muses of the moment

December 28, 2013

Antifragile: gg’s thoughts #2

Filed under: Housing Market, Long term investing, Odds 'n ends, Precious metals, Real Estate Investments — totallygroovygirlfriday @ 1:52 am

As you may know, I am reading Antifragile. So, this book has groovygirl thinking: how can gg make her investments more antifragile, not just robust.

So, looking at real estate investments, which is what gg is studying for her next long-term investment cycle (after or along side gold/silver). This is what gg is thinking about.

Antifragile means that the investment becomes stronger with adversity and stress, not just surviving.

Antifragile is about options. Groovygirl loves options, because it means she doesn’t have to be right about where the market is going.

Analyzing a real estate investment with little or no debt with positive cash flow.

Current advantages:

Tax advantages: depending on company structure, little to no taxes on cashflow income. Real estate is still one of the only investment incomes not touched by the government’s tax increases.

Even a total cash deal, with no debt, can produce returns of 5%-20%, tax-free. (Debt can increase the tax advantages, but reduce actual cash flow and possibly reduce options in the future.)

Past advantages:

Tax free capital gains, with tax-free cash flow, using large amounts of debt (other people’s money). Now we have a stagnant or negative capital gains and possible negative cash flow with the pressures on large debt deals in the US real estate market. What worked well before (since 1950), may not work in the next 15-20 years.

Future options:

Option #1

Real estate market stays the same as it is now. Little to no gains. High pressure on debt when Fed is not flinging free money at banks.

5-20% tax-free return with no to little capital gains. (gg is using a wide range of return percentages because rents tend to go up and down and each market is its own little world.) All gains are related to cash flow and tax-free. If gg needs to sell, she will get original investment back, no loss.

Option #2

Market advances and grows like it is 2004-2007. All gains are tax deductible if gg moves it into a 1030 exchange and buys more cash flow real estate. gg sells outright because she finds out she hates real estate investing 🙂 and pays a capital gains tax. Benefit: had cashflow returns of 5-20%.

Option #3

Government takes away tax advantages on cash flow from rents on residential or commercial property or both and/or capital gains and losses. gg can sell and get out and move cash into another investment class. gg can sell and carry a note to the buyer, creating a higher positive cash flow from the interest on the loan.

Option #4

Real estate market goes down. This is the one that gg is favoring, since Martin Armstrong has written about the long-term decline in the US real estate market from 2015 thru 2032.

gg can sell outright.  Depending on the structure of the business/investment, gg can take an unlimited loss, if she sells and apply that loss to taxes on other income. (For tax questions, consult a professional. gg is not a tax professional.)

gg can sell and finance a loan to the buyer, creating continued, perhaps higher, cash flow.

gg can continue to collect positive cash flow.

With that cash flow, she can continue to buy more cash flow real estate as prices drop. Ideally, gg will have other income to live on, so this investment will be a wealth generator, not a living income, for several years. But if something unforeseeable should happen, it could be a living income.

Since the investment is debt free, rents going up or down may affect cash flow amount, but will not cause her to be in a negative cash flow position and forced to sell when it doesn’t line up with one of her exit plans (i.e. not profitable).

Since this investment has little or no debt, gg will not be “upside down” on it and have to put cash in just to get out.

gg will never have to worry about the banking system folding. She is her own bank for now. If it does fold, people will either want/have to to rent or need to be financed by someone other than banks (i.e. seller). The government may even create more incentives for real estate investors to pick up slack for a failing banking system and falling real estate market. Although, gg doesn’t count on the government doing things that would make sense 🙂

If and when markets stabilize near the end of the cycle, gg can sell for a tax-advantaged loss and get out or move into another investment cycle. She can finance the investment with low-interest debt (if that is possible) and get cash out, but still have the positive cash flow, without the risk of further falling prices. She can keep everything status quo and let the investment go up (as it will be a new real estate cycle) in value while creating positive cash flow.

Warning: gg is not a financial professional nor does she play one on television. This is not financial advice. She is just writing about what she might do with her own money in an area that interests her. You are responsible for your own money, education, research, and interests. Groovygirl has been studying real estate and real estate investing since 2006. Do not invest in anything without education. And always have several exit plans. Always consult a tax professional, as everyone’s tax liability is personal to their own circumstances. groovygirl is a long-term investor and extremely patience. So her plans reflect that mindset, you may not have that same mindset. That’s fine, it is not for everyone.



  1. This is hard to predict, gg. Counter cyclical investments are anti-fragile. The problem is that they have been the losing investments of the last few decades. They will be desperately needed during the crisis, but will people have a means to pay for them?

    What you do depends on which economic school you follow. From an Austrian perspective, consumer goods (and the companies which make them) will increase in value as an economy declines. People have to eat, you know. Capital goods become worthless.

    The fly in the ointment is hyperinflation. That can ruin any plan you make.

    The safest investments for me, right now, are in what will get me through the crisis. This means a safe place to live (in the country side), food, survival goods, trade goods and weapons. This would apply to either a deflation or hyperinflation. I would much prefer a deflation, but think it unlikely. A hyperinflation in the US seems to be an excellent tool for the central bankers to use to push us into a global fiat currency. That global fiat currency will not be trusted, so a black market will develop using precious metals.

    The greatest returns on investment will be after the crisis. That is when you will need precious metals. Look at Chile toward the end of the Allende regime. Anyone who invested in Chilean Blue Chip stocks, when they appeared to be on the verge of nationalization, did quite well. The same is true of farmlands or commercial property. Chile had the advantage of a stable currency, the US Dollar, to buy these assets in. We don’t have that advantage, now, since all the world’s currencies are being debased.

    I prefer silver over gold. The ratio between them will vastly drop. A 10 to 1 ratio, rather than 60 to 1 now, is about what the mines are putting out. This will make silver have a greater purchasing power.

    Also, silver is safer to trade in during the crisis. Almost everyone has a few old silver coins in their sock drawer, but hardly any gold. A silver dime could buy a loaf of bread in 1960. It ought to be able to do the same in the crisis.

    Comment by LG Wheeler — December 29, 2013 @ 2:18 am

  2. I know a restaurateur who has been trying for a decade to sell her establishment. Most recently, she financed a buyer’s mortgage (sans bank intermediary) only to have the buyer walk out. I share LG Wheeler’s skepticism as to the reliability of many buyers in a predatory, debased, confidence-less market. I am no RE investor and know little of the technicalities, especially in other jurisdictions, but speaking generally, if you do buy property for cash flow purposes, I hope you take every measure possible to protect yourself.

    Comment by Lore — December 30, 2013 @ 6:16 am

  3. Lore,

    gg agrees that any investment should have research, due diligence, and lots of education behind it. That education should include how to find and qualify tenants and buyers. Every real estate investment is different and needs its own specific education.

    If you are going to be an investor, you need to have enough knowledge to do all aspects yourself, or as gg prefers, know how to qualify the experts to help you. That means you must have marketing, leadership, project management, banker, tax, legal, as well as your own specfic business knowledge. And lots of experience.

    The main point of my post was not real estate investing per se, it was about defining antifragile. We are a few years away from a possible high in metals, according to Martin (2017-2019). Now is the time to start thinking about the next possible investment cycles and doing the due diligence. Making your money work for you while you educate yourself is what gg tries to do. While metals are doing its thing, gg is exploring the next options. It would be a shame to lose all the gains in the next cycle.

    Education drives out fear.

    Thanks for your comments, Lore.


    Comment by totallygroovygirlfriday — December 30, 2013 @ 10:43 am

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