Financing Investment Property

March 1, 2013 By Leave a Comment

Some basic tips

When looking to finance investment property acquisitions, here are a few of the most basic tips you’ll want to consider before you begin your property search.  Figuring the best way to finance your investment will be one of the first steps you’ll need to take prior to spending a great deal of time and energy in locating a real estate investment.

Get to know your local lenders

There will be greater latitude with smaller, local banks.  Each local bank will have their own set of lending guidelines.  Get to know each lender’s guidelines, and their individual strengths and weaknesses.  Get local real estate agents to refer you to their “preferred” lenders.  These real estate pros should each give you three names.  See whose name pops up the most out of all local lenders, then work directly with them.

Make sure your credit is excellent before starting your search

Always know your credit score at any point in time.  Your score will have the greatest impact on your ability to secure a mortgage when financing investment property, as well as having a tremendous impact upon the interest rate you will be granted.  A score of 740 should be a bare minimum.  Preferably, you’ll need a score in the upper 700’s to low 800’s these days to ensure getting the best interest rates on real estate investment loans.

Be prepared to put up a large down payment

Unlike homeowner loans, banks assign greater risk to investment properties.  They therefore help lower that risk by asking for larger down payments.  Most lenders will require 25 to 30 percent down on most investment properties.  Some lenders require 40% or more, depending on your credit score.  The lower the score, the higher the down payment required.

Ask for some owner financing

Never be embarrassed to at least ask if the owner will consider SOME amount of owner participation when financing investment property – EVEN if they do not say they will on their property information listing sheet.  Always ask!  You never know just how desperate a seller’s situation may be, and you don’t want to pass up the opportunity to utilize other people’s money (OPM) when possible.

Think outside the box (creative financing options)

Use home equity lines of credit.  It’s an extremely cost-effective use of borrowed funds – as long as you’re aware of the potential dangers.  You need to set a conservative time horizon for the sale of the investment property to ensure a quick payback of borrowed home equity funds.  Otherwise, you’re asking for trouble – placing your own home in jeopardy.  In addition, consider short-term borrowing from credit cards – especially discounted credit card offers with zero percent or one or two percent charges on borrowed funds.  Of course, shop around for the lowest surcharge cards.  Most cards require some upfront surcharge – ranging from two to four percent on average.  Again, know your time horizon for holding your investment property acquisition – then choose the credit card offer that best fits your needs, and offers the most leeway in payback period. 

Another oft-used method of alternative financing is a shot-term loan from a relative.  This can work – but be sure to absolutely create a signed promissory note to your relative/friend/”angel.”  That way, everyone is on the same page, knows the repayment period, interest rate, and what will happen if you default.  At the end of the repayment period, you certainly want to retain your relative/friend/”angel” as someone who continues to hold you in high esteem.  Of course, you should always discuss these creative ways of financing investment property with your financial advisor prior to making any moves.  It just makes good business sense to get another outside professional opinion first.

 

photos courtesy of kwcommercialsa.com, fhasinc.org, anchoragehomesearch.com, thelastembassy.blogspot.com,  psdgraphics.com

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The Latest Outlook For Property Investing

February 7, 2013 By Leave a Comment

The new normal

As the overall real estate market continues to recover across the U.S., there is now becoming a new normal for property investors. Compared with the last several years, investors need to be aware of several important changes in the marketplace.  Understanding  these changes is crucial to properly allocating your real estate investment dollars in the foreseeable future.

Inventories are stabilizing

As the foreclosure crisis slowly becomes a foreclosure way of doing business, and the overall volume of foreclosed properties continues to drop, the real estate market will respond by pricing rebounds.  The less inventory, the more demand.  This is simple, basic economic theory.  Banks have been selling off their inventories of distressed properties to investors in record numbers over the last few years.  And that huge glut of foreclosures has now been worked down to a manageable amount.  Investors who bought them are now reaping the rewards of either flipping or holding them for rentals.  This slow lessening of housing inventory nationwide will invariably tighten the overall marketplace.

Investment loans are getting costlier

Interest rates have remained at record lows for quite some time – almost three full years.  That’s about to end.  The Federal Reserve has indicated they may tick rates up slightly later this year, based on the continued slow but steady economic growth pattern exhibited in the U.S.  last year.  Rates should remain relatively low through the end of the year, on average between 3.5 to 4 percent.  But the lowest rates have already come and gone.  In addition, expect the credit markets to remain tight for property investors, making qualifying for a mortgage much more difficult.

 

The Ability To Repay Rule makes borrowing more difficult

As mentioned in one of my recent articles posted here, the Consumer Financial Protection Bureau instituted a new rule to make sure lenders prove that borrowers can actually repay the mortgage they’re applying for.  Obviously, this was created to help protect the entire U.S. banking system, and avoid the collapse we came through over the last few years, as no-income mortgage lending was the norm – and got so many homeowners into hot water as they could not repay their loans. So now all lenders must verify all assets, income and debts of every borrower.  In order to now qualify for a loan, the new norm here is that investors are obtaining mortgages from hard money lenders, with higher interest rates and much shorter terms, in record numbers. 

