Bargains
By Benn | March 28, 2011
The key to successful vacant land investing is buying at a bargain price. But, in this economic environment, what is a bargain price?
We have undergone a dramatic change in the real estate industry in the United States in recent years. This has not been the typical recession. This time, it’s different.
We went through many years of escalating real estate prices, driven by ever-easier credit. That’s over. Credit is tight. It will remain tight. At least you should assume credit will remain tight when contemplating real estate investments.
I hear many people talk about, “when the market comes back…” What they mean is, when the credit markets return to where they were in 2005 or 2006. If that were to happen, real estate markets and prices might also return to where they were in 2005 or 2006. I believe they are kidding themselves – it ain’t coming back.
The relevance to an investor is that we must always know what constitutes a bargain, if we are determined to only buy at bargain prices, which is something I advocate throughout my book.
Let’s look at a couple of examples.
A parcel of vacant land is for sale for $1,000 per acre. You are told it sold for $2,000 per acre five years ago. Is that a bargain? The answer is: You don’t know! What it sold for five years ago represents a totally different market. To know if this is a bargain, you have to have extensive knowledge of this market.
I know of a lot that sold recently. The tax assessment value was $120,000. It was a large lot in a neighborhood of $400,000 plus houses, which would indicate that a $120,000 value is reasonable. However, whoever owned this lot lost it for non-payment of property taxes. The buyer bought it for $1,000! Is that a bargain?
In this economic environment, no one is building, so the chances of selling this lot to someone who is about to build on it is not good. So, forget about $120,000. That is a retail price, and there is no retail market at this time.
Remember where this lot came from. It sold at a tax sale. Someone lost this lot because they couldn’t (or wouldn’t) pay the property taxes. Property taxes on $120,000 lots can be significant annual expenses. Until a retail buyer comes along, the owner must pay those annual property taxes. So, you have to factor that in to the cost of the lot. In that sense, the buyer paid a lot more than $1,000 for this lot.
The buyer plans to flip this lot for about $20,ooo. An investor can justify paying $20,000, plus, say, $2,000 per year in taxes. In five years, he will have $30,000 invested. Hopefully, by that time, a retail buyer will come along. Will he pay $120,000? In today’s purchasing power, probably not. He may only pay $60,000. But that still provides an acceptable return to most investors.
One of the objectives of many vacant land investors today is to provide a store of value for their assets. In that sense, it is much better to own that vacant lot than to own financial assets that might be vulnerable to a currency collapse.
Just make sure you are buying in today’s market – not yesterday’s.
Topics: Rural Land Investment | No Comments »
Government Programs
By John | March 20, 2011
If you are a regular reader of these posts, you know how skeptical I am of government programs. They mostly don’t work, and when they do, you wish they hadn’t.
If you are an owner of vacant land, you might be tempted to participate in some of these programs. If you are contemplating buying vacant land, you might want to evaluate the effect on land that is subject to some of these programs.
I am an advocate of owning vacant land as part of an investment portfolio. In these particular economic circumstances, I am an advocate of owning land as a long-term store of wealth and as a hedge against the inflation that is coming, as well as the inflation that is here.
Agricultural land may be subject to Conservation Reserve Program (CRP) restrictions and payments. This is a program set up by the U.S. Department of Agriculture to encourage farmers to use soil conservation practices on their farms. It requires that the land be managed in prescribed ways. In exchange, the farmer receives annual payments to compensate him for keeping the land out of production.
Now, I have several problems with this program:
1) In this economic environment, with soaring food prices and concerns about shortages, should the U.S. Government be paying farmers not to plant crops?
2) Does the U.S. Government really know better than the local farmer what soil conservation practices are best for his particular farm? After all, who has the most to lose if the farmer’s fields are subject to erosion? Who has the most to gain by maximizing the long term productivity of the farm?
