Headlines around the world scream in panic about the housing crisis in America. But did you know the Chinese symbol for crisis also means opportunity?

Consider comparing the economy to a game of tug-of-war. When there are winners, there are also losers on the other end. And if you’ve played tug-of-war, you know you can be on the winning or losing side of the game just as soon as the momentum swings in the other direction.

Tug-of-war can be a fun game played at camp that leaves half the players in the mud. But when it comes to your money, it’s no fun to be on the losing side. Wouldn’t it be better if you could jump over to the winning side at all times? It can be done, if you understand the market forces.

Let’s take real estate as an example.
Right now millions of people are on the losing side of real estate. Those who bought property in the mid-2000’s thought they were winners because easy financing allowed them to buy their first home or trade up to a larger home that they normally couldn’t afford. However, when it came time to pay the piper, the momentum quickly turned. Many were unable to make their full payments after the teaser rate expired, and were forced to walk away from their homes.

Who was on the winning side of the tug-of-war at that time?
The property sellers certainly were, since they cashed out at the peak. Banks, title companies, realtors, mortgage brokers and anyone else selling real estate or real estate-related services were also winning.

When the momentum shifted, who became today’s losers?
The banks are certainly the biggest losers today, sitting on millions of repossessed properties worth nearly half of what they were. Certainly the people who lost their homes have taken a hit. Businesses also suffered from the lack of home equity lines that fueled the economy.

Who are today’s winners?
First-time home buyers are in a great position today. If they have saved some money and protected their credit, they have the opportunity to pick though large amounts of housing inventory at bargain prices.

They can get an FHA loan with just 3.5% down payment and lock into a 30-year fixed interest rate below 5%. The combination of low prices and low interest rates makes their mortgage payment cheaper than rent in many parts of the country.

As millions of foreclosed homeowners become renters, we are seeing rents increase. The first-time home buyer will be locked into a fixed payment for three decades – which will be a welcome relief in the upcoming inflationary period the United States will experience.

According to the National Association of Realtors (NAR), 32% of the 4.8 million homes that are selling this year are to first-time home buyers. That means over 1.5M families are growing their wealth by paying off a mortgage instead of paying rent.

Investors are also winners today.
People who have saved money and have good credit can also take advantage of the low home prices and high rents. It is quite common to receive over a 10% return in today’s real estate market as a landlord. Those who can qualify for financing are receiving upwards of 15% return on their money through the use of leverage.

Hard money lenders are also receiving over 12% return for lending money to those who want to buy real estate. And in the “flipping” business (buying distressed property for cheap, fixing it up and reselling), investors are earning as much as 30% ROI.

Who Was On The Winning Side Before and After the Momentum Changed?
Those who bought homes they could afford can ignore the crisis. If they planned to stay in the home, the ups and downs won’t affect them. Each month they make their mortgage payment, they are paying down principal on their loan. Eventually, they can own their home free & clear and even use the equity to purchase investment property..

Those who own rental property and live off the monthly income also could ignore the crisis. They live off the cash-flow from rents. They don’t care if the property value goes up or down because they aren’t selling. Either way, their income has increased because rents are increasing.

Doomsdayers will say that the housing market is hopeless, but that’s only because they are looking at just one side of the tug-of-war. Sellers may indeed be challenged today, but buyers are in shopping heaven.

By: Kathy Fettke, renowned real estate professional and host of her own radio show on KABC in LA; and Greg Uehling, property consultant in Australia.

September 2011

Imagine if you could buy a little machine that spits out $500 cash every month. How much would you pay for such a gadget? Now imagine owning 10 of these cash machines. You’d have an annual income of $60,000 and all you’d have to do to earn that money is maintain the machines.

Welcome to the world of income-producing assets! Income-producing assets can come in many forms. A friend of mine wrote books and over time he became a popular author. His 10 published books are now little cash machines, as they continue selling around the world.

A neighbor bought a fast food franchise, which he successfully reinvested profits to buy 100 fast food restaurants. Now there’s a lot of cash machines!

You can buy laundromats, vending machines, create products, write songs, and sell stuff on a website. You name it, there are many different ways to create passive income so that you can stop working someday. You just have to find the one that works for you.

What if your cash machine broke down and you had to fix it? Would you be upset and throw it away or vow to never own another? Of course not! You’d use one of the month’s cash of $500 for repairs so the machine could continue to spit out cash. If you could use the machine until you die and then pass it on to your kids, there would be no need to worry about retirement or wait until you’re 65 to stop working.