As inventories level off, expect a construction boom

Records indicate that building permits for single family homes nationally are up about 25%  from the past year alone.  With the near-record low interest rates currently available, builders have been gambling on pent-up demand in the housing market.  And it’s a demand that has been held back since 2007.  New home prices have been rising faster than existing single family homes of  late, and builders also want to take advantage of this trend.  However, this expected larger supply of homes could keep prices down over the next year.

Valuations continue to level off

While a majority of local real estate markets saw increases in house prices over the last year of about 9 to 10 percent, due to shrinking inventories and low interest rates, this year should produce more modest gains.  Economists feel these price increases will probably be in the 2 to 3 percent range.  Naturally, everything is an average, so there will still be some areas of the country, like in the Northwest, which will continue to remain hot regarding price increases.  But others will lag, and some major cities will continue to show little or no growth.  These include cities like Denver, Atlanta and Chicago.

Investors continue to feed on distressed properties

As mentioned above, it’s getting harder to find great foreclosure deals these days, as the sheer supply of distressed properties plummets rapidly.  Most large investors have gobbled up the best foreclosure deals.  Real Estate Investment Trusts (REITs) enlarged their portfolios over the last two years, buying huge numbers of distressed properties, then fixing them up and renting them out en masse.  Still too, many banks decided to hold a number of their foreclosures, add value to them by making minimal repairs, and have placed them back on the market with higher prices.  But overall, as the inventory has declined, house prices have rebounded.

 

photos courtesy of reiwa.com.au, blogs.va.gov, legalrefinance.com, builderonline.com, vamortgageveterans.com, guardian.co_.uk, biz.thestar.com.my

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A Quick Peek At The Current Mortgage Landscape

January 23, 2013 By Leave a Comment

Traditional lending sources remain difficult to obtain

In the current investment property mortgages landscape, traditional bank loans remain a tough road for financing. And many property investors have had to hold onto their existing, long-held properties while paying off those older mortgages that were set at much higher rates. These investors are finding it nearly impossible to refinance their debt loads, and tap into their equity to help finance new investment property acquisitions. So it’s a double-whammy: not only can they not finance new opportunities, but their cash flows are reduced due to their old, higher-rate mortgages remaining in place.

New Lender Rules = Tighter Credit

The latest news from Washington means traditional bank mortgages will continue to be hard to obtain. This is because the new “qualified mortgage” definition could adversely affect investors who require jumbo mortgages that are too large to qualify for government backing. Most recently, the Consumer Financial Protection Bureau created a rule that spells out exactly how lenders can avoid legal liability under a new law that holds these lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet the new qualified mortgage definition will get a clean bill of health – and they will have shown compliance with the new ability-to-repay part of this law.

Fortunately, some jumbo mortgages won’t be considered as qualified mortgages, and would be exempt from the new rules. Any loan that features an interest-only provision for an initial period won’t be considered as part of the new regulations. And any loan where a borrower’s total monthly debt payments exceed 43% of his or her income would also not be considered a qualified mortgage under the new rules.

Interest-only mortgages increased during the housing boom because they were marketed as being more affordable. It allows property investors the ability to carry a mortgage, and gain a tax deduction – all this while making a minimum loan payment. Later down the road, the investor can refinance or pay off the loan before they are required to make principal payments. Or at least, that was the thinking behind this type of mortgage. The debt-to-income rules, meanwhile, could wreak havoc with investors who have lots of cash and other assets, but whose incomes are harder to document. This includes some small business owners or self-employed professionals who have incomes that fluctuate widely from year to year.

The true meaning of these rules for property investors

Since the current real estate market is rebounding, investors are now looking to refinance their existing investment property mortgages and search for new, additional properties for their stable of investments. However, finding traditional bank loans for new investment property purchases, as well as trying to refinance existing loans has become much more difficult with the qualified mortgage rules. Even borrowers with excellent credit and income, who still show a steady rental revenue, are having trouble getting a bank mortgage on an investment.

As such, a great number of property investors have been financing recent acquisitions with their own cash. Of course, this is a horrible way to grow your business, since no leverage is being utilized. More importantly, these investors who bought all-cash thinking they’d be able to refinance afterwards, and pull out some of their equity on their income-producing properties, are being left high and dry when they find that traditional lenders, tied down by the qualified mortgage rules, are simply unable to extend mortgage loans to them.

Hard money lenders

Likewise, it is just as onerous for those investors who acquired investment property in recent years using hard money lenders. Since hard money loans are always short-term, those investors who could not refinance their investment property mortgages at a bank, and who are unable to come up with their own cash resources to pay off those loans, are being forced to sell those properties that they had originally intended to be long-term acquisitions.

