What to do in the current economy ?

I am not sure how anyone can miss the recent news about the economy. Between layoffs, bankruptcies and federal bailouts it seems the end is near. I heard a wide range of advice from financial pundits (including Charles Barkley, the former basketball player) that runs the gambit from practical to irresponsible. I figured I would share my ideas; but more importantly what I am personally doing.

As mentioned previously, I subscribe to the Random Walk theory, so if you have been investing via a 401(K) or just simply dollar cost averaging, continue to do so. I don't think trying to time the market is practical (so don't try to cash out and put the money back in at just the right time) and historically if you were out of the market for only a couple of the big rally days you miss a significant portion of the gains. The best course is to make sure your stock portfolio is diversified, the S&P 500 (or a total market) index fund will serve you well in the long run.

If you are also a real estate investor (like I am), you might want to consider both the action being taken by the government both in the US and around the world. The housing market is vital to the economy, both for the economic stimulus and because it provides people shelter. In my opinion, the foreclosure will help the rental market as there will be more demand for rental properties. Also, the tightening of credit will force more former buyers into renters. The location mantra will still hold and properties in areas that will have a net migration of people will not fare well. There has been a lot of interest in buying investment properties in some areas, where vulture investors are buying bargain properties. This is a positive sign as there is money on the sidelines waiting for the right deals.

I am not an Oracle, so it is impossible to predict what will happen to the markets given the complexity but there are a lot of considerations:

• Given the recent increase in gas prices (hopefully people won't forget after the recent fall), I suspect the innovation in automobiles and public transportation (see the California initiative to build high speed rail between Northern and Southern California) will drive at least a partial recovery. This was the first time in a long time that people were actually changing their driving habits based on the significant gas prices. This is what caused the lease terminations for SUVs and low mileage cars. Reducing the dependence on foreign oil has a positive impact on the economy (think about where the money goes for $100 barrel of oil). Electric car fuel could be produced within the US, using solar, wind, geo thermal, and perhaps even nuclear power. This would provide more spendable income for individual households by reducing the monthly gasoline bills.
  
• Changes to executive compensation. The recent economic downturn has shed some light on excessive executive pay, there have been many recent articles like this one. AIG is not alone. I am firm believer in tying compensation to performance, just like the individual contributors.
  
• Health Care. The Obama administration has health care as one of the goals. This may change the landscape for drug companies and large health insurers.
  
• Retirement of baby boomers. The social security system is starting to feel the baby boomer retirees making the claims. There has been talk about privitizing social security (that would be an interesting investment in the stock market, might not be a bad idea) but I suspect the challenge will be to make sure this stays solvent without a massive budget deficit or tax increase. I have seen estimates of 40% vacancies which should help with the unemployment numbers (assuming retirees have saved enough to retire).

The best advice is to hold your course. Don't hole up and think the world is coming to an end but don't spend like it is either. Continue with a well diversified investment strategy (if you don't have one start a 401(k) or buy your first house). If nothing I have said yet has made you feel any better, consider this all you hear about on TV is the financial apocolypse is near, so the more you hear this the more you should start distancing yourself from the herd. If you wait until you only hear positive things, it will be late. You will be buying high and then later selling low.

Suggestions on how to improve property management agreements

One of the complaints with property management agreements is the incentive structure is not always consistent with the landlord. Here are some common fees and whether they have property manager and landlord interests aligned:

• A monthly fee based on the rents collected. The landlord and property managers interests are aligned. 
• A maintenance oversight fee. The property managers interest is to achieve the highest fee which could lead to inflation of the repair price. 
• Resigning fee less than the advertising fee for finding a new tenant. In this scenario, the financial motivation would be to find a new tenant as the property manager could potentially get the advertising fee as well as the oversight fee for repairs (if any). An unscrupulous property manager could promote turnover leading to increased maintenance and repair costs. 

A goal would be to have property management agreements align interests with landlords. For example, an incentive based bonus based on the year over year operational costs would provide additional incentives for reducing repair costs and turnover. 

Working with Property Managers

Real Estate for most investors requires securing tenants to rent the property while waiting for the property to appreciate. One way to manage a property is to employ a property manager to find tenants, collect rent and oversee repairs. The concept of a property manager is considered by some a necessary evil as the investments don't necessarily present themselves where it is practical to self manage (or if you are like many investors don't have time to do this yourself).  In case you need to use a property manager, here are indicators of a good property manager:

• Available and responds promptly to your desired communication medium. I like to use email because of its asynchronous nature
• Has relationships with repair vendors. Some property management companies do their own repairs. This is not necessarily a red flag, but you want to make sure the repair costs are reasonable. One thing to be aware of is that many property management contracts charge a fee for overseeing repairs, so make sure the repairs costs are not artificially inflated. 
• Perform periodic property inspections. This can help detect problem tenants early. 
• Own their own investment property. This will help them think from an investor perspective. 
• Advertise effectively for the market. Craig's list is effective in markets like Phoenix. 
• Distribution of rent. Some property managers offer direct deposit which will save a trip to the bank and the mailing time.
• Relationship with a collection manager. Occasionally you may have tenants who break the lease, move out without paying, or damage the property. Turning them over to a collection agency can help you recover some of the money as well as possibly impacting the tenants credit.