Recovering Real Estate: Another Virtuous Circle?

[thriftyandboringinohio]

Re: Recovering Real Estate: Another Virtuous Circle?

Cool idea. Can you explain a bit of how you set up the self-directed IRA in order to do this? thanks

A self directed IRA is pretty easy to set up. A little web searching will find you companies that do these.

You must have IRA money under your control, not with your current employer.
You pay a fee to set up the account and then roll your traditional IRA money into the self-directed IRA.
You pay an annual fee for the company to handle the paperwork.

The company involved is the trustee/custodian who holds all the cash money; writes all the checks; and shows as owner of all assets on titles, deeds, notes, mortgages, stock certificates....
The owner of any property is "XYZ Trust Inc for the benefit of voniveri account 1234"
The tenant makes out the rent check to "XYZ Trust" and sends it to their offices, they put it into your IRA account

The Internal Revenue Service has rules about these self directed IRAs that are pretty clear.
You or your immediate family cannot directly benefit. The IRA money cannot touch your hand or your relative's.
I cannot rent my house to my daughter, or myself, or my mother.
Neither can I invest in a promisory note held by my relatives, nor in stock of a corp owned by my immediate family.

Any earnings are tax deferred just like earnings from mutual funds in a normal IRA.

The rules are pretty flexible about what you can buy within a self-directed IRA.

It has worked well for me for a few years now.

[coolhand]

Re: Recovering Real Estate: Another Virtuous Circle?

A self directed IRA is pretty easy to set up. A little web searching will find you companies that do these.

You must have IRA money under your control, not with your current employer.
You pay a fee to set up the account and then roll your traditional IRA money into the self-directed IRA.
You pay an annual fee for the company to handle the paperwork.

The company involved is the trustee/custodian who holds all the cash money; writes all the checks; and shows as owner of all assets on titles, deeds, notes, mortgages, stock certificates....
The owner of any property is "XYZ Trust Inc for the benefit of voniveri account 1234"
The tenant makes out the rent check to "XYZ Trust" and sends it to their offices, they put it into your IRA account

The Internal Revenue Service has rules about these self directed IRAs that are pretty clear.
You or your immediate family cannot directly benefit. The IRA money cannot touch your hand or your relative's.
I cannot rent my house to my daughter, or myself, or my mother.
Neither can I invest in a promisory note held by my relatives, nor in stock of a corp owned by my immediate family.

Any earnings are tax deferred just like earnings from mutual funds in a normal IRA.

The rules are pretty flexible about what you can buy within a self-directed IRA.

It has worked well for me for a few years now.

I love the idea, since it is becoming increasingly clear that the Fed can never raise rates again under the current currency regime. One point of caution IMO re: how you structure your deal - the risk of gov't confiscation is highest for 401k's & IRA's, IMO.

They would never call it that, but given that iTulip believes an Argentine situation is possibly/ultimately likely in the US, it might be worth a few minutes of your time to investigate what happened to gov't sponsored private pensions in Argentina when they had their "Ka-Poom" or "Janszen scenario"...

[touchring]

Re: Recovering Real Estate: Another Virtuous Circle?

it is becoming increasingly clear that the Fed can never raise rates again under the current currency regime

Assumption is never good. The dollar may not be good, but Europe looks worst, and China is no better with all the reserves dumped into useless infrastructure and housing projects built in the last 4 years that altogether combined may not be worth even an Apple if the bubble crashes.

Just a thought, 6 out of every 10 persons in Singapore uses an iPhone or an iPad (the highest iPhone penetration rate in the world). If you use a Samsung android, you're a minority here.
http://e27.sg/2012/05/16/singapore-h...ates-of-148-9/

I'm now starting to see 50 inch Andriod TVs in many homes....

[coolhand]

Re: Recovering Real Estate: Another Virtuous Circle?

Assumption is never good. The dollar may not be good, but Europe looks worst, and China is no better with all the reserves dumped into useless infrastructure and housing projects built in the last 4 years that altogether combined may not be worth even an Apple if the bubble crashes.