To help fill this void, a recent trend has been for hard money lenders to offer additional short-term mortgages to fill the gap. These non-traditional lenders now offer two- to- five year loans on investment properties, all at a much higher interest rate than traditional banks would offer, of course. However, these mortgages have allowed many investors to retain their properties until they can qualify at a traditional bank. And they don’t have to place these properties on the market just yet. These loans, even at their higher rates, allow investors the ability to reduce their monthly costs, increasing their overall cash flow. And they also allow investors the ability to pull some cash out for future purchases.

photos courtesy of etsy.com, allmandlaw.com, answers.yourdictionary.com, realtor.com, worldpropertychannel.com, hardmoneylendersutah.com

 

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The Genie’s Predictions For 2013

January 1, 2013 By Leave a Comment

Watch the unemployment rate

The unemployment rate will be one of the most important figures to keep a watchful eye on in the coming year. If it starts ticking upwards because of the effects of no deal being reached by Congress on the proverbial fiscal cliff, then look for overall U.S. rents to continue to increase as homebuyer malaise begins to sink in.  So individual rental property owner’s should be able to see increases in their cash flow as the new year progresses.  Clearly, residential rental properties will become even more valuable than they were in 2012.  So it would behoove the individual property investor to continue to search for and acquire additional rental property in 2013.

If, however, the fiscal cliff is averted, either by tax rate reductions in early January, or some short-term debt reduction package enacted by Congress in the next month or two, then the unemployment rate should continue to tick downwards.  And residential rental rates may suffer over the course of next year.  This would occur as consumer confidence increases, throwing more renters back into the buying game, especially first time home buyers.  With fewer renters, rental rates will start to go down, negatively affecting property investor’s cash flows.  On the other hand, housing valuations, by and large, should increase slowly but steadily over 2013.  So any currently held investment property should begin to appreciate in the new year under this scenario.

Result of higher taxes on the rich

If taxes do rise next year on upper income workers, and their disposable income is reduced, look for housing values to remain stable throughout the country.  The net effect of soaking up disposable income on the “rich” will be minimal for the housing market.  It really should have a negligible effect on consumer confidence, and the demand for housing in this country.  As mentioned above, it is the unemployment rate that is most important to property investors.

Credit markets and property investing

I fully expect lenders and the overall credit market to remain in stasis over the next year, regardless of Congressional maneuvers with the fiscal cliff.  Banks will continue a policy of strict lending guidelines, making only the most credit-worthy recipients of mortgage loans.  So the tight credit market will continue into 2013.  That said, non-conventional sources, like hard money lenders, will continue to flourish as those investors with less than stellar credit ratings seek to close deals that are cash-positive.   

The European debt crisis becomes orderly 

The situation with Europe’s money crisis should continue to stabilize in 2013, building on the positive work and financial bolstering and deal-making done by the International Monetary Fund in the last half of 2012.  This can only help to further stabilize U.S. credit markets.  While some countries like Greece, Italy, Spain and Ireland continue the long road back to financial stability through austerity budgets, high unemployment and Draconian fiscal measures, enough sound restraint has accompanied their efforts to take the strain off of their own fiscal cliff.  Proof of this can be seen in the news media, as we no longer hear of the doomsday forecasts, which for the first half of 2012 espoused daily reports of the demise of most of  the European Union countries, save for Germany.

Looking at things in reverse, the U.S. fiscal cliff situation appears to have little effect on European nations.  I believe Europe is already on the right economic course, with enough corrections over the past year, and the U.S. situation will be resolved very soon, although probably with a short-term political fix.  And the resolution will have little impact on foreign markets.  Overall, U.S. credit markets should remain unaffected by the European debt crisis, as they work through their mess.  Thus, look for further stabilization by banks here in the U.S., and little or no change in mortgage lending policies and standards in 2013. 

The fiscal cliff redux

I don’t believe Congress, in all its machinations on the fiscal cliff, will allow the full sequestration cuts to go through.  The country would be placed in a very real jeopardy for a new recession if this were to occur, especially if there are major cuts to the defense budget, as well as social programs.  If sequestration were to occur, the overall unemployment rate would zoom up in 2013 and beyond. And if that unemployment rate were to go up next year, look to continue acquiring residential rental property, since rent prices will then continue to escalate.  And cash flows on rental properties would commensurately increase as well. 

Wall Street and property investing 

As we know all too well, Wall Street is highly reactive to the smallest of maneuvers that take place in Congress – especially when they involve taxes and spending programs.  So I expect a real roller coaster of a ride through the first half of 2013 in the stock market.  However, that should not affect home buyers if consumer confedence remains upbeat.  And it certainly shouldn’t dissuade you from continuing to search for additional investment properties to add to your long-term portfolio. 