Americans have been duped into thinking that contributing to traditional retirement plans are the same as buying cash machines. As the Baby Boomers head toward retirement, they’re realizing tax-deferred plans that were supposed to spit out cash for the rest of their Golden Years are broken and probably can’t be fixed.

What did the Baby Boomers do wrong?

They lost control.  They handed money over to a stranger.

They lost interest.  They expected the stranger to take as good care of their cash as they would, so they stopped paying attention.

They settled for too little.  They allowed upper-management to skim all the profits.

They got too patient.  They believed what they were told – that if they just waited long enough, the money would be there for them when they needed it.

In order to create a real cash machine, you’ve got to be in control, pay attention, and be able to keep the profits. And most importantly, the machine has got to create real income for you (not a speculative hope to sell it at a higher price.)

Most people expect at least 6% annual return on their investments, so they’d generally pay around $100,000 for a cash machine that spit out $500/mo ($6000 annually). Unfortunately, not everyone has that kind of money sitting around. But what if you could borrow $80,000 and pay it back over 30 years using money from the cash machine?

Where can you find a deal like that? Little cookie cutter homes in good neighborhoods near jobs to be one of the best cash machines available today. When they are rented out to good families, the monthly rent becomes the owner’s monthly income. And as much as people like to complain about the responsibilities of a landlord, it sure beats a 9-5 job! Toilets don’t break every day, and even if they do, the landlord can make it the tenant’s responsibility to fix what they break.

Wealthy people create cash machines in two ways: owning businesses or real estate. Real estate is the simpler choice. Don’t believe me? Ask a lender! Walk into a bank and see how much easier it is to get a mortgage on a rental home than a loan for your business.

Today there are 117 million households, of which 79 million own their own home. That leaves 37 households in need of a rental. Assuming an average of $150,000 per property, there is $3.4 trillion worth of rental property out there. That’s nearly double the size of traditional investments.

If you have not taken the time to learn about real estate as an income-producing asset, you’re listening to the wrong advisors. With home prices slashed, low mortgage rates and rising rents, these cash flow machines have never yielded the double digit returns they do today.

By: Kathy Fettke, renowned real estate professional and host of her own radio show on KABC in LA; and Greg Uehling, property consultant in Australia.

While most of us don’t play in the same league as Mr. Buffett. Investors worldwide try to mimmick his strategies in hopes of achieving even a fraction of his success. So, when Buffett hands out free investment tips, the world takes note.

Recently in a TV interview, Buffett surprised those who have been bearish on real estate. He said: “If I had a way of buying a couple hundred thousand single-family homes and a way of managing them, I would load up on them.” (See video interview below)

Too bad Mr. Buffett doesn’t know about Tandem Uehling! We could certainly introduce him to the best providers of turn-key rental homes in the country, and point him to experienced property managers in those areas.
Most of us normal folks would be happy with a dozen or so rental homes, which would provide a steady retirement income and would be much easier to manage than a few hundred thousand. It must be tough for guys like Buffett who need a place to invest millions, and even billions of dollars at a time. Sometimes they have to pass on good deals simply because they are too small.

That’s why single-family home investing is best suited for individuals, and not hedge-fund managers. We are able to pay closer attention to our properties, which helps keep up the quality of the neighborhoods, bring in the best tenants and stay on top of the management.
Personally, I’m happy that this time around, Buffett isn’t suited to take his own advice. This is the time for the small-investor to get ahead. Thanks for leaving the good real estate deals for us, Warren! This is our playing field.

Buffett also added that if houses are bought at low rates and held for a sufficiently long period of time, single family homes perform even better than stocks. Of course, this is something we’ve been saying for years. It’s nice to finally hear it from a man whose net worth of around $50 billion is made up almost entirely of stocks.

His final bit of advice is for buyers to take out a 30-year mortgage and refinance if rates go down. I’m sure he envies the leverage available for home-buying that simply doesn’t exist in the stock market. Where else can you get a loan on an asset and pay less than 6% interest, take three decades to pay it off, and keep all the cash-flow and appreciation along the way?

Thanks for endorsing our industry, Mr. Buffett! Your wisdom will wake up the masses who have been so frozen by fear that they just can’t see a good deal, even when they’re living in it.

See the interview for yourself.

Property as an asset class dovetails right into an Australian investors psyche as Australians are true believers in brick and mortar. It’s not just a belief but it’s a trust that over time, property will appreciate.