Just a thought, 6 out of every 10 persons in Singapore uses an iPhone or an iPad (the highest iPhone penetration rate in the world). If you use a Samsung android, you're a minority here.
http://e27.sg/2012/05/16/singapore-h...ates-of-148-9/

I'm now starting to see 50 inch Andriod TVs in many homes....

I'm just going off a Hussman Funds piece from a couple years ago that noted that at that time, a return of interest rates to 50-yr averages would add $500B to the US deficit...that was about $1T or so ago on the debt monitor, so we are probably pushing close to $600B on that metric now.

Not saying never again, just never again under current currency regime...if rates rise, it will be during or post currency reset. Every 1% interest rate increase adds $160B or 12% to the US deficit...

As far as Europe and China goes, two thoughts:

1. 70% of EU's currency reserves are in gold; as gold goes higher, the euro strengthens. In extremis, the ECB could print Euros, bid for physical bullion in the open market, & end up with a stronger currency, as the rise in bullion would more than offset the dilution of the money printing. This option is not available to the US.

2. As QBAMCO noted, despite all the talk of trouble in EU & China, there is only one banking system, & the US is the center of it. Just like the optimal strategy for Greece was do nothing until it became a big enough problem for the center of the EU, Germany; so has the optimal strategy for the EU been to wait until its a big enough problem for the center of the financial system, the US - that has been their strategy & will continue to be.

[touchring]

Re: Recovering Real Estate: Another Virtuous Circle?

I'm just going off a Hussman Funds piece from a couple years ago that noted that at that time, a return of interest rates to 50-yr averages would add $500B to the US deficit...that was about $1T or so ago on the debt monitor, so we are probably pushing close to $600B on that metric now.

Thanks, in the medium, China is going into stagflation sort of hard landing, Japan will also go into trouble because of political and economic woes. Would this pose a problem to interest rates?

[don]

Re: Recovering Real Estate: Another Virtuous Circle?

70% of EU's currency reserves are in gold; as gold goes higher, the euro strengthens. In extremis, the ECB could print Euros, bid for physical bullion in the open market, & end up with a stronger currency, as the rise in bullion would more than offset the dilution of the money printing.

Could you elaborate on this, in an all-fiat currency world, where gold is never used to balance trade accounts, never coined as commonly exchanged money, etc. It's not clear to me - beyond computing what gold theoretically could buy at any moment in time. I say theoretically because nobody is buying houses with gold, etc. Gold as a commodity has a value - though how that's 'discovered' is shakey at best - but how is it the motor strengthening or weakening fiat currencies?

[coolhand]

Re: Recovering Real Estate: Another Virtuous Circle?

Thanks, in the medium, China is going into stagflation sort of hard landing, Japan will also go into trouble because of political and economic woes. Would this pose a problem to interest rates?

Take a look at EJ's latest Bond Mkt Crisis part II piece - he looks into the leverage to a rise in rates as well, & finds it to be greater than what I talked about above. He also notes China is likely to start cutting rates soon, and has lots of room - their rates are still at 6.5% to our 0%.

Japan does have demographic & debt & energy troubles, & quite frankly has surprised me in its resilience post earthquake given the move into trade deficit status for the 1st time in 50 yrs (created by need to import more energy w/nukes off line.)

I have been told that Japan is a very strategic geopolitical asset to the US military - basically a large aircraft carrier in a very politically important part of the world...given that, i'd be surprised if we let it fall off the table, ever.

I continue to think that the trigger will be the physical world - all the problems of the world so commonly talked about in the financial realm can all be papered over...when the system is structured as a ponzi, it is easy to keep it going with a printing press.

