an article
How to be a Pirate in the Age of Privateers (2016*)
A long time ago pirates roamed the oceans, well… being pirates. They looked out for themselves and tried to steer clear of trouble that could land them in guillotine or noose.
In response to these pirates, Kings and Queens directed privateers to roam the oceans to capture pirates or enemy ships and appropriate their cargo. In return the privateers would receive a portion of what they were able to capture.
Granted Letters of Marque, privateers were instructed to leave alone merchants and ships loyal to the nation of their King or Queen. Many privateers, being former pirates, didn’t always follow instructions very well.
Flash forward to 2016
We are currently facing turbulent times. The corporate bond market is in upheaval, China is facing a recession, the commodities market has flat-lined, world currencies are sliding, interest rates provide almost no return, and most things financial are looking pretty bleak.
Privateers and Kings reign supreme again.
It is no stretch of the imagination to see Investment Banks, once labeled “too big to fail”, as modern day privateers. They have already been granted pardons, and have received massive bailouts at the expense of our future generations. However many people have a harder time understanding what the Federal Reserve Banks do. Think of them as Kings and Queens, having no one to rein them in, with no oversight, and a machine that prints US Dollars faster than you or I could ever spend them.
Worse yet, the Fed has strong ties with the Investment Banks because the majority of Federal Reserve members are hired from the Investment Banks. In effect, the Federal Reserve banks have replaced the Crown, and the massive investment banks are the new privateers, carrying out the will of the Federal Reserve, and getting a nice cut for their efforts.
If you or I were to manipulate, or attempt to manipulate any currency, stock, interest rate, etc. we would wind up facing the wrath of the Securities and Exchange Commission. The Federal Reserve and US Government get a free pass to manipulate all of them in the name of ‘our best interest’, but in reality, it keeps their extravagant spending hidden, and the privateers get a piece; a very large piece.
We pirates and merchants are left adrift on a barrel, out on the ocean, without so much as a pair of bloomers to fashion a sail, or a compass to direct us towards land.
What does this have to do with Real Estate?
I am of the opinion things are getting out of hand, and you only have to watch the news for a few minutes to understand where I am coming from. A topic I find myself discussing fairly often is how to protect wealth.
It’s a frightfully good question to ask oneself at the dawn of 2016. Where do I put my money to a) Not lose it, and b) Attempt to profit from it? Questions I have discussed at length with more people than I care to recollect. And what you should do with the wealth you currently possess? I don’t rightly know. Please don’t stop reading because you found you were halfway through this article, and that I may not actually have a crystal ball.
What I do have are a few useful suggestions for wealth preservation and accumulation. Before I dive into them, please understand the following:
I am neither a financial advisor nor a CPA, and any financial advice contained within should be held to the same litmus test as the advice you would get from a guy trying to sell you an oil field in North Dakota.
In fact, you should seek the council of a financial professional to see if any of these suggestions are a good idea for you personally. If it is a strategy you would like to implement, I hope you will call me to assist as your Broker and Property Manager, as I am fairly good at both.
Real estate as a means to protect wealth
Real estate is physical and it is tangible. Residential real estate provides people with one of the most basic necessities, shelter. When it comes down to it, people don’t need a new iPhone 6s, but they certainly need a place to live. As of 2016, we seem to be making new people faster than we are making new places to live.
For high net worth individuals
Purchase a stable of rental properties, or larger income producing properties, within a manageable area. Ensure that they sustain themselves, their management, and their maintenance when looking for target properties. While I believe that real estate has a downside, as well as exposure to a decline in pricing, I feel that equities and bonds have a much greater downside risk. Diversifying into physical assets, at least for 5-7 years is a very sensible move.
For small business owners and entrepreneurs
The purchase of commercial real estate, for your ongoing concern, may be a solution to reduce short-term tax liabilities through depreciation, and offer an advantage over paying rent. Interest rates remain low, and accumulating wealth through the addition of equity in your business held assets may have some advantages. It will be important to manage your debt well, and avoid secured debt that is not comfortable.
For little pirates
Save. Save. Save. Don’t spend money unnecessarily. Reduce the principal owed on loans for secured properties that have positive equity. Invest conservatively, or purchase a home that is well within your budget. Understand that difficult times pop up when least expected, and luck favors the prepared. So be prepared.
Why follow this “Pirates Code”?
Stocks were, at one time, an investment in a portion of a company with real meaning. Today, it’s a rollercoaster ride that enriches the kingmakers, kings, and privateers. There is real benefit to allocating a good portion of your wealth into real estate. There is no guarantee that real estate will be a better vehicle for wealth than the equity markets, treasuries, or bonds. I guess you could say I’m here trying to put real people back into real estate, because the fix is in at the casino.
The financial instruments I have discussed all have one thing in common; they are theoretical values placed on mainly intangible assets. Lehman Brothers, Bear Stearns, Bre-X, Enron, and others are glaring examples of what happens when a company falls out of favor with the wrong parties. And chances are, if you are reading this article, you are standing outside in the cold with the rest of us.
John Gallant, Broker Engel & Völkers Islamorada
*Originally published in Keys Life Magazine