Again, look to the unemployment rate as the main directional pointer for how you should invest in 2013.  If you see unemployment rise, continue to invest in residential multi-family property.  If you see it go down, start switching to single family home acquisition to fix up and rent out or speculatively sell (flipping) in the short-term. 

The commercial markets in property investing 

Here too, that unemployment figure becomes the major indicator of your actions in the next year.  If it ticks upwards due to Congressional inaction on the fiscal cliff resolution, there will be less investment by companies in equipment, inventory and personnel.  Therefore, look for higher vacancy rates overall in the office building, retail space and manufacturing (plant and warehouse) markets.   As the economy falters in this scenario, look for more company cutbacks and outright dissolutions.  That will obviously have a deleterious effect on space demands, especially in the retail and office building arenas.  Likewise, hotels (and the travel  business in general) will take a hit during any new recession, so you would also want to steer clear of hotel investments if unemployment starts upwards.

However, if the fiscal cliff is averted in the next month,  the U.S.will continue to show modest productivity gains over the next year (as was done in 2012), and then you can look for the unemployment rate to continue to slowly decline, just as it has this past year.  Then we can expect greater stability in the commercial markets.  With this, one can expect small increases in rents for commercial space, be it office, retail or manufacturing.  Vacancy rates should also drop with increased productivity.  This should make commercial property a good addition to your property portfolio in 2013. 

The flipping outlook  for property investors

Here too the bell weather unemployment rate will dictate how you approach flipping in the next year.  If the rate drops as the fiscal cliff is averted, credit markets will remain stable, and consumer optimism will remain at a slow and steady growth pace.   Then it would be an excellent time to get further into flipping properties. 

Over the last year we’ve seen small increases nationally in home market valuations, as well as a marked decrease in time on the market averages for homes nation-wide.  With the fiscal cliff averted, consumer confidence stays high, unemployment will tick down, so you can then look for a more robust housing market.  With this, look for  further  reductions in days on the market for the average single family home in the U.S.  Prices will slowly rebound upwards, and this will make for a much better backdrop for  flipping – certainly much better than the last several years have been. 

In the event of a recession

My best suggestion for property investors in the unlikely event of a Congressional meltdown and a descent into another recession, is to consider taking the properties you already own, and use the time to properly maintain and upgrade them in a downturned economy.  Use the downturn to your advantage, and try to rebuild your weaker, or deferred maintenance properties.  You’ll be able to address all necessary repairs, and/or increase their valuation by upgrading the properties. In so doing, you’ll also be able to increase the  rents you charge on all your improved units.

Also consider the next year as a good time to try refinancing your investment properties to help increase your overall cash flow on all your collective properties.  With rates at all-time historical lows, and with an economic downturn occurring, you’d be able to lock in excellent rates for the long-term on your portfolio of real estate holdings.  So in the event of a recession, look to revamp, refinance, increase your rent rolls and build cash flow on existing properties owned in 2013.  And hold these properties in the short term until you see signs of a recovery.

The bottom line

I still feel Congress will avert turning the economy into a major downturn though.  And so, I strongly believe you’ll want to remain in a steady acquisition mode through next year.  Make sure that in either the commercial or the residential rental arena, your cash flows work out to be positive before making any offer on a potential investment property acquisition.  You can’t avoid doing the basic homework of research and numbers crunching analysis.  Remember to always crunch your numbers properly, and always look for the discreet changes in the economy on a daily basis.  If you’re going to play the property investing game, it certainly pays to stay informed.  Above all, as noted above several times, watch that ever-changing unemployment rate as your main direction arrow.  That figure will point you in the right direction as you go through 2013.

 

photos courtesy of seerchat.com, en.wikipedia.org, myweathertech.com,  socalfools.org, the666.com, onlyhdwallpapers.com, onlyhdwallpapers.com, browninsuranceservices.com, intomobile.com, tmgnorthwest.blogspot.com, home.howstuffworks.com, psdgraphics.com, appraiserjobs.com

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Propping Up The FHA

December 4, 2012 By Leave a Comment

Another bailout to come?

With the most recent reports out about the potential insolvency of the Federal Housing Administration (FHA), a unit of the Department of Housing and Urban Development, real estate investor loans on 1-to-4 family residential properties are looking like some of the greatest bits of saving grace for the nationwide insurer of home loans.  

In an article in The New York Times from 12/2/12  (“In An FHA Checkup, A Startling Number,” by Gretchen Morgenson), it was reported that the FHA’s mortgage insurance fund, used to reimburse mortgage default losses by banks who underwrote FHA-backed mortgages, has dwindled significantly over the past year.  While last year the fund had $1.2 billion in its coffers, today that figure is down to minus $13.48 billion.  Yes, that’s right – a huge negative number to assimilate.

What went wrong?

