Commercial vs Residential Property Investment

What are the essential differences between residential and commercial property and which makes the best investment?

When you invest in residential property you are essentially dealing with people.
When the rent is late, you have to deal with a person – the tenant. If you feel the property is not being looked after properly, you will have to deal with people who may have a different opinion from you.

With commercial property, you are essentially dealing with contracts. If the rent is not paid on time, then the contract (lease agreement) stipulates a series of remedies that the landlord can take. If the property is not kept up to a certain standard, then the contract may stipulate that you can send in a commercial cleaner and send the bill to the tenant.

Generally, governments around the world have countless rules governing the renting of property to residential tenants, which override anything that you may put in your rental agreement. For example, in the UK, if a tenant is behind in their rent, you cannot just evict them. There are all sort of protections in place so that the tenants will not be exploited. You have to allow them to fall behind in rent for at least 30 days before you can start eviction proceedings.

With commercial property, what is in the lease contract is generally what goes. Many commercial leases have a clause in them that stipulates that if the rent if late by more than a week, then penalty interest will be applied to the amount of rent outstanding. If the tenant still has not paid the rent a certain period of time thereafter, then you have the right not only to change the locks and take your premises back, but also to seize all the tenant’s fittings, furniture and equipment on the premises, and to sell them to recover the rent owing. Your rights as a commercial landlord are far stronger than those as a residential landlord.

With commercial property, the tenants usually derive their income at your premises. Therefore they have a vested interest in keeping your property in good condition. With residential tenants, there is not the same drive to maintain your property, let alone improve it. With my commercial property, I spent thousands of pounds changing the business from a men’s hairdressers (which it had been for the previous 30 years) – into a real estate business. In fact, for the first couple of years, we often had men coming to the property and looking inside expecting to have their haircut.

With a commercial lease, the tenants often paint their premises every couple of years so that it will be attractive to customers. In fact, in a commercial property, the tenant is responsible for whatever maintenance repairs occur. So if there is a plumbing problem in a commercial property, it is up to the tenant to bring in his own plumber and to be responsible for whatever bills are presented to him. In a residential property, the tenant is entitled to call the landlord or the management company – they are compelled by law to fix whatever repairs are necessary.

Another fundamental difference between residential and commercial property concerns the typical length of the lease. With residential properties it can be on a month-to-month basis, but is rarely longer than one year. Commercial properties, on the other hand, are generally leased for many years at a time. From the tenant’s perspective, it gives their company or business the security of the same premises to work out of. Banks like long-term leases as well: the longer and stronger the lease, the more willing they are to lend money on the property.

In some countries a tenant cannot rent the premises with a lease that is under 5 years. There is an upside to this and a downside to this. The upside is that his business is secure in that location for at least 5 years. He cannot be asked to move. The downside is that if times are bad, he might be able to pay his rent and he has no wiggle room to get out of that lease. So in the end he possibly could lose everything. He could lose whatever deposits he has put down, he could lose his furnishings, his equipment. He could theoretically lose the essence of his business.

So far, you can see there are a lot of advantages of commercial properties over residential ones.

Let’s summarise the main categories of commercial property:

1. Retail: shops or any building where passing trade or the general public are invited
2. Office: commonly found with retail or alone, and often above the retail areas on the ground floor
3. Industrial: places where things are manufactured or services provided – but not necessarily where the general public are walking past.

Commercial property is much more specialised than residential and it may be more difficult to find a tenant in the area of specialisation catered to by your building.

Typically banks will lend you up to 80% of the value of the property on a residential investment. However, with commercial property usually the maximum is about 60%.

The biggest advantage of residential property over commercial comes when your property is empty. If you have a house where the tenants have just left, if you have bought it in a good location and the market is reasonably active, then you should be able to find tenants quite quickly. Generally even in a slow market, the only reason why a residential property sits empty for a long time is because of the rental price. If you drop your rent by 10% or more, you will usually get a tenant. However, this downturn economy has vastly affected both residential and commercial properties. Workers who have been made redundant find that they cannot pay the rent. Many commercial properties are suffering because their tenants have been forced out of business.

With residential property, if your tenant has been laid off or fired, it may take you months to be able to evict him let alone find another tenant. In a commercial property, you are entitled to keep his deposits, fittings, equipment and furnishings, but that still doesn’t give you an income for that property. And right now there are many commercial properties that are going bankrupt. So my best advice is that in this downturn economy, that while there may be numerous opportunities for investment, be aware that there are just as many situations where you could lose a great deal of money.

Let’s look at commercial property that has been empty for 3 months or 3 years, then the problem may not be because the rent is too high. Even if you were to slash it in half you still may not find a tenant.

