Archive for Inflation

Greetings from Albuquerque, NM….

Below is an article from my friend Brandon…..again.  He writes such great stuff….that….for obvious reason….I like to post it!  Enjoy…until next time….rob

The Führer Principle

Croc Fuhrer by AndyWarfuhrer 225x300 The Führer Principle   Brandon SaylorIn grade school, I remember asking myself how could the German people elect someone as evil as Adolf Hitler. How could they allow such a monster to become supreme chancellor? Understanding how it happened is very important, mainly so it does not happened again. The significance of this newsletter will only make sense by looking through the lens of today’s events. Many of the main ingredients that led to the Nazi take over are present today. Recognizing the circumstances is the solution to history not repeating itself.

The beginning of the end for the Weimar Republic began with the Treaty of Versailles in 1919. For the German people, the treaty was humiliating. The treaty placed heavy restrictions on Germany much of which were embarrassing for the once proud nation. The German army was reduced to one hundred thousand solders and arms for citizens became non-existent.  The initial German economic fatalities due to the treaty were shocking. Germany’s territories vanished overnight. Germany lost approximately 13.5% of its total land mass, 13% of its industrial productivity, and more than 10% of its population. Additionally, the loss of important mining regions such as the Saar and Upper Silesia resulted in a loss of some 74% of iron ore and approximately 25% of its coal reserves. Historians and economists have long deliberated the real effects of the treaty but one thing is for certain it lead to “deprivations that shattered their faith in the democratic process and left them cynical and alienated.” –G.A. Craig

Germany’s economic situation never improved. To keep up with the stringent demands of the treaty, the Weimar Republic faced hyperinflation never seen before in history. The German Mark ratio to the U.S. dollar was 4 to 1 near the end of the WWI. It was 8 to 1 in 1919, 250 to 1 in 1921, and 2000 to 1 in 1923. The Weimar government, at various times, faced food shortages, massive unemployment, and an unprecedented economic depression. By 1932, some 6 million Germans were unemployed. Millions of them were homeless living on the streets relying on soup kitchens and charity organizations. “Men standing hopelessly on street corners of every industrial town in Germany; houses without food or warmth; young people without the chance of a job. All these things explain the bitterness which burned in the minds of millions of ordinary Germans.”

The escalation of political violence in Weimar Germany must certainly be factored in as a contributory reason for the country’s political volatility. Beginning with the emergence of the Freikorps, which later became the brutal SS, formed units immediately after the declaration of the Republic. The tendency toward violence became entrenched in Weimar politics after the 1919 assassinations of Karl Liebknecht and Rosa Luxemburg. Large protests and riots became an all too familiar sight for the citizens of Germany.

Among the widespread disarray and frustration, the basic notion of a government was being questioned. What type of government could lead and govern the will of the people? This ongoing debate became known as the Führer Principle. The Führer Principle is established on the acknowledgment that the true will of the people cannot be revealed through plebiscites but that the will of the people in its natural and virtuous state can only be articulated through the Führer. Therefore, a difference must be drawn between the theoretical will of the people in a parliamentary democracy, which simply echoes the discord of diverse social perspectives, and the true will of the people in the Führer-state. Hitler took the Führer Principle and redefined it as himself…he was the Führer. Redefining the Führer was nothing short of audacious. It was captivating and alluring to many who were famished for change.

Many of the governing members in the Reichstag (congress) struggled to tame and communicate effectively to the youth of Germany. The Reichstag members continually doubted the youth’s ability to recognize a just government. Keep in mind most of Germany’s youth grew up in this chaotic state. Their view towards the government was distorted to say the least. The Weimar Republic only lasted 14 years but before that Germany spent the last 5 years in battle. A huge cohort of individuals only knew suffering and turmoil. Disconnect between the defenders of the former Kaiser rule and much more progressive governments were mounting daily. During the short lived Weimar Republic, Communism, Socialism, and a whirl of leaders/dictators were fighting for control.

Hitler knew very well that the youth’s mind were especially susceptible. This is exactly why he began with them. In the beginning, his messages were engineered for the youth. He knew the youth would be prone to messages of change and optimism. Joseph Goebbels (Hitler’s Minister of Propaganda) used propaganda methods to manipulate the masses. It was this desolate desire for change that gave Hitler his power.

The straw that broke the camels back for the Weimar Republic was the American Great Depression. The stock market crash of 1929 sent shock waves across Europe. The crash knocked Germany into the gallows. It was Hitler’s time to move. On September 14th, 1930, the Reichstag elections were held. The results were shocking. The Nazis had entered the register as the ninth and smallest of Germany’s political parties. The German people voted. The Nazis controlled 107 seats after that election. In November 1932, Hitler was defeated in the presidential election to WWI veteran Paul von Hindenburg. He received 42% of the votes. Hitler decided to enter a coalition government as chancellor in January 1933. Upon the death of Hindenburg in August 1934, Hitler become successor by popular vote.