But how is that possible?  And what does it mean for the average real estate investor?  Well, for starters, the negative figure only represents an estimate of the difference between future collections by the FHA (of mortgage insurance premiums) and the potential losses on mortgages they are obligated to make good on over time.  Using historical mortgage default data, their auditors can extrapolate future defaults, based on lending criteria in effect when loans were made.

Stringent lending standards

More recent loans (after 2010) with more stringent lending standards now built in mean there should be less defaults in the future.  However, loans backed by the FHA between 2007 and 2009 have been seeing high rates of defaults due to formerly lax lending standards.  And those defaults become the foreclosures of today – and tomorrow.  We already know that there is a long backlog of bank foreclosures ready to be rolled out over the next few years in the U.S.  And the FHA is on the hook to banks for accrued losses from these bad loans.  Hence, the projected $13.48 billion shortfall for the FHA – over time.

Real estate investor saviors

Property investors, as a group, can be seen as white knights for the FHA.  New standards allowing for FHA backing of non-owner occupied 1-to-4 family properties require much greater down payments (usually in the 25% to 40% range) by real estate investors than standard FHA-backed mortgages.  Those standard FHA backed mortgages to homeowners allow for as little as 3.5% down payments.  And while the FHA does not receive revenue from mortgage insurance premiums (typically created when down payments are less than 20%) on these real estate investor loans, there is much more security and low rates of default built into these new mortgages.

A bailout ahead?  Absolutely.

Overall though, look for some form of modest FHA bailout by the Treasury Department at some point in the next couple of years.  The U.S. government is not going to allow the FHA to become insolvent.  And look for more types of FHA-backed mortgage loan programs to come down the pike for property investors.  With their high down payments offering greater security, the FHA is developing a strong desire and attachment to befriend real estate investors for the sake of building up their own financial strength.  The need for more stability of the FHA is there, and property investors have been helping to prop up this lending industry behemoth.

 

 

photos courtesy of  jordansmuse.blogspot, bubbleinfo.com, ml-explode.com, chicagoagentmagazine.com, blog.amerifirst.com, realty.com

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The Sky Is Falling! The Sky Is Falling!

October 10, 2012 By Leave a Comment

What the doomsayers are espousing…

In my article posted here on September 12th, “The FED and you,” I concluded that the end result of all the money printing the FED has been doing of late will create a scenario where the next generation will have to pay the piper.  And real estate investors today will end up having their heirs pay for this loose money policy.

There are others who are more doom and gloom than I in their predictions, however.  One noted economist, Marc Faber, has recently said that “U.S. monetary policy will destroy the world.”  He is referring to the most recent stimulus plan by the FED – also known as “QE3” or  “QE Forever.”  In an article posted last week in MoneyMorning.com that recapped Faber’s dire warnings (Faber warns everything will collapse. (n.d.)  Retrieved from moneymorning.com/ob/Faber-warns-everything-will-collapse/), the case was made by Faber and other renowned economists that the dominos were in place for a worldwide collapse to occur.  Besides the FED’s current policy of printing money to keep markets stable in the short term, the other key dominos included the major protagonists in the European financial crisis, including Greece, Italy, and now, Spain.

The article went on to describe how Chris Martenson, a global economic forecaster  who’s recognized as an expert on the dangers of quick economic growth, had a theory that the world’s economies would collapse in short order.  He was quoted as saying:  “we found an identical pattern that guarantees they’re going to fail…This pattern is nearly the same as any pyramid scheme.”

Somewhat less than reassuring, right?

I do not subscribe to this Chicken Little philosophy of a oncoming train wreck that will be create a quick, devastating worldwide economic collapse.  It makes for good, sensationalist copy – but hardly sound economic theory.  I think the head of the International Monetary Fund, Christine Lagarde, would agree.

While governments in Europe and the U.S.  have helped create these economic conditions through a combination of volatile spending with little austerity measures in place,  governments also have the ability to right their own country’s economic fortunes (albeit with extremely unpopular political overtones).  This righting takes time, certainly won’t occur overnight, and historically runs in cycles of five to seven years. What is new here though, is the interconnectedness between countries.  That is at the heart of the aforementioned economists’ doomsday theory.

I still don’t buy it.  Will the twenty-five percent unemployment rate in Spain bring the U.S. economy to a grinding halt?  Possibly – but doubtful.  There are too many other countries, investors, banks and extreme oversight in place to prevent a domino effect from occurring.    Meaning:  is it all a possibility?  Yes.  Is it a probable scenario?  I think not.

Making sense of it all…

So what does it all mean for real estate  investors here in the U.S.?  I think doomsday scenarios are quite frankly, irresponsible.  They can create a sense of economic panic that can affect markets worldwide…not just in real estate.  While it is OK to advise about the possibility of a horrendous economic collapse, saying one is imminent is ludicrous. 