The reason for this is simple. Just about any residential property on the market has all that is required for someone to live in it. However, when it comes to commercial property, the requirements vary hugely from tenant to tenant. For example, when a dog food cannery becomes vacant, it may not be simply a matter of reducing the rent to find a tenant. No matter how much you drop the rent, no photographer looking for a studio is likely to settle for the dog food cannery. No shoe shop that relies on passing foot trade will want the top floor in an office tower, no matter how good the view or how reasonable the rental.

To summarise the differences between residential and commercial property:
Residential
Tenants have little interest in maintaining or improving your property
Leases tend to be short
Tenants contact the landlord for minor problems
Governments tend to legislate to protect tenants rights
Banks lend up to 80% of the value
If the property is empty, it is usually easy to find a new tenant
You deal with people
Commercial
Tenants have a strong vested interest in the upkeep of your property
Leases tend to be long
Tenants tend to fix minor problems
Governments tend to leave you alone
Banks will lend only 50-60%
The appraised value when tenanted may be 2 or 3 times the value when empty
If the property is empty, it may be difficult to find a new tenant
You deal with contracts, not people

If you were coming to me for property investment advice and you didn’t know which would be better for you: to buy a house or to buy a piece of commercial property. The first thing I would say to you is: research, research, research commercial property. Find out everything you possibly can about being a landlord, about tenancy agreements, about your areas of responsibility, the tenant’s areas of responsibility, and when you have spoken to a number of commercial property landlords, and gotten to understand the business really really well, then I would look for a group of investors who would go in on a building with you.

I would also look for a syndicate – you would be just a small part of that syndicate. Your financial obligation would be very small in comparison if you had just gone into it yourself or with one or two other people. A syndicate usually implies a large group of investors. The upside is that you don’t have to have much of a cash outlay if you invest with a syndicate. The downside is that you don’t make as much money if you invest with a syndicate. But your risks are greatly reduced, which is why people have a tendency to look for syndicates. When you have a syndicate investing in residential property, a lot has been written about landlords – that the landlord or landlords plural, are just soulless people out to gouge as much money out of their tenants as possible, making the fewest number of repairs they can get away with. The laws governing commercial property makes that condition less likely – mainly because most of what we are talking about is the tenant’s responsibility.

Is it too late to buy Gold?

Is Gold Due for a Correction and is it a good time to buy now?

I have been recommending physical gold for the last three years to all my clients. Those who invested and took my advice are of course very pleased with their purchase. However, there are new clients coming to me know who are very anxious about the state of the world economy and the continuing uncertainty and wish to know whether it’s too late to invest in gold.

It’s a good question. Let’s take a brief look at the major moves in gold over the last 18 months or so. One of the key high points was in March 2008 when gold went over USD$1000 for the first time ever. At that point it looked as though it would continue to rise and go through the roof. However, much to the chagrin of many gold bugs, only two months later, gold was at just USD$870. And for the next five months, gold continued to drop and by October 2008 it was below USD$715.

It wasn’t until February 2009 – just under a year later, that gold managed to go above USD$1000 once again. So those who bought gold at its high in March 2008 had been kicking themselves for nearly a year. Many were very concerned that perhaps gold would never go above $1000 an ounce ever again. However, I did try to allay their fears by showing them that the world economy was far from certain and that for sure, it would come back again and show its true colours.

However, gold is not for the faint-hearted. It is not something that you can watch every day and worry about. This is not the idea of owning gold. It is largely for insurance purposes and could just make the difference between being able to pay your bills and buy food for the month if the world economy got into severe difficulties. It is always best to be prepared for the worst and then hope for the best. Because only two months after gold hit $1000 in February, it went below $880 in April. In September 2009 gold has started to rise parabolically – going over $1000 and in November to $1150 and rising…..

So should you buy now?
I advise all my clients to buy incrementally so that if you do happen to buy at the high point, you won’t feel too bad if it drops subsequently as you will still have funds to buy in the dips. However, with governments around the world buying gold, banks buying gold and more and more private individuals investing in gold, you can be sure that the price eventually will soar. It’s just a question of when. The UK has never sold so many gold coins to private individuals ever before. In the East, the public are more accustomed to buying gold. However, with Harrods offering gold to the public in the UK, the West is catching up.

If you do not have any physical gold in your portfolio I would strongly suggest that you seriously consider buying some. This is a very difficult time to decide whether to buy or wait. The price may just to up and up, or it may drop back before rising again. In my opinion, probability is on the side of it going up overall with a few small dips in between.

If you have already bought your gold, then just sit and wait!

