Investing Strategies for a Struggling Real Estate Market: Sunday Morning Thoughts 09 December 2012

What subprime crisis? Affordable houses are everywhere. (Photo credit: woodleywonderworks)

It should not matter if the glass is half empty or half full, it has something in it.

So in a flat real estate market, how can you make money?

Having control over a property and not owning the property can prove to be a fast way to improving your bottom line, but what about another option?

Becoming the bank, becoming a private lender; some of the benefits:

• You don’t own the property

• You don’t have to pay the property tax

•  You don’t do maintenance and repairs

•  No dealing with tenants

Private lending is a way to be involved with the real estate recovery, but without the risk that a property owner would have.

As a private lender you can invest a sum of money for a specified period of time, at a nice rate of interest.  You do not spend time mowing the lawn, or fixing the minor or major problems, you lend money secured by real estate and collect either a monthly payment or a lump sum after a specified holding period.

Being a private lender is a viable option in a buyer or seller’s market.  A private lender can lend money to buyers and refinance sellers, so it would not matter the type of market, your investment could appreciate.

In our current financial economy, the buyers are looking for money sources since many lending institutions are having trouble with lending.  Sellers are looking for private lending sources to refinance or sell their property.

No matter what type of real estate market, your investment can still earn.

For more thoughts on lending read our other articles.

Private Lending Retirement Investing Part I

Private Lending Retirement Investing Part II

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Home Sales Up Foreclosures Going Up: Sunday Morning Thoughts 22 January 2012

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Home sales ended 2011 with an overall gain.  Mostly due to lower affordable prices, low-interest rates and a better outlook on the foreseeable job market.  It looks as though a real estate recovery is underway.

Homes sales were up but real estate prices were down and with the foreclosure crisis reigniting itself prices are due to go to new lows.  Many of the current sales for homes have been from foreclosures.   Short sales, once the dreaded enemy of many impatient investors is now the vehicle by which many real estate assets have been purchased and at hefty discounted prices for the more savvy investors.

So has flipping properties become a thing of the past?

Not at all flipping in a depressed market is still alive and well, and a well used strategy for many investors.  Only change has been the rules by which a flip can be done, but flipping nonetheless is still a viable practice.  Not all of the would-be homeowners will be able to negotiate with banks for a foreclosure let alone negotiate a short sale.

With more banks heating up the foreclosure pot, inventory is set to rise, more and more real estate deals will be sourced and made by savvy investors and home buyers alike.

But most foreclosures are sold by realtors.

Not all realtors can move foreclose properties, if the area is inundated with foreclosures a confused buyer may fall out of escrow on a few properties before finally deciding which property to close on.

So although the bleakness seems to be disappearing in some real estate markets, it is a matter of time before another cooling period will begin.

Bull or Bear Market, Food For Thought: Sunday Morning Thoughts 13 November 2011

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The day before Thanksgiving many of us will be preparing our homes to receive guests, or making the trek to a friend, or relatives gathering.

But the 23rd of November is D-day for the congressional debt committee.

There are many factors to consider:

Will Greece’s economy fail, causing them to no longer have credit whereby having to move to an all cash system?

What will be the outcome of the Italian issue, and its subsequent effect on the global economy?

There are many questions, with speculations disguised as answers.

The bigger question, what are you going to do about your situation?  Your personal finances are just as important as the global economy because you are a part of that same deteriorating economy. 

What are some of the ways you plan to protect the money you currently have from the future impending inflation, and will you still gain interest on your money?  Will it be enough to either live off of, or will you use it to build for the future?

With the rocking and rolling of the stock market, should you place your money in bonds?  But didn’t the analyst say the bond market is a bubble waiting to burst?

Should you move to tangible assets such as gold, silver, etc.? 

Will futures be the new ‘now’ market for growing an income, or retirement portfolio?

What’s happening with mutual funds?

The answer to all of these questions is everything has a cycle.  Study the cycles and you may be able to predict an outcome.

The stock market currently appears to be in a sideways pattern and with a new cycle starting around the year 2016, but what type of cycle will it be?

Are we in for a Bull or Bear market future?
Only time can really tell.

All bubbles do burst eventually, the futures market may be having gains at this time of the year, and gold’s value is through the roof and moving higher with silver riding its coattails. Mutual funds are currently stagnating, but some will gain with the shifts of the S and P.

Real Estate is still a viable consideration for investing, if done wisely.  The area, growth rate, employment, and expanding or shrinking housing availability are factors when considering an investment property. 