That said, we are coming through an economic upheaval not seen since the Great Depression.  But the downturn cycle that began in 2007 has already begun changing over the last year.  And I think it will continue, slowly, but steadily.  If you get into property investing, you do so knowing the inherent risks:  it’s illiquid, and in a down market, hard to get your money out quickly.  But if you’re in for the longer term, the ups and downs tend to even out.  Historical data has proven this – and will keep the doomsday prophets at bay.

While the residential real estate market continues to slowly rebound, average national rents have done quite well -  and continue to rise at about a six percent annual clip. It’s possible that  short-term financial upheavals overseas may create a ripple effect of tighter credit here in the U.S., but nevertheless, renters are still going to rent.  As the rental market remains strong, combined with low interest rates on existing mortgages, it makes for an excellent time for real estate investors to be building a portfolio of rental property.

 

photos courtesy of  blogmosaic.knowledgemosaic.com, silverbearcafe.com, infiniteunknown.net, article.wn.com, davidicke.com, chicagolandrealestateforum.com

 

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The FED and you

September 12, 2012 By Leave a Comment

Economics 101

The latest reports from Washington point to an anticipation of new actions on the part of the Federal Reserve System to help alleviate the current stagnation in the U.S. economy.  Currently, chairman Ben Bernanke is looking at the possibility of having the FED pump huge amounts of money into the economy through the buying of trillions of dollars of bonds.  What will the net effect be for property investors down the road if this were to occur?  A brief review of some basics of monetary policy  will be helpful in deciphering this type of investment property information…

What happens when the FED prints money?

One of my early teachers in Economics at Syracuse University was a gentleman named Melvin Eggers.  When I took his upper level class in monetary policy, he had been Chancellor of the university for several years, and because of his “day” job, never taught classes any more.  But he did come back to teach this course, and I remember jumping at the opportunity to learn from the master.   Basically, I considered him the Milton Friedman of Northern New York.

Eggers espoused a number of key axioms about monetary theory that I hold as gospel to this day.  One  tenet was that when the FED prints money to prop up a sagging economy, there will always be a time when the economy has to “pay the piper.”  In physics, I believe the corresponding law is known as “every action has an equal and opposite reaction.”  When the FED prints money to pay for bonds –  the types of bonds that spur growth through accelerated borrowing (for example,  when government borrows to fund the repaving of a highway, or to build or maintain a bridge) - these bonds will have o be repaid overtime.  Just like when you, as a property investor, have to repay your mortgage over a long term – say 15 or 30 years.

Pay it forward economics

The key element of course, is that this source of borrowing has to get repaid.  Eggers liked to joke that businesses grew only though increased borrowing.  Just like property investing.  But, he would add, if you were really into risk and making easy money – just build up your credit –  then use it, and fly off to South America to start your new life – preferably in a non-extradition country.

What a kidder…

The fact remains, when the FED eases monetary policy by pumping trillions into the U.S. economy – there will definitely come a time  somewhere down the road – maybe not in a few years, but within our lifetime, where the rent’s gonna come due.  It’s only hoped that the next generation can shoulder the financial burden.  Right now, it ain’t lookin’ too good.  As can be seen by the fiasco that the Social Security  system  has created.  (And now some plans call for the privitization of social security with a cut-off at age 55.    So much for governmental social contracts. )

Loose monetary policy effects

But loose monetary policy is kind of the same concept.  The central component is that you institute the plan now to help alleviate an immediate strain on the economy, in return for shouldering a lot of pain on the same economy down the road (on the collective backs of the next generation).

So how does this help dictate what you as an individual property investor should be doing right now?  Well, you’ll obviously want to try to grow your business, your little fiefdom of rental properties, utilizing the easy money policies being put into effect right now.  Through these FED actions, borrowing costs for the Central FED banks will be lowered, which in turn will lower borrowing costs for all lending institutions in the country.  The net result of this investment property information is that you benefit – when you borrow – for your next mortgage, for example.

The piper is always paid

Just know that your individual real estate portfolio, while set up to help fund the mid-to long term (like retirement), will also have to “pay the piper” somewhere down the road.  Consider things a very long time away – like when your properties, as part of your overall estate when you die, get subject to all new sets of inheritance taxes that invariably will be passed on to your kids or grandchildren…the next generation.  You may have set it up during this period of easy money, but  as I mentioned above,  there is always an equal and opposite reaction in the financial markets.  Over time, that is.  And you can certainly expect your heirs to pay the price after you’re gone.