3) What happens when the U.S. Government runs out of money? Whether by choice or by necessity, the Government will soon be forced to reduce expenditures, prioritize programs and eliminate those that are not absolutely essential. Do you thing the CRP program will be a top priority when that happens? Do you think the Government might not meet its obligations to the farmer under these circumstances?
If you are buying land subject to CRP restrictions and payments, and if you place a value on future CRP payments, you may be disappointed. You may be left with the restrictions. However, you may find payments in the form of IOUs, or something much less than you anticipated.
Another popular government program involves conservation easements. You give up specified rights as a landowner in exchange for tax benefits. The rights you give up are perpetual – they go with the land. The benefits you receive are good until the next emergency arises, or until the next administration is elected.
If there is one unmistakable government trend, it is one of diminishing credibility. The U.S. Government is essentially bankrupt. To the extent that you should choose to participate in one of these government programs, you are taking on a partner – a partner that is bankrupt. Bankrupt entities do desperate things, including taking unfair advantage of their business partners.
I advocate land ownership as long-term investments that can become inter-generational assets to offset the inter-generational liabilities the government is creating. Recognize that an incentive for making this investment is protection from government. Don’t screw it up by making your enemy your partner.
Topics: Rural Land Investment | No Comments »
2011 Farmland Investing
By John | March 14, 2011
Most real estate prices in the U.S. have declined in recent years. Houses, office buildings, industrial buildings, retail have all taken a hit. There is one exception: Farmland.
Should you invest in farmland? Let’s look at a little history.
For those who remember agricultural land prices in the 1980s, that was a bubble created by easy credit, as it became popular to believe the U.S. was going to feed the world, and all farmland would be in demand at steadily escalating prices for years to come. Then, the bubble popped and many farmland investors, as well as farmers, found themselves unable to service their debt.
Again, as in the early 80s, we have seen some fairly dramatic increases in farmland prices in the past few years. Is it comparable to the 1980s? I don’t think so.
The 1980s price move was mostly speculation about what was going to happen in the future. Today’s price movements are primarily a consequence of what has already happened. Namely, commodity prices have escalated, causing farm income to soar. That has provided farmers with capital and the inclination to expand their operations.
Farmers expand, and acquire their neighbor’s property, during the confluence of two events: When they have the capital, and when their neighbors are willing to sell. As these two events don’t coincide very often, they don’t have many expansion opportunities. When they do have the opportunity, they tend not to be too price sensitive. In other words, as it may be another generation before this land comes up for sale again, and as I am in the financial position to do the deal, I had better pay the price and acquire this land now.
So, farmland prices have reflected the recent escalation of commodity prices. Will that continue? I wouldn’t count on it. why?
First of all, commodity prices can’t keep escalating. They have already reached the level where many buyers can’t afford to pay the price.
Second, with turmoil in the Middle East, energy prices may be soaring soon. Farming is an energy intensive operation. If commodity prices level off or decline while input costs are going up, farmers could find themselves in much different financial circumstances than they are in today. And, as indicated above, that could reverse the causes of escalating farmland prices.
Farmland has been mentioned lately as an attractive investment, mostly by those who lack expertise in farmland. I believe there are compelling reasons to own farmland, and have for years. My only caveat is that this may not be the best time to buy, especially as conventional wisdom seems to be advocating it. Conventional wisdom is historically wrong.
My conclusion: Look for opportunities to own farmland, but be aware that you may be in the wrong part of the investment cycle.
Topics: Rural Land Investment | No Comments »
Global Starvation
By John | January 25, 2011
A panel of distinguished scholars recently completed a comprehensive study of global food supplies and hunger. This unique assemblage of the academic elite concluded that a global plan encompassing such issues as global warming, soil conservation, transportation, as well as crop production be prepared to address this problem.
Accompanying the article about this study was a map of the globe, showing those countries most at risk of starvation. Now, I was not a member of this distinguished group of scholars, but a brief glance at this map exposes a direct relationship between hunger and autocratic government. i.e., those countries suffering food shortages also suffer from lack of personal freedom and the rule of law.