With all time lows on residential and commercial property it would only make sense to have an implemented strategy to invest in real estate.

If you decide to buy a house to rent out, check to make sure other homeowners are not doing the same thing, and if so then how many other homes will be for rent and at what price.

If you decide to invest in an apartment then check to see if there is a shadow market from residential.  If a shadow market exists, how much of an impact will it have on being able to rent your units, and still being able to not only break even on the new investment but also realize a profit?

For which ever investment vehicle you are going to utilize to guard against an uncertain future, ensure you weigh all the pros and cons and make an investment choice which will work for you, yielding you appreciation in the present and future.

Knowing what you know now, would you have invested in the stock market and real estate after the crash in the early 1900’s?

As with all cycles and time, change is always on the horizon.

 

Risk Management Covering the Downside

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When investing in real estate risk comes with the territory, but minimizing risk to a manageable tolerance is crucial.  Some investors can tolerate huge losses while others would find a small loss difficult to handle.  It is a matter of considering all your options and then proceeding from there.  You do not need to have a vast knowledge as a private lender for a possible deal but you will have to make a consideration of many aspects of the deal.

Aspects to consider is the structure of the deal, what is the percent collateral to debt, which position are you 1st or 2nd, etc., and when will you receive your profit.

With the four aforementioned considerations you may be able to limit high risk and maximize profit. Remember the four points are when you initially look at a deal, if these things are not answered the way you want, then you can let the deal go or improve upon the deal to make it profitable for you.

The structure of the deal, how will the property be obtained?  Will it be seller financing and at what percent and length of time?  Will it be bank financing along with private funding, if so then how much bank financing is needed?

With seller and bank financing are you the second lien holder or even further away from the collateral?   Are you the rehab money?  The first lien holder is the best position especially if the borrower goes into default.

These are just a few things to consider when minimizing risk.

The downside would be being the 3^rd or even lesser lien holder on a collateralized note, a property having no to low occupancy (occupancy under 55%), a property with major rehab needed, and a property with poor management.  This is not the end of the list but only a few of the normal problems which can be encountered on a real estate deal.

Of course each one can be covered to help benefit in profitability.

Lien holder position, find out what it will take to make you number one or number two.  Funds necessary may only be the difference in $5000 or possibly less.

Having no to low occupancy; many profitable deals have started that way.  The upside is having new one year leases in a multi family property, or a buyer or a lease option for a single family residence.  In a no occupancy situation, finding the best management company for the area is a great start to a profitable finish.

Major rehab projects may be a time factor downside.  Time of year for weather concerns for certain areas, and or time of investment return.

A property with poor management, the remedy is to find the best management company in the area or build a team for the property.  Hiring people with people skills is the biggest key.  Many companies with less than stellar products may have high sales due to the people skills of the sales staff.  People have a tendency to stay when they have been treated fairly and respectfully.

So remember, covering the downside by taking proactive steps to maximize profitability can result in less risk of investment.

The Rising DOW and Falling House Values

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It seems as though with the raising of the DOW property values are on the decline.  The DOW, even in its unsteadiness, has made more gains over the past few months than real estate.  As long as the DOW maintains its cycle it will end the year with a positive gain.

 But, what about property values?

With the onslaught of more foreclosures and less and less successful loan modifications, property values will continue to decline.  This means you will be finding more and more deals, especially since credit lending is becoming tighter.  Loose lending practices which landed home owners in the current foreclosure mess are now a thing of the past, or are they just taking a break for now.  Our past banking system has taken a bad toll on our economy. 

The economy will not improve until people begin to feel more secure, and lending institutions become more accountable with the extending of credit.  More individuals are continually moving towards using cash only at the registers, and at home are using scissors on the once preferred method of spending.  

Will being a liquid society help the economy to stabilize and have growth? 

Becoming liquid will cause a slow down in the growth of our economy.  How many people are able to buy a car, house, or any other big-ticket items with cash only?  It takes time to earn, and save. 

Does this sound like bad news?  Yes in a way it is.  But if you are able you can take the bad news and turn it to the benefit of yourself and others.  How can the average person extend a helping hand to a snowballing problem?  By understanding the principles of arbitrage whether it be negative, neutral, or positive.  Money invested wisely can make money no matter which arbitrage is present. 

So which is better the DOW or real estate?  Learning to capitalize on situations with diversification is best.

Arbitrage and Real Estate: Sunday Morning Thoughts 14 November 2010

Arbitrage by definition: The practice of taking advantage of a price difference between two or more markets striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.