Gold Hits New Highs

So just what is happening around the world? Gold hit new highs of $1123 per ounce this week, the US dollar came under severe pressure and yet stocks continue to rise. Some call this the “jobless recovery” and cannot understand what the media mean by “green shoots of recovery.” Others are convinced that we will soon be out of global recession. So whom can you believe and what is the truth behind all the stories that we hear?

In my view, I tend to agree with those pundits (who are in the minority) who say that this recession/depression has a long way to go. The fact that millions of dollars have been thrown at our banking institutions around the world and now that some are showing positive balance sheets and are paying themselves record-breaking bonuses once again beggars belief. Do we have to go through the same scenario once again – and maybe the second time it will be even more painful? Or are there some serious politicians and leaders out there who can see alternative solutions that might actually turn this impending depression around?

This week I was heartened to see that the Wall Street Journal reported that “Merkel (German Chancellor) Vows to Cut Taxes Despite Rising Job Losses.” This has made her very unpopular with some and she has received much criticism for her approach. In fact, this could be the best strategy out there right now. Cutting taxes is a very intelligent thing to do in order to deal with the current economic uncertainty. By cutting taxes more monies will be in the hands of the consumers who may just spend more and thus boost the economy. Cutting taxes is also a great way to encourage small businesses to hire people which could also be the answer to long-term job creation. Yet Merkel is being criticised for this longer-term stimulus proposal. She seems to be the first world leader who is willing to go against the tide and propose a new strategy that is constructive and promises to bring Germany out of recession sooner than many other countries. If she actually implements this policy, then Germany may be a country to keep an eye on for investing your money for the future.

I predicted that gold would soar in value as it is doing, (against the opinions of many stalwart investment analysts) and I think it still has a long way to go. So don’t be kicking yourself thinking that you should have bought earlier – try to buy when it goes down a little and buy incrementally so that you can take advantage of the dips when they occur.

We live in interesting times – the main thing is to try to protect yourself and your family first, then adjust your mindset so that you are aware of the possible outcomes around you and if necessary change your strategy to suit the prevailing conditions.

Housing Market and Mortgages Top Tips

I am frequently asked by clients and colleagues: Should I buy a house to live in or should I just rent? Should I get rid of or reduce my mortgage by moving into a smaller property?
Is it a good time to invest in a property or a piece of land? There are so many foreclosures out there – maybe there are some bargains to be had?

With the volatility in housing markets around the world, it’s very hard to know what action to take. Economists talk one day of a possible fall of 30% in the housing market and the next day they’ve changed their minds and they predict just a 15% drop. Whom can you trust and how reliable is the information we receive in the media and in our papers?

I have many clients around the world who are just dying to get back into property investing – why? Because they see that they are getting a very low return on their money in the bank – very often only 1,2 or 3% if they are lucky. They want to have something that brings them an income for their retirement and also hope that the value of the property will go up over time.

Today, I’m going to look at the various options available to you and their respective advantages and pitfalls.

The first thing to say is please do not be fooled by the media’s constant reporting of “green shoots” of recovery. There is very little evidence showing any recovery. There are three main reasons why it is likely that house prices will continue to fall for the foreseeable future:

- rising unemployment. The more people that are out of work – they cannot afford their mortgages and thus have to relinquish their homes. This means that more properties for sale come onto the market and thus drive the prices down. For example, if there is too much availability of rice and no one wants to buy it, then in order to attract buyers, the price has to be reduced. The housing market is no different. If you really want to sell a house in a falling market, you need to price it at least 20% below the average price in that area in order to generate some interest
- banks are now wanting at least 20% deposit. During the housing boom, banks were lending money to people often without asking them for a deposit at all. I saw this happening when I had my property investment company in the UK – they were lending to people who were on unemployment benefit! How irresponsible can you get? So because the banks have got into trouble, they have now tightened up their rules and are asking people for at least a 20% deposit. So this means that fewer people can get mortgages and thus afford to buy a house.
- interest rates will go up in the medium term. The reason why prices have gone up for such an extended period is because interest rates have steadily come down, which has meant that your mortgage payments have steadily gone down. In fact, in the US, they are now at 0%. However, there are already signs that the banks are going to increase interest rates and it is more than likely that they will start to go up in the next year or two. What this means for the housing market, is that fewer people will be able to afford to take out a mortgage and so more houses will be on the market and thus prices will fall further.

So those are the reasons why property prices are likely to either fall or at least remain static for the foreseeable future.

With this in mind, should you rent or should you buy?

It depends largely on your financial situation.