I would also add the observation that government tends to create problems, then prescribes more government as the solution. In this instance, it is obvious to me that the problem is an excess of central planning and a lack of personal freedom at the local level to solve the problem. Is the answer, as this distinguished group of disconnected airheads would suggest, more central planning?
Global food shortages are not the result of a shortage of resources. The cause is a lack of intelligence.
Topics: Commentary | No Comments »
2011 Outlook
By John | January 1, 2011
The future is too complex to predict with certainty. However, given the precarious state of the U.S. economy, I am compelled to attach probabilities to likely outcomes for the coming year.
Most Likely Scenario
I would apply a 70% to 80% probability that the following occurs in 2011:
GDP: 2-3% reported rate of growth, though I believe a more honest representation of economic growth would probably be closer to zero. Government statistics under report inflation, among other things, thereby exaggerating reported rates of growth. Look for comparisons with economic stagnation in Japan.
Inflation: 2-4% reported, though that is much less than actual.
Unemployment: Little improvement. Staying above 9% throughout the year.
Interest rates: Trending up, along with inflation.
The dollar: The dollar to remain fairly steady throughout the year, except in response to currency crises in other parts of the globe, such as Europe. All currencies, however, are sinking in value together.
Precious metals: Gold and silver continue to climb in value in relation to most currencies, including the dollar. Gold ends the year at $1,600 to $1,700 per ounce; silver at $40 to $42.
Federal Reserve Actions: Continuing QE II through May, then stopping. No change in interest rate policies, despite rising inflation, as they will point to the weak economy as justification for not fighting inflation. Look for other methods of supporting government deficits that may not be announced to the public, or may be given a different spin, such as providing economic stimulus.
Federal Government: Business as usual. deficits as far as the eye can see. The Federal Government continues to crowd out the private sector, sucking up capital, and preventing economic growth.
Less Likely Scenario
I give a 20% to 30% likelihood of the following during 2011:
GDP: Rising at a 4% plus clip early in the year, then suddenly turning negative.
Inflation: Rising steadily early in the year, then rising in a fashion that appears uncontrollable later in the year. Ending the year at a 20% plus rate, and rising.
Unemployment: Dropping early in the year, followed by massive layoffs later in the year.
Interest rates: Trending up early in the year, then spiking up later in the year.
The dollar: Flat to declining relative to other currencies early in the year, then plummeting, as foreign countries begin announcing that they will no longer use the dollar in international transactions.
Precious metals: Rising steadily early in the year, relative to currencies, then spiking up in value later in the year. Gold ends the year above $2,500 per ounce; silver above $100.
Federal Reserve: Despite assurances to the contrary, it becomes obvious as the year progresses, and as inflation accelerates, that the Federal Reserve has no ammunition to stop inflation. This creates panic throughout the world, and a mass rush for the exits regarding dollar denominated assets.
Federal Government: Business as usual. The Obama administration continues to blame others for the economic panic, including foreign governments and the private sector in the U.S. Confidence in government plummets. Social unrest is simmering by year end.
Topics: Commentary | No Comments »
Inflation Outlook
By John | December 30, 2010
As we end 2010 and look forward to what we might expect in 2011, many investment gurus and economists are denying that inflation will be a problem. I don’t pretend to know the future, but I do believe the reasons given for a low inflation outlook are very shallow.
Some point to high unemployment and low factory utilization and claim inflation cannot be a problem in this environment. I believe this totally misses the point as to the true cause of inflation. Yes, the supply and demand of labor, materials, equipment, capital, etc. influences prices. However, I do not believe prices have anything to do with inflation. Inflation is a decline in the purchasing power of currency. We frequently measure that purchasing power relative to prices of goods and services, but what we are truly trying to measure is the value of the currency and not the natural fluctuations of prices of things other than currency.
I believe inflation is a measure of the relationship between supply and demand of one commodity only: currency. In the case of the U.S., that is the U.S. dollar.