However, the key underlying it all that can't be printed is energy, & oil specifically...i think everything will bump along till something bad happens to oil production at a couple big fields - remember, 1% of oil fields produce 65% of the world's oil, & they are all very old - the majority are past peak. If a few of them do a Cantarell (production down 80% in a few yrs), that will stress political alliances, gov't bond mkts, etc., in the world's biggest game of musical chairs. Until then, I think the game will continue as it has been run - print money to manipulate interest rates, manipulate inflation metrics to keep the inflation the bond price fixing generates from becoming problematic, print money when needed, & work to secure oil lines with the US military.

[touchring]

Re: Recovering Real Estate: Another Virtuous Circle?

I'm just going off a Hussman Funds piece from a couple years ago that noted that at that time, a return of interest rates to 50-yr averages would add $500B to the US deficit...that was about $1T or so ago on the debt monitor, so we are probably pushing close to $600B on that metric now.

Not saying never again, just never again under current currency regime...if rates rise, it will be during or post currency reset. Every 1% interest rate increase adds $160B or 12% to the US deficit...

As far as Europe and China goes, two thoughts:

1. 70% of EU's currency reserves are in gold; as gold goes higher, the euro strengthens. In extremis, the ECB could print Euros, bid for physical bullion in the open market, & end up with a stronger currency, as the rise in bullion would more than offset the dilution of the money printing. This option is not available to the US.

2. As QBAMCO noted, despite all the talk of trouble in EU & China, there is only one banking system, & the US is the center of it. Just like the optimal strategy for Greece was do nothing until it became a big enough problem for the center of the EU, Germany; so has the optimal strategy for the EU been to wait until its a big enough problem for the center of the financial system, the US - that has been their strategy & will continue to be.

Germany, France and Italy benefit a lot from the money printing that goes on in China in the form of luxury goods, cars and infrastructure equipment sale. Won't a hard landing in China affect European exports?

[coolhand]

Re: Recovering Real Estate: Another Virtuous Circle?

Could you elaborate on this, in an all-fiat currency world, where gold is never used to balance trade accounts, never coined as commonly exchanged money, etc. It's not clear to me - beyond computing what gold theoretically could buy at any moment in time. I say theoretically because nobody is buying houses with gold, etc. Gold as a commodity has a value - though how that's 'discovered' is shakey at best - but how is it the motor strengthening or weakening fiat currencies?

As "Another", FOA & FOFOA have said, one must think like a "Giant" to get this. Gold is not a commodity, it's a currency. That's why the US has 8,000 tons, the ECB 10,000 tons. EJ touches on this in his Bond Market crisis part II piece, noting that central banks began buying gold for the 1st time in 30-40 yrs in 2009 b/c they began seeing the need to hedge USD currency risk. They began to see the end game - the US will print money to infinity to protect its bond market...so if you are a foreign central bank, do you want to hold 100% UST's as your reserve asset, or do you want to start to have some gold, that the US Fed can't print? Does China care if their purchasing power is held in $2T in UST's & no gold or, $2T in gold & $0 value for the UST's, which can easily be achieved with a high enough gold price?

See how the giants started thinking?

US central bankers hate gold b/c of the unique role in history of the USD as global reserve currency. There is no currency in the world that competes with the USD, except for gold. The structure of the Euro is superior to the USD for the reason I described prior - a rising price of gold strengthens that Euro, while it weakens the dollar.

If you were selling oil, where you are taking in $2B today; $2B tomorrow; $2B the next day; and the next day; and EVERY day...up until the the Euro was created, you had no alternative to the USD...once the Euro was created, you did. Take a look at the proximity of the start of the rise in gold prices to the creation of the Euro. Compare the Euro/USD ratio to gold prices on rolling 2-yr time horizons. Compare how European central bankers talk about gold v. US central bankers, as EJ notes?

I'll give you a hint - read "Boomerang" by Michael Lewis...in it, a mid-level German finance minister tells Lewis re: the Greek crisis, "Well, worst case we have 3,000 tons of gold." You will never hear a US central banker say that. B/c these people know that a rising gold price is good for the Euro & bad for the dollar.

A rising oil price is bad for the dollar & good for gold - so it is good for the euro.

