised pensions. In addition, some pension funds have been invested primarily for the benefit of the companies or plan administrators, not for the workers."

In 1974, we obviously had a Republican president, but what did the legislative branch look like? This was the 93rd Congress and the Democrats were firmly entrenched. They had control of the Senate (56 D, 42 R, 2 O) and the House (242 D, 192 R, 1 O). It's believed the idea for the bill was conceived in the 60s while Kennedy (D) was president. It gained steam in '63 after Studebaker went bankrupt and couldn't afford to pay pension benefits. The bill was introduced in 1974 to the House by a Democrat and to the Senate by a Republican. This was a non-partisan effort to say the least.

Public officials in the executive branch and Congress overcame strong opposition from business and organized labor to pass ERISA. Before it passed, federal law gave employers and unions great discretion in the design and operation of employee benefit plans. Most importantly, firms and unions could and often did establish pension plans that placed employees at great risk for not receiving any retirement benefits. In the early 1960s, officials in the executive branch proposed a number of regulatory initiatives to protect employees, but business groups and most labor unions objected to the key proposals. Sound familiar?

Faced with opposition from powerful interest groups, legislative entrepreneurs in Congress, chiefly New York Republican senator Jacob K. Javits, took the case for pension reform directly to voters by publicizing frightening statistics and "horror stories" about pension plans. This deft and successful effort to mobilize the media and public opinion overwhelmed the business community and organized labor and persuaded Javits's colleagues in Congress to support comprehensive pension reform legislation. ERISA was signed into law on September 2nd, Labor Day, by President Ford...24 days into his presidency.

The need for ERISA was so similar to the need to reform health care, but solving it was handled so much differently. Both parties worked together to overcome special interest and big businesses. ERISA passed Congress with an overwhelming majority, 376-4 in the House alone. This comment, again from President Ford's speech, struck me the most. "It is essential to bring some order and humanity into this welter of different and sometimes inequitable retirement plans within private industry." Go back reread that last line but substitute the word "health care" for "retirement".

Chalk it up to the naivete of youth if you must, but I still believe politicians can come together and do good things when they're more concerned about their constituents well being than their votes. I hope the new health care bill overcomes its difficult, partisan beginning and blossoms into a great piece of legislation. ERISA was born in the turbulent 60's and was passed 24 days after Nixon resigned because of Watergate. Even with all of that politicking happening, they still found time to write, sell and pass good legislation...together.

I hope, for all of us, the partisan tone of today's politics soon finds itself out of favor. It's making me sick.

Real Estate Providing "Generational" Opportunities

Ron Isana was on the Today Show this morning talking about his new book, "How to Make a Fortune From the Biggest Bailout in U.S. History." His #1 piece of advice? To rethink real estate in 2010. Check out the segment here.

Ron says, "2009 was a great rebound for Wall Street, but 2010 will be a rebound for Main Street." While we're still not out of the woods yet, he believes that the worse of the recession is behind us. In his opinion, the biggest opportunity is in Real Estate, which is producing "generational" opportunities. With the market at or finding its bottom this year, both homeowners and investors are offered the unique opportunity to buy at the market's lowest point.

And that lowest point is more than just price. There's also historically low interest rates that are enabling far greater buyer purchasing power. And don't forget about the Federal tax credit. The IRS is allowing a range of home buyers generous credits that can either be used as a portion of their down payment or to help offset the end of the year tax bill. The extension that was passed in November of '09 now allows both first time AND existing home owners to take advantage of the credit, while raising the income limitations. Truly historic times.

So if you're a renter, now is the time to consider buying your first home. If you're looking to upgrade, today's market is providing enough buyers to unload your current residence and generous incentives and opportunities to find a bigger house in a nicer area with better schools.

If you've ever thought about investing in real estate, you won't have a better time to get started for at least another 7-10 years. Both inside and outside of your retirement account, real estate is a broad and valuable asset class that can deliver strong cash flow AND long-term appreciation.

If real estate was a part of a New Year's resolution in any way, the time to to take action is now. It all starts with an email or phone call, so please don't hesitate to reach out and learn more.