The U.S. Federal Reserve has been criticized by some for their current policy of quantitative easing. By purchasing U.S. Treasury debt, the Fed is distributing more dollars into the economy, with the stated objective of keeping interest rates low, avoiding deflation and stimulating the economy. I believe these stated objectives are outright lies. The Fed knows what they are doing won’t accomplish their stated objectives. But that is not why they are doing it, in my opinion. I think they are helping the Federal Government support deficit spending by purchasing debt that U.S. and foreign investors are no longer willing to purchase. The borrowing to support trillion dollar deficits cannot be paid back, and foreign governments realize that. They are phasing out of U.S. Treasuries, and using other currencies as reserves.
As alternatives to using dollars for international transactions are sought and become more common, the demand for dollars will naturally subside. At a time when dollars are being produced in huge quantities and dumped into the open market by the Federal Reserve, creating accelerating supplies of dollars, demand for dollars is declining. As with any commodity, that means declining price. That means inflation.
The Federal Reserve has been providing assurances that they can prevent inflation, as they have tools available to accomplish that. Well, with accelerating dollar prices for corn, soybeans, wheat, oil, cotton, gold, silver, airline tickets, and everything except real estate, consumer price inflation will soon have to be recognized. Of course, we know inflation is already there. Declining housing prices have been concealing it.
In any case, the Federal Reserve will soon be tested to see if they can stop inflation. How do they do that? They use open market operations. They attempt to sop up excess currency that is sloshing through the economy. How do they do that? They sell assets from the Federal Reserve’s investment portfolio, requiring the buyers of those assets to transfer currency to the Fed in exchange for the assets. The Fed then “retires” that currency.
Normally, the Fed has a portfolio of U.S. Treasury securities, which it sells on the open market. But wait, isn’t the Fed in the process of buying U.S. Treasuries? And, as stated above, the real reason the Fed is buying is to make up for a shortfall of other buyers. So, how can the Fed suddenly reverse course and start selling what it has been buying? Won’t that shock the hell out of the Treasury market?
Well, fortunately, the Fed now holds other assets than just Treasuries. Remember, it purchased a bunch of toxic assets from banks a couple of years ago, such as mortgage backed securities. It could sell them. But, who is going to buy them? Aren’t the houses and mortgages underlying those securities still declining in value? These securities would only be salable at steep discounts. Wouldn’t that bankrupt the Fed? Who would then bail out the Fed? The U.S. Treasury? But wait, isn’t the U.S. Treasury having difficulty raising the money to support its current level of spending? Isn’t the Treasury relying on the Fed to keep it afloat?
Do you believe in perpetual motion machines?
Once inflation becomes recognized, interest rates will rise, as they have been, to compensate for the lower purchasing power of the dollars that will repay borrowed money. That will increase the U.S. Federal deficit. That will cause the Treasury to have to borrow more money, which will have to be purchased by the Federal Reserve, as other buyers are backing away from lending to the bankrupt U.S. Government. This is a hyper-inflation scenario.
When will this start? In 2011?
Topics: Commentary | No Comments »
Expenses vs. Investments
By John | December 30, 2010
One of the best ways to become a successful investor is to start with a list of things not to do. Let’s start with one that I believe is very common as it applies to vacant land investments.
Someone asked me recently what I thought of his idea for a vacant land investment. He wanted to purchase some land that was adjacent to land his family owns. That way, it will be convenient for him to use for hunting and recreation purposes, in addition to being an investment. There is a fundamental problem with this approach.
Once you target a particular parcel of land for purchase for personal use, you have become a retail buyer. For those who have read my book, you know I emphasize buying at a bargain price from motivated sellers. I also emphasize not falling in love with property you do not own.
Now, I am not suggesting you should never purchase land for personal use. On the contrary, it can be very satisfying to own your own piece of the planet. However, you need to recognize why you are buying it. Don’t confuse this purchase with land investments. This is a retail purchase – an expense. You may be purchasing an asset that will be a good, long term store of value, but it is not an investment, at least the way I define investments.
