“It’s the end of the world as we know it, and I feel fine”

Below is an article written by my good friend Ken Holmes. We live in times when many people are worried about economics, investing and their future. I’ve had discussions with many people. While I want to be aware of what is going on, and prudent with my decisions, I am by no means hiding beneath a rock. Enjoy the article:

Those of you old enough to recognize Michael Stipe’s words above have lived through some recessionary times before. The Document album by REM came out in 1987, the same year of “Black Monday”, an unprecedented loss in the stock market of over 22% in one day. The Savings and Loan industry was collapsing, real estate prices tumbled, and the government took over the management of many lending institutions. Sound familiar? Fortunes were made and lost during those heady times. Yet do you even remember?
Today’s economic crises may be worse, or different, or longer. Yet I believe that it will end at some point. The United States is a huge country with over 300 million people. These people must eat. They need homes to live in. We are just too big of a market to stay down forever. Change is occurring. But with change comes opportunity. There will be entrepreneurs that start businesses this year that prosper for years and eventually employ thousands. A child born today may not even remember The Great Recession and will have to learn about it in school. Economies go in cycles. The roaring 50’s post war boom. The 70’s had wage and price controls and high interest rates up to 18%. The 80’s leverage buy outs and stock market increases. A couple recessions late 80’s and early 90’s, then the stock market bubble followed by the real estate run up then it’s collapse in 2008. Likely my two sons (9 and 13) will come out of college into good times but live through a downturn or two before they retire.
So, what does this mean for you and me as investors right now? For me, it means that I need to be looking for opportunity. You see the difference between the losers and the winners is that the winners see opportunity. Many people are so scared right now and clinging to their cash and their job that they don’t see opportunity, or if they do see it they don’t do anything about it. The house you just bought for 40K that is worth 120K fixed up and will rent for $1000 a month, doesn’t it have houses on each side? Aren’t people living next door that know what that house could be worth? Yet, did they make an offer on it? You might say that they don’t have the money, but they could find the money if the really saw the opportunity to make 30 grand or $250 a month. But fear and lack of knowledge keeps them from acting on the opportunity right under their noses.
Currently, interest rates for deposits or money market accounts are less than 1%. The stock market tumbled down again today. Rich people don’t know what to do with their money to make a decent return. I have a new private investor who has over $300,000 in cash at the bank making .5%. He is a lawyer and is a smart guy. But he doesn’t trust stocks right now. He is very excited when I tell him I can get him a 10% return on his money. He would be excited with 5%! What is an interest rate anyway? It is the cost of money. Money is cheap right now. We live in a world with cheap money and cheap real estate. Doesn’t it make sense that a fortune could be made given that reality? Who will make that fortune? Those that see the opportunity, have the knowledge, and take advantage. Money is looking for good returns and can’t find it. If you become the guy (or gal) that can show money where they can make a good return you can make your fortune using the age old principle of OPM – other people’s money.
It all comes down to attitude. Is your attitude one that has you waking up each day expecting to find a great deal? Or are you scared and waiting for better times to try and build your business. During the Great Depression do you think some people made money buying real estate for cash flow then later selling it at a huge profit when prices came back. You betcha! Will that happen again during these times? I think so! But will it be you? If you want to be scared, how about being scared that you will miss the boat. Do you want to go to your local REIA meetings in 10-15 years and have the young one’s say “I bet you bought plenty of property when prices were so low in 2012”. Then will you have to say “Well, times were tough so I stayed on the sideline until they picked up.” I hope not.
I try and make myself the guy who can help the richer people make a good return. If I can buy a property cheap that makes a 15% return, and I can get an investor who is happy with 10% to put up the money, I can keep the 5% for myself. No money down as they say. Better yet you do the deal 50/50 and you both make 7.5%. If that cash flow is say $1000 a month, you can make $500 a month for as long as you are in that deal, often adjusting with inflation too. 10 deals like that is $5000 a month. And 20…..
I used to set goals based on net worth. I wanted to be worth X millions dollars. I have changed that now, realizing that cash flow not net worth is the goal. Every deal I can get involved with that can result in me realizing a monthly cash flow is good. Often these deals have upside potential down the road as well. I look at rental opportunities, owner finance opportunities, anything that will create a cash flow big enough to make my investor happy and makes me a nice monthly income.
Same with my own money – leaving out the investor -- I look for cash flow investments that make a high return. The example I have used teaching a few times is my dump trailer example. Being an investor, I know contractors and other investors who need dumpsters at job sites. They often pay $500 or more for this service. If I buy a used dump trailer for say $3000, I can rent it out to these people at $200 per use, saving them money. If I rent it out even 5 times a year I can make $1000 on a $3000 investment. That is a 33% return on investment. If I rent it out 10 times I will make 66%. Now that’s a nice rate of return! Find a need and fill it is the old business adage. Waking up every day looking for opportunity can help you find situations like this where you can help people and make a great return. I can be scared about the future and put my 3 grand in the cookie jar “just in case”, or I can invest the 3 grand to make a grand or two for years to come. Another example: If you had a good contractor who needs a truck. He might go to the “buy here, pay here” used lot and pay $15,000 and 29% interest. If you could find a truck and negotiate a price of $12,000, then sell to him at $15,000 with $2000 down and 12% interest, your return is close to 20%. And he gets a better deal. Mobile homes, duplexes, equipment rental, financing – there are many ways to create high yields on small sums and get great cash flow returns. Find a need a fill it and make a great return.
So, wake up every day and look for opportunity. Quit reading the gloom and doom in the news. It’s good to keep up with current events, but it’s also good to keep the right attitude and expectancy of good deals around every corner.
Ken Holmes
July 2012

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