Last point - knowing this, think about what happens to the price of oil in Euros the day the US has its "Janszen moment" & has to use the US gold to back foreign debt to prevent a hyperinflation. At $5T in external UST debt, the price for US gold to offset that is over $19,000/oz. So the Fed makes a market in gold at $20,000 per oz, like they make a market today in UST's. Our creditors are placated.

When the Fed does that, b/c the Euro's reserves are 70% in gold, the Euro skyrockets against the USD, which on one hand hurts European exports, but on the other hand, makes oil extraordinarily cheap in Euros. That means that while the EU export market is hurt, the EU consumption market more than offsets it.

A group of Germans created the Euro - it is a brilliant structure. At least part of the "European crisis" is simply a currency war involving the US trying to keep the Euro from usurping the exorbitant privilege we have gained from the fiat dollar.

[thriftyandboringinohio]

Re: Recovering Real Estate: Another Virtuous Circle?

I love the idea, ...

It's not my idea, it's EJ's.
I'm too small to be an accredited investor, so I can't be part of the Eastham Capital Fund.
This is my little imitation of it.

[touchring]

Re: Recovering Real Estate: Another Virtuous Circle?

Take a look at EJ's latest Bond Mkt Crisis part II piece - he looks into the leverage to a rise in rates as well, & finds it to be greater than what I talked about above. He also notes China is likely to start cutting rates soon, and has lots of room - their rates are still at 6.5% to our 0%.

Can interest rate really affect lending in China when many Chinese companies are willing to pay whatever interest demanded by lenders because there is no intention to return the loans in the first place.

[coolhand]

Re: Recovering Real Estate: Another Virtuous Circle?

Can interest rate really affect lending in China when many Chinese companies are willing to pay whatever interest demanded by lenders because there is no intention to return the loans in the first place.

Good question...i don't know, i am not well versed in Chinese financing mechanisms, so i would be the wrong person to ask/comment.

I will say that interest rates aren't the only way to stimulate demand - if one's currency were to strengthen against energy & food, it would be very stimulative.

I've been saying for a while, before this crisis is said & done, a weak currency will be seen as a negative & a strong one as a positive...b/c of peak cheap oil. The guy who can buy oil cheapest will win in global trade, which will necessitate a strong currency, not a weak one. When oil supplies were an afterthought, cheapening one's fiat currency most worked...those days are done.

[touchring]

Re: Recovering Real Estate: Another Virtuous Circle?

Good question...i don't know, i am not well versed in Chinese financing mechanisms, so i would be the wrong person to ask/comment.

I will say that interest rates aren't the only way to stimulate demand - if one's currency were to strengthen against energy & food, it would be very stimulative.

I've been saying for a while, before this crisis is said & done, a weak currency will be seen as a negative & a strong one as a positive...b/c of peak cheap oil. The guy who can buy oil cheapest will win in global trade, which will necessitate a strong currency, not a weak one. When oil supplies were an afterthought, cheapening one's fiat currency most worked...those days are done.

Yes in the short term, but in the longer term, all countries need to export, a strong currency means lower competitivenes and a damaged economy.

[Milton Kuo]

Re: Recovering Real Estate: Another Virtuous Circle?

Yes in the short term, but in the longer term, all countries need to export, a strong currency means lower competitivenes and a damaged economy.

A strong currency only lowers competitiveness if one is playing the race-to-zero game. It is wholly possible to have a strong currency and a strong production economy. Taxes levied on the exports of nations playing race-to-zero are a good start.

[touchring]

Re: Recovering Real Estate: Another Virtuous Circle?

A strong currency only lowers competitiveness if one is playing the race-to-zero game. It is wholly possible to have a strong currency and a strong production economy. Taxes levied on the exports of nations playing race-to-zero are a good start.

Actually, there's no need to impose taxes, the mere threat of it is sufficient to cause a revaluation. Of course, the chief negotiator very important. If you got someone like Obama doing the talks, and a granny-like Secretary of State, no one will take them both seriously, be it the Chinese or the Persians.