Keep your expenses – anything purchased for personal use – separate from your investments. In one case, you emphasize the personal benefits you are acquiring. In the other case, you emphasize picking up a bargain at a price and under terms that are exceptionally favorable to you. It would be very difficult to accomplish both with one purchase, as you are dealing with conflicting purposes.
So, if you are shopping for land, start by being very clear as to why you are buying it. To achieve your objective you must first know your objective.
Topics: Rural Land Investment | No Comments »
Government Debt
By John | December 7, 2010
We have become very aware lately of the risks imposed by excessive government debt. The economy of the entire planet is on the verge of collapse, as countries from Japan to Europe to the U.S. struggle to calm credit markets and provide assurance that sovereign obligations will be met. It is becoming increasingly obvious, however, that the response to the debt problem is being met by short-term solutions, creating further doubt that most government debt can ever be paid in real terms.
This raises the question: What is an appropriate level of government debt? Is it a certain maximum percentage of GDP? Should we analyze government debt as we analyze the debt of a business, and look at income coverage ratios?
Well, I have my own criteria as to what constitutes an appropriate level of government debt: ZERO! I do not believe government debt is justified under any circumstances. Let’s examine why.
First, if government debt is allowed under any circumstances politicians can be relied upon to create those circumstances. If one can only borrow during an emergency, then this is an emergency. If one can only borrow up to a given debt limit, then the limit must be raised continually.
Second, allowing government to borrow removes any constraint upon what government does. If taxes must be raised to fund a program, the taxpayers will be immediately affected, and may object. If the program is funded by floating a bond issue, most taxpayers will not even be aware of it.
Third, interest on debt can quickly become a major part of a government’s budget, squeezing out essential services to pay for past excesses.
And fourth, it can lead to economic collapse (stay tuned).
In my book, Investing in Vacant Land, I point out the difference between debt used to support consumption versus debt used to support income-generating investments. If a business or investor borrows money to support something that generates income in excess of the cost of capital, that debt returns a positive return to the business or investor. If not done to excess, and there is a low risk of default, that is good debt.
If money is borrowed to support consumption, however, the borrower is a loser. He not only pays the cost of the product or service consumed, he pays interest on the money borrowed. And, unlike money borrowed to support an investment, consumption debt returns nothing to the borrower. It is bad debt. It simply makes everything more expensive.
Good debt creates capital that earns more than it costs. Bad debt just costs.
Now, back to our government borrowing question. What does government invest in? Nothing! Government is a consumer. Ignore those politicians who tell you they are “investing”. They are not. Government funds go for consumption. Period.
Of the almost $14 trillion of “on the books” debt currently owed by the U.S. Government, about 70% of it is accumulated interest! If that money had been borrowed and invested, it would have generated a positive balance. Borrowing for consumption has cost $10,000,000,000,000 and climbing.
And the above principle applies equally to national governments, state governments, municipal governments, and every government on the planet.
To those who advocate leaving a loophole to borrow in the event of war, I disagree. If government were pared down to its essential services, it would only take a small percentage of national income – say 3%. Let’s suppose the U.S. had done that prior to World War II. After Pearl Harbor (69 years ago today), the U.S. had to prepare for war. Under those circumstances, don’t you think the population would readily accept a doubling of taxes to 6% to support the war? 12%? 25%? 50%? I think we would do whatever it takes to defend ourselves and our way of life.
Now, would the population have accepted a doubling of taxes to support the war in Iraq? Probably not. So, maybe we wouldn’t have had a war in Iraq. And maybe we wouldn’t have Medicare or farm price supports or Social Security or a Department of Energy or a Department of Education or ObamaCare or……
Topics: Government Excesses, Property Rights | No Comments »
Essential Government Services
By John | November 29, 2010
It’s deer hunting season in Michigan. My brother-in-law visited a friend of his the other day. His friend owns a farm, on which he hunts deer. My brother-in-law gave his friend a ride to his hunting blind and was leaving down a two-track road when he was stopped by two officers of the Michigan Department of Natural Resources, driving two separate vehicles. They trapped him on the two-track, coming at him from two different directions, so he could not escape. They were intent on arresting him for a serious violation of the law.