There are six conditions upon which I would consider buying a property to live in right now:
- You find an absolute bargain. This would be based on you having done extensive research on all the other properties in the area. For example, if the average price right now is $200,000 and you find something for $100,000 that is a foreclosure, then that might be a good buy. However, it is only a good buy if you can afford it.
- You have at least a 20% deposit and you have at least 12 months emergency funds in savings to cover unexpected situations
- If you are buying the property with a spouse or partner, you calculate your outgoings for just one income or even no income for a period of time – what happens if one or both of you gets laid off for an extended period of time and you cannot find other employment?
- You calculate your costs based upon interest rates going up which means that your mortgage will go up - so you need to have plenty of buffer monies
- You include in your calculations, the possibility of other costs rising such as property taxes, utilities, telephone, food etc. Many Councils are saying that your property is worth $1M and they are charging you taxes on that amount when in fact you could only get $200K for your property if you sold it.
- You are willing to hold onto the property for at least ten years before you may see an increase in its value.

Remember to keep in mind that if you buy now, you may be sorry as the property you buy for $300000 may only be worth $250000 within a few months. However, I have a client in Michigan and her property a year ago was worth $1M – now she has it on the market for $250K and she still cannot find a buyer. If you do buy a property, don’t have expectations that that property is going to go up in value anytime soon.

If you can satisfy all these conditions and you are not going in by the skin of your teeth – then off you go – happy house hunting!

If you cannot satisfy all those conditions, then I suggest you stick to renting for now. In fact, rents should also start to come down too and you may be able to negotiate a better deal with your landlord. The advantage of renting is that you are not tied into any mortgage agreement and you can be more flexible. If prices continue to fall, you may find that you are in a better position to pick up a bargain when the time comes.

For those of you who are struggling with your mortgage payments at the moment, try to negotiate a better deal with your bank. They would still prefer to have you in the property paying part of the mortgage rather than going through the procedure of foreclosure which usually costs them a whole lot more money. I knew someone who was having trouble paying her mortgage and she managed to negotiate a year’s holiday from paying the mortgage while she got herself back on her feet. It’s a bit like the negotiation we talked about last week – you have to be willing to ask. Also, if one bank does not want to negotiate, try to find one that will.

Depending on the size of your mortgage, you may consider moving to a smaller property so that you can either free yourself of debt altogether or at least reduce your monthly payments.

If you owe a lot of money on your property and you can still get some equity out and get rid of your mortgage altogether, I would suggest that you seriously consider taking that option. Then you are free to buy later when the prices have come down further.

If you have a property in a block of flats, or a condominium, where you are sharing the service charges – if many people in that block of flats have their apartments foreclosed, then the people who are still living there have to take on the added burden of those maintenance costs and if there are a lot of people out of work and not buying merchandise, then cities have to make up the money that they are nto collecting for taxes in some other way. Chances are that one of the first things they will be do will be to increase your property taxes substantially.

People really don’t know what to do with their money and because property investment has been such a good bet in recent years, there are many people itching to get back into the market. But is this the right time? It’s very difficult to pick the top and the bottom of any market – even the experts will tell you that that is almost impossible, but what you can do is to see the trend. With the degree of change that is happening right now, trends are much more difficult to predict, and for the average person, who is not well-informed on the housing market, it is best to wait until things have settled down somewhat before making a major purchase.

For those of you who are looking to invest, here are a few conditions I would suggest that you consider before putting your hard-earned money into property at this time:

- during a recession or depression, people have less available funds and may not be able to afford to rent. So you may need to drop your rental price. This is all right is you have no debt on the property and you have paid in cash – then you will not be too affected if you cannot find a tenant or if rental values go down for a few years. So if you are paying cash and you don’t need a mortgage, then buying a “real bargain” in a good location is a possibility. However, once again, don’t expect the value of the property to go up in value anytime soon.
- If you are taking out a mortgage, I would suggest that you do not take out more than 50-60% of the property price. Then if interest rates go up, your property taxes go up, your property sits vacant for a year or more, you will stillbe able to afford the outgoings. But you must be prepared to sit on the property for a few years and have your money tied up. Remember that selling a property is not a quick exercise and you may have to wait several months or even years to access your cash.

Buying land is even more risky as you do not have a property on it to bring you a regular income. You would either have to hang onto the land until such time as prices go up – which could be many years away – or you could build on the land and hopefully find tenants to bring you an income. However, I know people who own sections around the world and they are having great difficulty selling them right now. Indeed, in Fiji, a couple have had to reduce their section by 50% and they still have not found anyone to buy it. I see this happening around the world. Land, unless you are using it for yourself, is largely unproductive and does not bring you an income. So unless you are using it yourself e.g. to grow vegetables, for farming, livestock and you have a business that brings you an income from your land, then it is not the best investment during a downturn economy.

Summary
Do not leverage yourself too highly – i.e. don’t take out too much debt and make sure you have plenty of buffer funds
In volatile times, best to play it safe and not to borrow too much. Remember if you buy with a 20% deposit and the house price drops 20% you have lost all your equity.