And there you have it, a way of making money in real estate in a nutshell, now let’s crack it open and see what’s inside.

An example of simple arbitrage and real estate, making money on the difference as a private lender, would be if you did not have the funds but you have a wealthy Uncle with the funds.  The Uncle loans you the money at 2% simple interest then you loan the money to an investor with the collateral being real estate at 8% simple interest.  Not a bad investment.  Your Uncle loaned you the money as a personal loan then you in turn loan the money on a collateralized investment.  The difference of 6% simple interest is your profit.  This is how easy arbitrage works.

Now let’s look at arbitrage with your own credit abilities if the rich Uncle does not pan out.

There are many types of credit you can utilize to perform arbitrage.

Line of Credit from a property you currently own. You use the line of credit which has a low-interest rate then invest in a property as a private lender gaining a profit from the difference in interest.  You can pay a line of credit with the line of credit (read the fine print from your lender to make sure).  You may also have tax benefits, consult an accountant for the specific in’s and out’s.

Credit Offers in the mail, the best ones are the interest free for 12 months or longer.  But be careful to read the fine print, make sure the creditor is not charging a fee for using the credit.  Also make sure the investment you are lending on can be liquidated before the interest begins from the credit offer.  With the use of this type of credit, payments would have to be made, so make sure you can cover the monthly payments with either payments from the loan or from your own source of funds.

Credit Cards you currently have.  Credit card companies send convenience checks to some of their customers from time to time.  Occasionally the use of the check may or may not be interest free for a period of time.  But beware some of the check offers charge a fee, which may be a percentage of the value of the check.

Obtaining a regular personal loan, this may not give you the best arbitrage but as long as there is a difference in interest in your favor then you still have arbitrage.  A personal loan normally will have a specific limit with a payment schedule, so monthly payments are something to be considered.

Which ever way fits your situation arbitrage is a way a private lender can make money in real estate with minimal use of your own liquid funds.  You can make a profit on lending the funds and make a profit on the use of the funds.  So even if you are just thinking about becoming a private lender.

 

Print Your Own Money Invest in Real Estate: Sunday Morning Thoughts 7 November 2010

Investing in real estate can be like having your very own printing press.  First you load the press with the type of money you would like to reproduce, small investment to get your feet wet, or something larger which will make a greater profit.  There are multiple upon multiple ways to purchase, maintain, and have passive income in real estate.  Which ever proven strategy you use, investing in real estate can be very profitable.

Becoming a private lender is a good way to earn passive income without taking a great risk.  The property you are agreeing to finance should already be generating an income to sustain the payment, maintenance, and incidentals.  And the loan to value should not be any greater than 70%.

Real estate investing can be a safe alternative to the volatility of the stock market.  Real estate values do fluctuate but not as much as in the stock market on any given trading day.

Being a private lender you have the security of having your investment being backed by profitable real estate and secured by legal documents.  Documents such as being named as lender on insurances, title, home, hazard policies.  So if the investment should burn down to the ground your money is not lost. 

There are many types of situations and properties a person or persons can lend on.  It could be a Single Family Residence (SFR), multi-unit such as duplex or apartments; an office building, medical or retail, or even a triple net lease.  A triple net lease is for larger companies to occupy a property, such as a Starbucks, or Costco, Jack-in-the-box, CVS pharmacy, business of these types do not always own the building they are occupying.  It’s better for their bottom line and yours for them to lease the property they are doing business from. 

No matter which one or ones you invest in, you would be generating passive income.  What does this really mean; your money is working for you not you working for your money.  The money comes in the form of equity in a property because the loan amount is no greater than 70% of the value of the property. 

The lump sum, quarterly or monthly payment, however you chose, will be a passive income since you do not have to punch in on a time clock to earn it.  And it does not matter if you do or do not show up, what matters, is that you do invest. 

Depending on how you invest, you may receive tax breaks.

So if you do nothing then you will continue to have what you currently have.  If you chose to invest in real estate then you could have a better return than the current money market account, or CD.  Ask yourself, would you prefer to keep your investment money safer in a bank account or CD and earn a possible 1.5% or would you like to invest in the stability of real estate and earn up to 8%.

Each one has a risk which risk are you willing to take.

Invest in American Real Estate: Sunday Morning Thoughts 31 October 2010

In the not so distant past American real estate was hitting all time highs in almost every area.  Today we are seeing all time low’s in those same areas that once had great appreciation.

 

What caused the shift you may ask?