Now, you don’t know my brother-in-law, so you wouldn’t know what type of criminal he might be. But, let me assure you, he is about as law-abiding as they come.
OK. What was this serious crime that required two law enforcement officers to arrest the suspect? He was charged with creating a BAIT PILE! What is a bait pile, you might ask? It is a pile of deer food intended to attract deer to a particular location so they can be hunted. It was outlawed a few years ago in Michigan to prevent deer from congregating together and spreading disease. (Of course, deer herd up in the winter anyway in Michgan, but apparently that was lost on the Central Planners in Lansing that oversee everyone’s welfare, including the deer’s.)
Back to the scene of the crime. My brother-in-law denied any knowledge of this heinous deed. So, the arresting officers transported the alleged transgressor to the scene of the crime – a pile of shelled corn on the edge of a cornfield – right where the combine had spilled it!
Now, how did these super-sleuths know about this “bait pile”? They were alerted by one of their air-crafts. It had been scanning the area, looking for criminal activity.
After further examination and discussion, the arresting officers conceded that this was not a bait pile, just some corn spilled during normal harvesting operations, so my brother-in-law was released to the general population. However, let’s take a look at this picture from the point of view of a reasonable, tax-paying citizen of Michigan.
The State of Michigan endures its reputation as one of those economic basket cases, with budgets hopelessly out of balance, and, essentially, bankrupt. Governor Granholm has pared expenses down to the bare bone. Only essential services remain.
Now juxtaposition that with the incident I just described. How many thousands of dollars (millions?) and man hours were expended, scouring the countryside from the air looking for bait piles, then positioning law enforcement personnel to await the arrival of the perpetrator? Even if this had been a legitimate case of deer baiting, SO WHAT! What kind of sense of priorities does it take for the government of the State of Michigan to spend money they don’t have on this nonsense? The financial viability of the state is in question. Businesses are being driven out of state by excessive taxation and regulation. That, apparently, is not important. We must look out for the good of the state employees, no matter how questionable their functions; no matter how non-essential their jobs.
Does this make sense to you? Citizens of Detroit (for those of you who are geographically challenged, Detroit is in Michigan) are abandoning their homes because the police won’t investigate burglaries, home invasions or arson. In Detroit, you have to kill someone to get the attention of the police.
In Northern Michigan, you will receive the full force of the law if you accidentally spill some corn.
Topics: Government Excesses | No Comments »
Your Siamese Twin
By John | November 17, 2010
Suppose you were going to spend the rest of your life attached to your Siamese twin – someone who would be with you every second of the rest of your life – someone you could never get away from. Also, suppose you have a choice as to who that Siamese twin will be.
Now imagine how important that decision would be. You could end up with someone you dislike, or even hate. How miserable would that make your life? However, you could end up with someone you really like – someone you really care about – someone who becomes your best friend and confidant.
Well, you do have a Siamese twin. You do have someone who will be with you every second for the rest of your life. Who is that person? It is your character. It is the real you!
You can get away from everyone else in your life. You can get away from your parents, your spouse, your friends – everyone. Except, you.
What is your character? It is the sum total of all of your experiences, your decisions, what you say, feel, think. It includes your values, how you treat others, and what you prioritize in life.
Now, what kind of person would you like your Siamese twin to be? Remember, you have a choice. It can be someone you highly respect, admire, love. Or, it can be someone you loathe – the kind of person you would like to get away from.
So the next time you are faced with a decision that affects your character, regardless of whether anyone else knows about that decision, think of your Siamese twin. No one else may know your true character. But you will. And your character will be with you for the rest of your life.
Topics: Commentary | No Comments »
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