If you rent – you are flexible, you can move quickly and you will be able to pick up the bargains at a later date

Investors: - not the best time to be buying – not only are rental yields low, but leverage is not wise now as there is no promise of capital gain in the near future. If you are paying cash, the risk is much lower and you can afford to wait and sit it out

If you are buying without too much debt – i.e. preferably only 50-60% and you know you can afford the mortgage and rising property taxes and other costs, then ok, but if not, then wait.

If you want to extend or renovate your house – this is going to be a good time:
-builders are looking for work and are willing to negotiate on their labour costs.

Credit Card Debt - how to free yourself

As amazing as it seems, most people do not understand credit card debt. They see a refrigerator and they think – oh, it’s only $10 a month for the refrigerator. We can afford that can’t we? They don’t think in terms of how much money is on their credit cards as a total amount. They just see it as another sum of money they will have to come up with each month, and while $10 a month more may sound reasonable and doable, that $10 a month, added to what they already owe, may tally into the thousands of dollars.

What they also may not understand, is that $10 a month is going towards a $700 refrigerator – by the time it’s paid off, they would have been able to buy 3 refrigerators for all the finance charges they had to pay over the years.

I know a woman who only bought merchandise that was on sale – whether she needed it or not – if it was on sale, she bought it. She had a closet full of clothing that she had bought over the years, most of which she had never worn, but they were all on sale so she bought them. And with each blouse or dress, she added to her collection in the closet, I kept hearing her tell me about the wonderful bargain she had got and how much money she had saved. These articles of clothing stayed in her closet unworn for years at a time- while she stuck to just a few outfits that felt comfortable on her. She was struggling to pay her bills – I said to her – stop shopping – and she said: that’s the only thing my husband and I enjoy doing together.

I told her that she and her husband needed to develop another hobby. They did. They started eating. Gargantuan amounts of food so she couldn’t even get into any of her bargain clothing. This went on for several years. When she lost her job and couldn’t find employment, I started to counsel her on her spending habits. I wanted to know what she needed at a bare minimum to survive. Part of me was afraid to ask her how much her credit card debt amounted to – but I did anyway. When she told me she had racked up $50000, it took everything in me not to let out a loud gasp in shock. I then proceeded to give her financial counselling for many years after that – and now I’m pleased to say that she’s free of credit card debt and she even has $4000 in her savings account.

Credit cards are very seductive. When they first came into existence, people used them for the purpose for which they were intended – as emergency funds. Your car breaks down, you have no cash, no savings, nothing that you could use to pay the towtruck to come and rescue you for the repairs that are needed at a service station, so you whipped out your trusty little credit card that was on hand just for an emergency, and you breathed a sigh of relief when they put on a new fan belt or a new radiator or a new tyre to replace the one that had just blown – and that’s what credit cards were supposed to be used for.

But over the years, people have become very irresponsible with their finances. These credit cards are no longer being used just for emergencies by most people. They are being used for a better way of life, a higher standard of living, expensive purchases that they don’t really need. And the credit card debt just keeps going up and up and up – and they pay no attention to it as long as they can make their payments.

When they are laid off from their job or fired, and their income goes out of the window, they suddenly become aware of payments that they cannot meet. And still it doesn’t occur to them that they have become credit card junkies. When they are facing bankruptcy and they have to go for consumer counselling and all their credit cards are taken away from them, while the credit card counsellor negotiates with the credit card companies for manageable payments, it’s like having withdrawal symptoms. And never underestimate the fact that they are not only having financial withdrawal symptoms but emotional ones as well. Because now, they cannot see a way of life that doesn’t feel hopeless.

To illustrate this point, during the Cuban missile crisis of October 1962, the people in Miami, Florida, were only 90 miles away from Cuba when the threat of being bombed and blown out of existence became a very real possibility. Emotions ran high, people panicked and the main attitude of the residents was – if I’m going to die, I might as well enjoy my last few days. They rushed to the stores in droves. They charged all kinds of luxury items on their credit cards because they never really expected to have to pay them off. After all, if they were going to be bombed, they wouldn’t have to pay the consequences, so they might as well enjoy themselves. They bought television sets, they bought boats, they bought cars. They bought all the things that they never could have afforded if they lived to be over 100.

The Cuban crisis was averted. Miami stayed intact, people went on with their lives – except one vast difference –now they had credit card debt up to their eyeballs. They had big ticket items that they couldn’t afford and wouldn’t be able to use. They had small ticket items too, but a great many of them - again with purchases that were totally unnecessary, extravagant and way beyond their budget.

The economy of that state was in great jeopardy. People’s homes were foreclosed, their cars and their boats were repossessed and people were out on the street. Businesses went under when their customers couldn’t afford to pay their debts.