 

Well, unless you have not been living in the country nor have an affinity for American news you would be clueless to the opportunity which awaits you.  With so many foreclosures on the horizon, housing in most American communities has before affordable and profitable again.

 

Buying a foreclosure or pre-foreclosure is one way to make money in this recovering economy.  If you were to consider purchasing a short sale, consider purchasing it all cash which gives you the ability to purchase at a lower price.   Once purchased you could either sell it for a profit to another buyer, or rent it out and gain equity while waiting out the recovery.

 

So let’s say you have a home with equity of $250,000, you could use the equity to purchase a home in pre-foreclosure or a foreclosure.  The equity usage could be in the form of refinancing to cash out or a line of credit.

 

What if you did not intend to own the property but want to still make a profit from this American recovery?

 

You could use a line of credit or the cash out to become a private lender.  Being a private lender gives all the benefits without the headaches.  You lend money; receive interest without ever having to own the property.  Being a private lender is less of a liability position.

 

But also keep in mind when becoming a private lender the money does not go in the hand of the buyer.  The money goes to escrow for a specific property.  This way, you can have your cake and eat it too, without losing in the end.

The Re-Evaluation of Money and Mortgages: Sunday Morning Thoughts 24 October 2010

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President Obama recently asked the Bank of China to reevaluate the Yuan to raise its value.  This would help make the dollar weaker against China’s Yuan, making it easier for America to compete in the world of exporting.  The hope of this strategy is to help keep jobs in the United States instead making it more cost-effective to manufacture abroad.

Sounds good in theory.

If China were to reevaluate the Yuan to a higher value, then manufacturers would probably reevaluate the use of China as one of the many low-cost manufacturing places.  With China’s current booming economy the next back up for manufacturing has been Indonesia and Vietnam.  Companies such as Nike have already moved the bulk of their manufacturing to these countries.

So even if the Yuan were reevaluated to a higher value, this would not necessarily return manufacturing jobs to the U.S.  The cost to manufacture in America would out weigh the product, making it more expensive and harder to afford.

With the reevaluation of money in world markets, one would begin to think of the reevaluation of our current banking system.  The New Reform is slowly taking place colliding with the halting of foreclosure due to paperwork problems.  The process of foreclosure is not halting, but proceeding in court has halted to make certain all paperwork is in order.

Re-evaluating properties in foreclosure has now become more of a problem for the banks, which they did anticipate.  The investors in notes, mortgages secured by property, are now clamoring for a refund.  This is very understandable since they were promised good notes, and not bad notes.

Investing in a good note is the amount you will pay for a note that will later mature and generate passive income.  A bad note is also a good investment but from a different stand point.  An investor would not pay as much for a potentially non-producing note (bad note), when compared to a producing note, (good note).

Law suits are to be expected for the fraudulent selling of notes.  The lawsuits will more than likely make mortgage policy stricter and bolster the use of the New Banking Reform watch dogs.

So, how can an Investor profit from all this Bad News?

Well, opportunity is knocking, purchasing non-producing notes at a deep discount and acquiring the property for resale.  Purchasing producing notes, at a deep discount because other investors might not want to deal with the banking issues to come; and then profiting from the passive income generated by the note.

The DOW 12,000 Get Ready

 

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The DOW is poised and ready to hit 12,000 before the end of the year.  There are many things, including the current cycle, which factor into the greening of the stock market.  Don’t let today fool you.

The weaker dollar (read “What IS the Value of Money” blog post) the fed’s lowering interest rates to historic lows-cheap money if you can get it-, unemployment not changing too much, and the halting of more than one million foreclosures.  All this is more attractive to domestic and foreign investors.

How will this impact America, an improving recovery.  The recovery will still stay slow but the pace will pick up a little bit more.

The real estate market will also benefit with the halting of many foreclosures.  This will be a false positive improvement for the real estate market.

The foreclosures are only halting to perform a final check of documents before going to the judge for court approval.  So the process of foreclosure will continue but will stop to ensure there are not any mistakes or oversights.

It only makes sense for lenders to do this; it is already costing the lender legal fees to start the process of foreclosure.  To go to court only to have the foreclosure rejected and then have to check paper work for inaccuracies and then return to court to take another stab at it, is only costing money and time, neither of which is currently in great abundance.

Investors can leverage all this new information to increase their portfolio’s value.  Remember there is still an avalanche of foreclosures on the horizon and money is cheap but hard to get.  So, investing in real estate will prove to be the best investment in the long run.