Catharsis, Reflection and Opportunity
I woke up stewing on the several rental properties that my wife and I own on this fine Sunday morning. As you can probably guess, I am the scholar of the family while she is the entrepreneur. After the kids were in high school, my wife, needing something to do, decided to get into rental properties. We read some real estate books and decided to flip a house! We did OK on the first one, except the bank earned nearly as much as we did. One thing led to another and we stopped flipping houses after the second one and decided to buy, hold, and rent. By 2009, we had 9 properties, but the economy had crashed.
In 2009 my uncle, who owns a local bank with several branches, invited me to drive 4-wheelers in the mountains of Colorado near his cabin. I figured if anyone understood what happened in 2008, he would. On our drive up into the mountains, we had a chance to talk. He said he did not know what went wrong, in 2008. He said that Wall Street banking was over his head. I was shocked! And since my retirement had just lost 60%, I wanted to know why.
So I turned my scholarly eye to understanding the economy and I did not like what I found. I awoke over the next few months, discovered silver later that year and we started stacking. A year later, we started preparing for the new economy, reading and posting on participating on discussion boards like this one to stay on abreast of all the canaries and swans. And our real estate sat there, grinding out a small profit each month as we scrambled back and forth, making repairs, screening renters, and generally working for the bank.
The world economy is not recovering now in 2014. As the sophist Gorgias said, “to tell the knowing what they already know, may seem right, but brings no delight.” Thus we don’t need to discuss the overwhelming evidence that we are headed for a big reset of some sort.
But after trying to sell out in 2010 and 2013, we still have this rental property. And as QE has taken hold, pumping up stocks and real estate where most people keep their wealth, that inflation has provided the ostensible argument the MSM needs to persuade the majority of the population that the economy is recovering Yellen says, “Stocks are up, inflating your IRA!, Real estate is rebounding, giving back your equity! All is well, folks! Right? Right folks?”
The rental property is paying its own bills, still allowing us to skim a small profit. But trouble is brewing. Though my realtor says sales are strong in the area, national data presents a gloomier picture that will overtake my region. A day of mark to market valuation is coming. Deflation can wipe out my equity in those homes. Recession can wipe out my renters. And if that happens (when that happens) the banks will seize my hard earned wealth, cause I still have mortgages on those houses.
As we attempt to sell the property again, we recognize that somebody is robbing us. When one sells an asset after holding it for several years, who benefits? Let’s see, let’s do the math.
I paid 85K in 2007 for a duplex on a golf course. According to John Williams, the inflation rate has fluctuated between 3 and 8% for these years (1990 method… the 1980 method is even more radical), making the home arguably worth 121K today. But I have NOT earned 36K, but have earned nothing, due to real inflation. And if I liquidate, I pay 28% tax, or 10K, on an imaginary gain! And rental returns on the property have not been lucrative.
Damn! Who am I working for anyway?
If I had bought gold with that down payment instead of the property that day, I'd be ahead by 94%, even at these suppressed prices!
But I was a sheep, putting my money where the MSM said was the wise place to put it. Oh God! I wish I had not stopped collecting coins as a kid, but kept up on the hobby. Then I would have been in tune with the real value of precious metals and perhaps, just perhaps, I would have awakened sooner. Thank God that I did wake up! I have been shaking my relatives, trying to wake them up, but I guess they like their dream world better than reality.
But wait! This no time for catharsis, reflection, remorse, or regret! Even after being robbed of 28% by the IRS, I am still better off to make a move now. QE has bought us all some time and opportunity. Markets are not dead and gold is still suppressed. The economy has not collapsed yet. So there is time to sell whatever we have that has equity and put that equity into gold, keeping the things that we will need for the new economy.
According to Mike Maloney, we will experience deflation before inflation really begins. Indeed, in housing we got a taste of deflation in 2008-09, driven by fundamentals with too much product and too few buyers. Another round of housing deflation, especially if connected with higher unemployment, will probably wipe out any equity I have in the rental properties, as well and cause me to lose enough tenants that I begin to fall behind on the mortgages. Selling the real estate now before the deflation hits is a no-brainer. Putting that equity into gold or livable land is a no-brainer.
So I have seven properties for sale and “NO” you cannot buy them. Go buy metals instead. I am looking for buyers who refuse to wake up, are committed to the current system, and will lose all they have anyway.
But my personal decision goes deeper and is perhaps one that you face as well.
Taking equity out of my current home is a difficult question. Do I try to pay it off to be free of banks, or do I take equity out through a refinance or sale? (Of course, I am asking these question for all to ponder.) If I sell out, I have to live somewhere and then likely make a move—not an attractive option. If I refinance the equity out, I only get 80% and probably lose all hope of paying off the place and staying here. If I do either, then wait for the deflation, maybe, just maybe, we can purchase a comparable or better home. Frankly, refinancing and putting the equity in a bug-out home, then continuing to live and work in this economy seems the sensible thing to do.
But my wife prefers to try to pay off our current home. Though I’d like to move the equity to gold, the past few years make that a more difficult argument to support.
Another question for all of us perhaps, is “How do you protect your paid off property from creditors?” I still hope to get out of debt by the time of the reset, but what if I do not? Can I set up a trust for my children, place a paid off home in that trust, then live in it as the economy declines without fear that a repossession of my other refinanced house will jeopardize the paid off house? Perhaps some familiar the law, trusts, and corporations can steer us in the right direction. My best friend’s brother is a lawyer who says that your kids are there for this purpose. Put the house in my daughter’s name. Problem solved. Hmmm…
In the past, banks have opted to accept the foreclosed home as payment in full and not pursued the delinquent homeowner for losses. Will they continue that practice? Or will they follow a more devious option, taking you to court to recover their loss of equity, forcing you into bankruptcy? Knowing bankers and lawyers, I suspect they may start pursuing option 2. So does a trust protect you, or will the laws be changed to let them steal your fiat?
Whatever we decide to do with equity in our possessions, I bet that seven years from now, those who sell now, before deflation, and buy gold or land they can make a living on, will pat themselves on the back. We have the opportunity today to dodge what comes in part, preserving as much wealth as we can. And I think many of us are wealthier than we realize—especially that gold is still suppressed and undervalued.
I shall not regret my missed opportunities of the past—like $8 silver and $500 gold, and instead, I’ll make the best decisions I can from today forward. Given the reset that is approaching, business as usual is NOT my best choice. I am grateful to QE, ZIRP, & NIRP for extending our time table these extra years. It is giving people like me, who started stacking later, time to resettle, time to board up the house, situate the equity into a safe place, and have a hope that we will be standing firm when the storm is over.
Hmmm… I wonder what else I have of temporary, fleeting value that I should sell?