Now if we look at what took place in 1962, a little under 40 years ago, and we multiply it by many millions of dollars more, we get to see the beginnings of what would eventually affect a global economy.

To summarise:
- be aware that your minimum monthly payment may seem to be a small amount, but you are paying several times over the original purchase price for your goods
- learn to use your credit cards only for emergencies and nothing else
- don’t incur any more debt than you already have

Let’s take a look at how our global economy got to be in such a mess. As we discussed with the Cuban Missile Crisis in 1962, we saw that what started with one small state in the US, became a temptation of easy living with no responsibility for paying off those debts. This is something that is felt around the world. I doubt if there is a country in the world now that doesn’t have its fair share of problems with people who are tempted to go into debt for luxuries that they cannot afford. We have only to look at the banking institutions, the financial institutions, with people who have got mortgages for nothing down, or 5% or 10% down, who would not have qualified as creditworthy if the banks had really vetted these people properly.

Now let’s look at cash advances. Again this is something that credit card companies have made too easy for its users. If it’s used appropriately for emergencies and nothing else, consumers might be better able to pay off these debts. Unfortunately, many people look at a cash advance differently. They ignore the fact that their finance charges start the minute they make that cash advance and that interest keeps accruing every single day from the first day of that loan. If they bothered to do the maths, they would have the option of seeing whether or not taking that cash advance was really of benefit to them.

More often than not, these cash advances are not paid off quickly, but they just get added into their ongoing credit card debt. Not enough people look at their statement each month to see how much money is going towards their cash advance and how much money is going towards their monthly charge –and those rates differ greatly.

Now let’s take a look at balance transfers. The average consumer sees a balance transfer as an quick way to pay off their credit cards, perhaps by combining all their payments into one, two or three payments instead of maybe ten payments. And if it were that simple, perhaps their credit card debt would be more manageable. But let’s look at some of the seductive ways that banks have of tempting you to do these balance transfers. During the good times, banks will offer a 0% finance charge for a certain number of months and then a higher charge for the remainder of the loan – and if you just looked at that, it might seem reasonable. But money has a way of making you greedy – so you may not look too closely at the fact that you may be paying $90 or $120 for every transaction you make on this balance transfer. Let’s say you want to pay off four of your credit cards: and you are going to transfer them onto this one credit card so that you have only one payment a month. For each of those four cards that you are transferring balances from to this one card, you will have to pay a fee of at least $90.00 per transaction. So you will be paying an extra $360 just for transferring the monies on these four cards. So you may be getting 0% financing for 6 months, however, and this is a big however, in smaller print, banks are telling you that they have the right to change that balance transfer offer as they see fit. So now you are thinking you are going in at 0% for the next 6 months and 9% after that until the balance is paid off. Now a few months later, you get your statement in the mail, if you look closely enough, you may be very surprised to see your interest rate go from 9% to 13.9% - because your bank can and often does change the original offer.

Here’s another eye-opener. You call your bank and you want to know what the payoff amount is, because now you have enough money to pay off the balance. You ask them to figure out the finance charges and add it to what you are supposed to be paying – and you think to yourself when you make that payment that you are finished with it. Not so fast. Your next statement comes in and lo and behold, there are more finance charges that have been accrued that you still owe.

So it’s very easy to see how credit card debt starts and how it escalates and how hopeless it seems for a lot of individuals.

And if you are one of the many consumers who looks at your statement and says – oh I just have to pay $15 – that’s the minimum amount due and then ignore the larger balance of everything that’s due, then you are one of those people who are just paying down the interest on the loan and not a penny off the principal of the loan.

Gold over $1000 an ounce

As I predicted in March 2008, October 2008, January 2009 and March 2009, I said that gold would increase in price substantially and would go over $1000.00. This week it is at $1005 per ounce. So where will it go from here?

With the Chinese stocking up on their gold reserves, Hong Kong deciding to take all its reserves out of a London depository and open their own holding at Hong Kong airport, with Russia saying that it’s advisable to have at least 10% of their assets in gold, there are signs worldwide that gold is becoming a more interesting commodity, even for the average person. Indeed in China, they Chinese public are being encouraged to buy gold and silver.

Nearly $2 trillion tax dollars have already been spent on bailouts of financial institutions and banks so far in the US, but we are probably about halfway through the unwinding of the mortgage bubble in the USA. There is still a lot of pain to come in terms of writedowns and losses that have yet to be recognised.