The standard protocol for an Australian property investor is to purchase the property, with borrowed funds and wait until time passes allowing the property to appreciate. Once there is sufficient equity accumulated with the property growth, it is then refinanced in order to extract that equity. That equity is then used as a deposit on a new investment property where time passes and the scenario is repeated. This occurs over and over again, over a long period of time accumulating more assets, more debt and more income.

Historically, interest rates in Australia are more than the rental income generated so this strategy will be negatively geared, unless manufactured growth is implemented. This portfolio will grow in size, debt and income until some day in the future when the acquisition process ceases, thus the debt stops increasing and the growth of the income increases to a positively cash flowing state.

The component in this strategy that works against the investor is time. Time is the secret sauce that the investor requires to make the strategy work and be positively cash flowing. Until the property portfolio is built up and ceases adding more debt, the investor will have a hard time cash flowing positively.

Accompanying time as a major component to a successful Australian property portfolio is an increasing or appreciating market. In an appreciating market, this strategy can work very well. The more properties the investor can purchase the quicker they can reach their goal of portfolio size generating the amount of income they strive.

Unfortunately, the last eight years hasn’t been that strong a market and in general, nationally it’s been mostly flat. There are specific pockets that have done better than others but for all intent and purpose, the general market has been flat. A flat property market prevents the equity from materialising, thus no capital to build the portfolio. Valuers don’t help either. In a flat market, valuers tend to be more conservative with their valuations making it that much more difficult to extract equity.

Have you ever heard the term ‘asset rich but cash flow poor’? This is what happens in a flat property market when the investor realises they are not receiving an appropriate amount of income but have a sizable asset and debt position. Is there anything that can be done to mitigate this situation? I believe so. I believe that by diversifying into the US property market, the investor will derive the cash flow any property investor would dream of. We can increase the investor’s cash flow by almost three times without adding any more capital or debt. As a matter of fact, we can lower the debt by 100 per cent of the amount of the assets.

Here’s how we do it:

Let’s make a few assumptions. Let’s assume we are dealing with a $5 million Australian property portfolio at an 80 per cent LVR, generating 6 per cent rental income and the current interest rate is 6 per cent for debt service. Let’s also assume that we can get a 70 per cent LVR loan at 5.75 per cent fixed in the USA (which we can do) and generating 13 per cent rental income. Let’s assume that the Australian dollar and the US dollar are trading at parity.

Chart 1:
$5,000,000 = $4,000,000 debt and $1,000,000 equity =  300,000.00  Revenue
-240,000.00  Debt Service
AU $60,000.00 Cash Flow

Chart 1 shows a $5M portfolio at 80% LVR generates $60,000 p.a. in cash flow. When we sell half the portfolio we lower the asset position in Australia by $2.5M which consists of $2M debt and $500k equity.

Sell $2.5M of Aussie property to invest in US property
$2.5M = $2M of debt and $500k equity in Australia
Take $500k and convert to US at 70% LVR = $1.5M investment capital (approximately)

Chart 2: 
$1,500,000 =$1,000,000 debt and $500,000 equity =  195,000.00  Revenue
-57,500.00 Debt Service
US $137,500.00 Cash Flow

Chart 2 shows the power of $500k equity in the US property market once leveraged with a 70 per cent LVR loan. The investor will have $1.5M of investment capital where $1M is debt and $500k equity. This $1.5M invested will generate $137,500 p.a. in cash flow.

So what does the total portfolio look like?

Total assets drop from $5M to $4M, a decrease of $1M. Total income increases from $60k per annum to $167,500 per annum ($60k/2+$137,500), and increase of 2.8 times. Total debt outstanding decreases from $4M to $3M, a decrease of $1M.

The benefits

1) 2.8 times greater cash flow without adding any more equity.

2) Greater growth potential on the basis that the US market is close to or at the bottom of the cycle. Potential foreign exchange gain over time with the Australian dollar historically trading at $0.80 to $1.00 US dollar.

3) Diversification of assets and cash flow; Diversification into two separate currencies.

S. Gregory Uehling is Director and Principal of Tandem Uehling. He is a dual Australian/USA citizen who has lived in Australia for the past 11 years. Greg has had his own Australian based Proprietary Limited Company for over 8 years with financial planners and accountants topping his client list. Greg visits the US regularly while providing his tailored services to his customers in Australia. Tandem Property USA is a wholly owned brand of Tandem Uehling.

Greg can be contacted at info@TandemUehling.com.au, www.TandemPropertyUSA.com or follow him on Twitter @TandemProperty