Or, feel free to borrow up to your neck in debt.  And abscond to a sunny beach down South America way…

 

photos courtesy of thelastembassy.blogspot.com, declineoftheempire.com, gazelleindex.com, theswash.com, business.time.com, csmonitor.com

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Convention-al Wisdom

August 28, 2012 By Leave a Comment

“Mr. Chairman, you have the floor”

With the start of the Republican National Convention now upon us, it seems like an appropriate time to speculate on the potential effect on property investors should the Republican’s win the Presidency.  I specifically don’t say “if Mitt Romney” wins the general election, because for nearly a generation now, Presidents have been merely figureheads – puppets – of an extensive organization with a platform and a mission.  Political parties’ main goal is to simply stay in power.  The part about doing what’s right (or best) for the country is just dressing.  If you think presidential candidates have some other form of higher calling, like, oh, say…service to the country – well…no.  It’s the business of politics, and like property investing, it’s just another business.

So let’s say the Republicans take this one.  What will the next four years look like for investors? If you’ll excuse the pun, conventional investment property advice will tend to be quite upbeat and positive on this subject.  Not that the concept of lower tax rates for the wealthy is nothing to sneeze at,  putting aside the right or wrong of the issue.  Obviously, high income earners will benefit.  But what will the residential housing market look like down the road with dashing Mr. Romney in office?

Breaking the logjam

I firmly believe a Republican President will immediately break the logjam in Congress.  There has been such a glut of stalled, stalemated legislation over the past couple of years.  With a majority in the House and a newly elected President, I think Republicans will generate a can-do energy, and push through many currently dead-in-the-water pieces of legislation, due to the long-standing uncompromising feud between the Democrats and Republicans in Congress.

So here’s the kicker:  I just don’t think it will matter what the new laws enacted will look like.  Simply getting the business of lawmaking rolling again can’t help but grease the wheels of our economy.  (Social issues be damned, of course…but that’s not what property investing is about, right?)

The housing market will respond accordingly

The stock market always loves action combined with stability in the political arena.  And I think so too will the housing market.  I see a Republican win in November as benefiting the residential housing arena, enough to produce a backdrop of stability – with ripple effects reverberating through the U.S. economy. Job growth will probably continue in its anemic pace – but the notion that SOMETHING is getting done in Congress will have a very positive psychological effect on home buyers.  And that should lead to increased demand, and a slow, but steady improvement in property valuations in most locales throughout the country.

Which means, of course, that any currently held property investments will slowly start to rebound as well – as their valuations increase with less foreclosure properties on the market, continued low interest rates, and increased buying activity.  Sound investment property advice is that it will be a great time to take out new mortgages, as credit markets will also view the increased movement in Congress quite positively, and banks should aid investors seeking new mortgage loans by freeing up increasingly more credit to the industry.

Tough choices

While my politics may not mesh very well with a Republican platform being hammered out this week at their convention, and while I continue to view Mr. Romney as a bit of a cartoon, my thoughts are that the Republican party makes sense for property investors over the next four years.  Which means that I’m going to be having lots of fights with myself over the next three months over what ballot to select when I walk into that polling booth in November.

photos courtesy of live.boston.com, washingtonpost.com, channelguidemagblog.com, abcnews.go.com

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Banco Not-So-Pop-u-lar

May 28, 2012 By Leave a Comment

Don’t invest in a vacuum

Let’s face it – we live in a world-wide economy.  And property investing in the United States requires being cognizant of the potential pitfalls that await us from overseas markets.  It seems like every day there are new, gloomy reports of impending financial disaster coming out of Europe.  The latest news comes this week from Spain, as their banking industry seems poised to collapse.  Banco Popular, as well as Bankia and Bakinter, three of the largest banks in Spain, have been downgraded by the credit ratings agency Standard & Poors.  S & P lowered their ratings to near-junk standards, as these banks have been hit hard by increasingly bad loans, especially mortgages.

In addition, Bankia, which is Spain’s largest mortgage maker, announced on Friday that it required an infusion of an additional 24 billion dollars to stay afloat.  Spain had seized the bank earlier this month, due to the bank’s huge portfolio of delinquent mortgage loans.  The greatest fear is that Spain will not have the ability to raise the funds to keep Bankia alive.  If this mammoth lender were to collapse, the entire European banking community will be rocked to its core.  Of course, the reverberations will be felt here in the states, much like a financial tsunami hitting our shores.

The bursting of their bubble

Spain is currently experiencing the same bubble burst in real estate that began here several years ago.  However, their central government may have waited too late to try to repair the rupture to their economy.  There is a double whammy on the horizon for them:  the genuine threat of a run on Spain’s banks, combined with the government’s inability to raise funds to cover all the bank losses in the short term.  Currently, short term debt is being offered by the government there at a whopping 7 percent in order to entice foreign investors.  It’s a very ugly situation indeed.

Will Germany have to come to the rescue again, as they have several times already with Greece?  It’s looking more and more like a strong possibility.  But at some point, Germany itself will be simply unable to financially take the lead as the main country in helping to bail out weaker European Union countries.  The writing’s on the European wall – and it’s not looking very positive in the long term.