Things are going to be much worse than anyone anticipates. There were two other kinds of mortgages that became very popular. There were option arms which lured in all kinds of investors with very low “teaser rates” for 2, 3 or 5 years, but after that the interest rate goes up substantially. The other type is called Alt A loans and they too were given to people on low rates and the unwinding of these mortgages is yet to come. A mortgage of say $800 a month could easily jump to $1500. Now these loans are starting to reset causing mortgage payments to go up and owners to default. This will lead to more foreclosures. This is a time bomb. We are at the beginning of the second wave.

With this in mind, it is likely that more people will rush into the safety of gold. So expect the price to go up to $1500 or more within the next year or so.

Entitlement Issues - why they are causing our economic crisis on a global and a personal level

Let's take a look at how entitlement works globally and see the reasons behind our bank failures, our pension failures, our financial institutions and then we’ll bring it into a very personal level of how our attitudes of entitlement are bringing failures into our own lives.

We’ll look at ways to reverse this.
We’ll look at the issue of why our attitudes of entitlement are a luxury that we can no longer afford.

In the old days, on a global level, our standard of living was much lower. Our cars were basic, our entertainment was much less costly and in most economies around the world, families were able to make it on one income.

Over the years, as our standard of living rose higher and higher, it now takes two incomes just to survive. Instead of using one car for the family, now we see two cars or more for the family. Instead of just going to a movie and some place inexpensive for dinner for a special night out – now we have very expensive forms of entertainment.

In the old days, when we had a much lower standard of living people actually sat around in the evening and talked to one another. They even read books. They listened to the radio and used their imagination to recreate the scenes in their heads. If you had a telephone, it was a luxury. People made appointments to see one another, they didn’t sit on the phone for hours on end. Nowadays, there’s very little personal interaction. People sit on cellphones, they do text messaging, they sit on their computers, they do instant messaging, emails or messageboards – and social interaction has become a thing of the past. We are now leading very insular lives and the end result is that we have more cases of depression, especially among teenagers and young adults. We see more people today on anti-depressants than any other time in the history of mankind. This is more than just being dissatisfied with your lot in life. It has more to do with feeling a lack of purpose in your life. Having family and friends around you to share the good times and the bad times. This is about being able to live your life without having a single person in your life. Anything and everything that you can possibly want or need can be purchased online. You don’t ever have to leave your house. In so many different ways we can see the breakdown of the family and of the community coinciding with the breakdown of the economy.

The higher standard of living that we’ve grown accustomed to isn’t really about buying toilet paper in different colours, but it’s actually separating ourselves from the family unit. Instead of listening to the radio and using our creative imagination, or reading a book and letting it take us to different locales, now we have to be entertained. Now we don’t entertain ourselves. Now we need TV, video games, the internet…but the worst part is that we have isolated ourselves from each other.

Instead of conversation, we plant ourselves in front of TV’s. Instead of board games that can be played with the family, we’re now playing games on the computers – we’re having online relationships that are usually disappointing and we aren’t reading books like we used to. People used to have to develop social skills. Now with modern technology and a lack of social interaction, social skills seem to be at the bottom of the list of priorities.

Unfortunately the ills of society cannot be reversed by waving a magic wand over them. As a rule people don’t change unless they are forced to change. So how do we get past this attitude of entitlement? That the world owes us a living? That if you don’t have what you want that it’s ok to steal?

How do we go back to the basics of child-rearing?
Where the parents made the rules and the children obeyed them.
How do we get parents to see that their permissive attitude is damaging their children?
That it’s not ok to whine and cry until you get your own way. That we’re raising a generation of children who are growing up to be irresponsible adults who are not held accountable for their actions.
These same children will grow up to be dissatisfied with life, blaming others for their failures and not able to hold down a job.

So before we can fix the economy, we have to fix ourselves. We have to learn how to put back into the community what we have taken from it. We have to hold our bankers and our financial institutions accountable for everything. Our greed on a personal level corresponds with the greed on a corporate level. We have only to look at the increase in shoplifting to the CEO’s of major corporations who have stolen from their company’s pension funds. Now that we’re facing very very hard times, we need to see how our attitude is causing our own destruction.

When the economy started to go down, a taxi driver in New York City was asked what he was going to do if people didn’t have enough money to take taxis and he couldn’t pay his bills. Without batting an eyelid and having to think twice about it, he said “I’d steal.”

I heard of a woman in her 40’s who walked through the produce department of a supermarket and started to eat the grapes and cherries that were on display. She didn’t pay for them, nor did she feel guilty for having taken them. It was as if she had the right to sample whatever goods were out there. Although security would not have been called for pilfering grapes, especially since the goods would not be found on her, it’s easy to see why a storeowner’s losses would have to be passed onto its customers.

When doctors and patients submit fraudulent insurance claims – those costs aren’t just washed away – they get passed onto the other people who are insured.