Today, we are suffering the ongoing effects of the worst recession since the Great Depression. We are facing a global economic contraction. Greece is on the verge of insolvency and the US is limping along. Worldwide riots and protests have plagued the streets invoking for revolution. Frustration levels are swelling. This is the formula for calamity. However, it begins with the youth. Vladimir Lenin famously referred to youth uprisings as “useful idiots”. With the exception of the American Revolution, most revolutions in history conclude with a radical party seizing opportunity out of the political madness. People such as Hitler, Mao, and Lenin took advantage of a chaotic situation. I do not foresee a Weimar revolution of this magnitude anytime in the near future. Nevertheless, if we are not careful and mindful of the situation it becomes an unquestionable possibility. Education and knowledge of the truth is the only thing that will prevent history from repeating itself.

Have a great weekend my friends!

Brandon Saylor
-Associate

feet 300x225 Rental Income—Calculating Your Paycheck from Real Estate

Are you living the good life from passive income?

Greetings from the Inn Of The Mountain Gods in Ruidoso, NM.  Enjoying the weather before heading to El Paso, TX to hang out with family and friends.  I will also visit some of our retail shopping centers and discuss some vacancy issues with our property management company, Jaxon Texas Property Management as well as our asset management company, True North Asset Management.

Before landing in Ruidoso, NM, I just returned from Sucre, Bolivia and trying to get my head around what I experienced.  Seeing Food for the Hungry in action was an incredible experience and looking forward to going back.

Anyway….

Today’s blog post is a topic that is a difficult one to learn becuase it is not a lot of fun.  Although most of the post is “definition” on thing I would like to point out is that “falling in love with the numbers” is a priority.  Many investors, especially inexperienced investors get emotionally involved before they study the numbers and their emotion will help them “fudge” the numbers.  This is a terrible mistake….but I digress…..

So…..evaluating cash flow….

In the evaluation process of determining whether the property can and will generate enough income, you must analyze the 51wD1d5rZnL. SL160  Rental Income—Calculating Your Paycheck from Real Estatenumbers. According to Kiplinger.com, you need to look at several different variables to make the best decision. An interactive worksheet is available at: http://www.kiplinger.com/tools/renthouse/

These variables include the following items, which have been defined based on input from investorwords.com and Kiplinger.com:

Mortgage Balance: The mortgage balance is the amount remaining due on the mortgage. A mortgage balance is a debt against the asset of the property. There are many creative financing tools available that can help you assess the options with the lowest balance.

Interest Rate: An interest rate is the rate you pay to use money. IT is often expressed as an annual percentage of the principal (amount of someone else’s money you are using). Interest rates are calculated by dividing the amount of interest by the amount of principal. Interest rates are subject to change based on the rate of inflation and policies of the Federal Reserve.

Loan Term: A loan term is the period during which a loan agreement is in force and during which the loan is repaid or renegotiated for other terms.

Building Value At Purchase (including capital improvements): Building value at purchase means the numbers used to calculate your tax basis and annual depreciation. For tax purposes, residential real estate depreciates over 27.5 years, which allows for an annual 3.6% write off of the property tax’s basis. Building improvements are included, but lot value is not. This is different than net present value. Net present value is the difference between the present value of the future cash flows from an investment ant e amount of investment. Present value of expected cash flow is computed by discounting them at the required rate of return.

Modified Adjusted Gross Income: MAGI is the income from taxable sources less adjustments. According to the IRS, you 510zM0ZG5hL. SL160  Rental Income—Calculating Your Paycheck from Real Estatecan deduct up to $25,000 of rental losses annually to reduce your tax bill on other income if your MAGI is less than $100,000. If your MAGI is too high, passive loss rules put your losses into suspended animation, which means that they have no value at the time but will resurface to offset taxable profit when the property is sold. MAGI is calculated for passive activities by subtracting the following from your grow income (not including rental income):
o Job related moving expense
o Penalties for early savings withdrawals
o HSA Deductions (health savings accounts)
o Deductions for qualified plans and self-employed insurance
o Alimony Payments
o Penalties for early withdrawals from tax savings or deferred plans.

Annual Property Tax: This is the local tax assessed on owned property.

Active Management Expenses: These include expenses from actively managing a property.

Private Mortgage Insurance: PMI is mortgage insurance provided by a non-government insurer that protects a lender against the loss if the borrower defaults.

Inflation (used as a yearly percentage increase in rent, property tax and insurance): Inflation is the upward price movement of goods and services in an economy usually measured by the Consumer Price Index and the Producer Price Index. Over time as costs rise, the value of the dollar decreases because you can’t buy as much with the dollar that you could before. The Federal Reserve actively tries to maintain a 2-3% rate of inflation but the annual rate has greatly fluctuated.

Income From Rents: This is the amount that tenants or lessees pay you to use the property.

Utilities: This is the amount spent on heating, cooling, providing water or gas to a property.

Parking Costs

Homeowners Insurance

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Maintenance and Repairs: Maintenance can be deducted from the cost of the property. Improvements are not deducted but recovered through depreciation.

Other expenses: Other expenses include points, commissions, tax return preparation, travel expenses, rental equipment and other expenses related to maintaining your property.

Until next time……rob