For this reason, property investors here in the Unites States should be extremely concerned about the negative consequences that lie in wait for us.  What exactly does this mean for the small investor in our country and the ability to obtain an investment property mortgage? Will the overseas crisis come to our shores? And if so, when?

The tsunami ahead

As I’ve written before, I think this financial tsunami will occur in some form, and will be making its way over the Atlantic to our shores by late this year. And the net effect for small property investors will be a further tightening of credit. It will be

much harder to get an investment property mortgage later this year and going forward well into next year as the crisis in Europe develops and intensifies.

So the end result is that you should be planning your buys of investment property accordingly. If you haven’t already this year, be sure to speed up your property purchases as soon as possible, and do not wait till the end of the year to try to go out searching for property and locking up an investment property mortgage. By the end of this year banks in the United States will be feeling the crippling effects of what is going on overseas. Banks here will try to tighten their credit in order to ensure mortgage repayments, ratcheting up their standards for lending in the process.  Small investors will be hit with higher FICO scores in order to qualify for a mortgage, as well as much lower loan-to-value ratios on all new mortgages.

A new bottom line

The new bottom line is that it will be much more difficult to increase leverage on your properties. More stringent qualifying standards will apply not only when you try to purchase new investment property by obtaining an investment property mortgage, but also when you refinance any of your existing properties. So your ability to leverage will plummet, and that will mean more cash out of pocket in order to help finance your new purchases. With less leverage of course, you will not be able to grow your real estate investment holdings as quickly. It will also create a scenario where your returns on investment will be substantially reduced as well.

So be aware of all that’s going on in Europe right now.  Banco Popular, Bankia and Bankinter are not merely names of distant lenders – their failure would have far-reaching effects on how you purchase your investment property here in the states.  To protect yourself, purchase and lock in an investment property mortgage now, well in advance of the end of this year. And plan accordingly. You should be planning your next year’s purchases based on the assumption that higher credit scores will be necessary to obtain that investment property mortgage, and your ability to leverage will be lessened. Also prepare for a reduction in mortgage loan-to-value ratios offered by lenders here. This means you’ll have to make up the difference utilizing your own cash on any new investment purchase.

 

photos courtesy of  flickr.com, telegraph.co.uk, economicnoise.com, bloomberg.com, colourbox.com, dmciphilippines.wordpress.com, kelsocartography.com

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Buy Investment Properties Now

January 10, 2012 By Leave a Comment

OK – now the writing’s officially on the wall

With the latest events in the Euro zone, it’s time to flip the calendar, and look at 2012 in a fresh new light. For real estate investors in the U.S., it’s definitely time to hurry up and act by locking in property purchases before (in the inimitable words of Jim Morrison) “the whole shithouse goes up in flames.”  That is to say, before lenders tighten credit to record levels here in the U.S. in response to the coming overseas recession.  I for one see the nasty effects of the European sovereign debt crisis hitting our shores by late this year.

Why am I so pessimistic?

Well, in the past several days European investors showed a high level of concern over the safety of their money in European countries.  They did so by purchasing six-month bills on German debt that carried a small but negative interest rate.  That’s right – overseas investors are now willing to lose a little principal on their investments in the short run just to protect themselves from further economic deterioration, and the potential for far greater losses.

It’s now been shown that Germany, Switzerland and the Netherlands are currently the most stable of all the economies in Europe.  And investors are scared enough to lose a little money buying up debt in these three robust economic countries, rather than take their chances on Greece, Italy, Spain and other European Union countries that are so economically fragile right now.

The latest talks…

Further talks are scheduled this week between Germany and the head of the International Monetary Fund, Christine Lagarde, as well as leaders from France and Italy.  These talks are designed to bring about more consensus on a plan to keep Euro zone countries from seceding from the Euro’s usage.

Unfortunately, the latest economic data shows further leveling off in European Union countries during 2012, if not a complete fall into recession.  In all, it is estimated that European countries will need to raise the equivalent of roughly 2.4 trillion dollars this year just to stay afloat.  Needless to say, it’s a daunting task, given the tremendous fears of overseas investors.

The bottom line for property investors

So as much as I would like to hope for and see a positive outcome from the latest talks, as well as an increased economic stability throughout the Euro zone and European Union countries,  investors buying debt at negative interest rates are just too big a smoke signal to ignore.

Protect yourself.  Buy investment properties now.   Don’t be so concerned with obtaining the greatest, absolute rock-bottom price you can get on your investment real estate.  Just make sure you invest in positive cash flow income-producing properties while you still have lenders here in the U.S. willing and able to offer mortgages.  Believe me, by this time next year, you’ll be sorely missing the leverage you’re able to obtain right now, with mortgage funds that are still available in 2012.

 

Photos courtesy of nmnewsandviews.com, the666.com, eurocoins.co.uk, senegal-business.com,  mediacenter.dw-world.de

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