I recently heard of a man who went into the hospital and was there for close to a month. A neighbour of his was one of his golfing buddies, and he was also a doctor. And every day he came to the hospital, he said hello to his friend. They talked about gold, about politics, their hobbies… and not once did he discuss this man’s medical problems .. and this man thought it was very nice of his neighbour to drop by. When he got his bill from the hospital, he was absolutely outraged to see that that neighbour charged his insurance company for every single visit for the month that he was there.

While most people would shrug their shoulders and not do anything about it because they didn’t have to pay for it out of their own pocket, this man called his insurance company and reported the fraud. He then called this doctor friend of his and told him that if he didn’t call the insurance company and rectify his mistake, he was going to contact the media and start an investigation. They lived in a small town and the doctor realised that he would be forced out of business if he didn’t drop the charges, which is probably the only reason he eventually notified the insurance company that he was dropping those charges.

The entitlement issues we face today can be traced back to the low standards we set for our children. The bar needs to be set higher, much higher. We are raising children who reach adulthood as grasping individuals taking whatever they can from whomever they wish without stopping to question their actions.

I recently heard of a widow in her late 50’s who sold the farm that she and her husband had owned for all of their marriage. She moved to a smaller place and planned on using the profits from the sale as her retirement income. Her children were so angry that they even refused to speak to her. They felt that the money from the sale was their inheritance and it should go to them. What kind of distorted thinking is that? She and her husband had worked the farm, had put in their life’s energy in that farm and she had every right to sell it and do whatever she wished with the money she received from it. Her adult children were living their own lives, earning their own money, and not supporting her. They weren’t entitled to one cent, yet they are trying to make her feel guilty for taking what she so rightfully earned.

In the US, they have been conducting surveys among middle management to upper-management employees who were laid off when their company’s downsized. There seems to be a growing trend among these people to try for a few months to find other employment, but then shortly afterwards, they give up and stop looking because they cannot find a job that pays the same kind of money. What we see happening to these people – they empty out their retirement funds, their pensions, their savings accounts, their family’s savings accounts, and mortgage their houses to the hilt. They have decided not to look for a job. If they cannot get the kind of money that they had been making, they are choosing to go on unemployment for however long it lasts and to live off everyone else. Some of them are sending their spouses to work at menial jobs, others are collecting food stamps and welfare and this number is growing rapidly. These are people who are able-bodied and capable of working but who choose not to – and society is supporting them.

You don’t have to look further than this to see how a country’s economic crisis is irrevocably tied to the entitlement issues of its populace.

A couple of years ago, I heard of a teenager who asked her father for a car after she got her license. Her parents were divorced and her father was trying to compensate for not being in the house as a full-time dad. He didn’t have much money so he got her a new Volkswagen. She was so angry that he didn’t get her a luxury car, that she deliberately rammed her car into a stone wall and practically demolished it. Her father couldn’t even claim on the insurance because it was deliberate. He ended up buying her a used car so that she would have transportation. This father, as well-meaning as he probably thought he was, only contributed to his daughter’s sense of entitlement. Had I been that child’s parent, I would never have bought her a replacement car and I would have had her go out and get a job and pay back, each week from her salary, every penny of the amount of the new car that she had been given.

This disregard for property, for other people’s financial problems, and for other people’s feelings represents the kind of attitude that is running rampant among many cultures. When parents accept this kind of behaviour from their children, they are setting their children up for failure as adults and of course this plays right into the failure of the economy of countries around the world.

How can we expect our politicians, our bankers, our financial institutions, our corporations, to exhibit more accountability than we expect from our own children?
Many children, single and married, move back home into their parents’ home because they cannot afford to make it on their own. At what point does a parent know that a child must learn how to survive on their own and stop taking money from their parents? At what point do parents know when they are causing more harm than good by continuing to treat their offspring as children? When they continue to make life easy for their children, these children will not know how to survive on their own when their parents die. It is far better to teach children moral and financial responsibility when they are young than have to learn it the hard way when they are older.

I had to learn this the hard way myself. My father kept on giving me money, even when I was in my 30’s and I never really learned how to be independent financially. It took me telling him that I didn’t need his help (even when I really did at the time), and then I learned how to stand on my own two feet and how to earn and manage money effectively.

I could go on and on giving you examples of entitlement in every strata of society, but the ones that I have cited are ample demonstrations of how we’re contributing to the downfall of our economy. We’re doing this on the local level, the national level and the international level. We’re taking the path of least resistance and while we’re holding everyone else accountable for their actions, we’re taking no responsibility for our own.

It’s time to reverse the status quo: Let’s try an experiment: for one week, between this show and next week’s show, try denying yourself something 3 times a day. Learn how to say no to yourself. Learn how to question your actions, how to observe them and question the validity of them.