I'm Scared

Financing, Hard Money Lenders, Private Money
1

The more and more i want to invest in real estate, the more and more i get scared. Scared that I will fail; that I will go into debt or the the house will burn down the second I purchase it.

Hard money lenders scare me because I’m so use to bank financing, it just seems like they are out to rip me off.

I have so many questions, the more I research, the more I read various books, the more questions I have.

-I dont know why I wanted to write that, I just need some reassurance from people who know the game, I guess.

I’m only 20, jobless, and in school fulltime. So getting a loan from a bank is pretty much out of hte question, my mom said she will co-sign for me, but will that make a difference?

2

Sounds like hard money lender is the way to go for you. Realize that any lender is out to make money off of you. That’s what they are in business to do. The amount they make is related to how risky you are.

Sure, paying HML rates will cut into your profit. They also offer you the chance to get properties quickly though that you’d otherwise miss due to timing. As long as you calculate the cost of the HML lender into your cost and can still earn a return you find acceptable then you do it.

You have to realize that you’re making money using their money. Without their money, you wouldn’t make anything. They are risking their money, so they want a return.

3

Your scared??!?

I’m in the business on the finance side at that… I’m out of school and still have school loans that need to be paid off.

You want something to be scared about??

Google:
“Iran Oil Bourse”
“Petrodollar recycling”
and
“International Capital Flows and U.S. Interest Rates”

…Whew…

After you’ve done a little internet research sit back have a glass of wine…smoke a “J” and think about why someone else who is already in real estate is scared :o

4

Mark,

I knew there was something about you that I liked even though we have never met…

Marcus,

Life is what happens when you are “planning” other things. Just do as much research as you can, look for a mentor in your area who will take you under their wing, and like nike says “just do it”. Good luck and happy investing.

5

No one said you had to jump in head first. Keep reading and take your time. Learn the markets in your area like you did your own neighborhood when you were a kid. Know every alley. Go to open houses and walk thru as many properties for sale as you can.
Run Cash flow sheets on investment properties to know if something would cash flow before you ever write offers.
Relax, you have all kinds of time. Start slow and do it right and you will never be sorry.
When you do get a job and are ready to make the plunge, why not start with you buying a duplex and live in one side to get the hang of how a rental would work out for you. Then move out when you are ready, rent the other side (now you have two units with income) and buy yourself a primary residence.
I hope this helps.
:beer:

6

4EEM

WOW I google searched those keywords. AMAZING.

Do you think we will see major things happening in the next 6 months or father down the road? What are your thoughts?

7

4EEM,
I’ll second MoneyLenderP’s comments. I consider myself extremely well read and current but Holy God, it really is a Jihad against Western Civilization, according to these articles.
Being from Texas and almost raised in the oil patch (my dad was a oilfield engineer) and knowing the capabilities we have here in our own country; these articles not only infuriated me but chilled me. Makes me think the Cold War isn’t really over. I cringed back on New Years 2000 when Putin took over. It looks like this may have been his plan all along. Didn’t his country back Iran against the US and Iraq? They lost, the Iron Curtain came down. As I recall, he kind of laid down after he took office; which I found extremely odd for ex-KGB. But, they were granted UN Delegate status soon after. And they adopted the Euro, how convenient. I trained in SF against Soviet Psy-Ops. I always smelled something fishy there…
Oil-Time to pi** off Greenpeace, disrupt the caribou herds and tap into Alaska. With our typical and much abused American generosity, the rest of the world seems to have us exactly where they want us, economically and militarily. Back in the Reagan era, we were poised to fight one major conflict and 2 brush wars. Today, we have barely the means to relieve the troops deployed.
May LBJ rot in hell for repealing JFK’s attempt to put us back on at least the silver standard to make our currency worth something. As it stands, our currency is based solely on the future economic output of our citizens. Future economic output has long since been outsourced to the Pacific Rim et al. What is our currency based on?
How does this relate to real estate, some might ask? Weakening of the US Dollar causes a rise in interest rates to combat inflation. (We’ve seen several consecutive quarters of increased rates) Too many folks/investors have ARMs which will ultimately adjust to prime (increased) plus points. Which will lead to first, IMO, the crash of overvalued markets like CA (5th largest economy in the world), FL (already plummeted by hurricanes and a glut of irresponsibly made ARM’s for underqualified buyers) followed by a rash of foreclosures throughout the nation for anyone that bought into the ARM hype.
Thank you for somewhat validating theories I was contemplating. I’d truly appreciate it if you would expound on these subjects, and don’t be bashful about disagreeing should you feel the need. My hat’s off to you and again I thank you.
Regards,
Dave

8

Your lucky I got into the office early this morning and have some extra time… :wink:

I hope your prepared for a long tirade. ;D

My $0.02 on where interest rates are headed

In the next 6 -12 months I expect the 30 Year rate to be between 6.95% and 7.125%…This calculation does not take into effect any major geo-political events and discounts the success of an Iran Oil Bourse. While major geo-political events add considerable volatility to the market it is hard to say what affect any one event would have on long-term U.S. interest rates.

If there is a run on the dollar in 2006 I would expect interest rates to range between 7.75% and 8.50% on a 30 Year Fixed mortgage.

I expect a growing number of foreclosures as early as spring, but I expect them to really pick-up in winter on 2006/2007 as higher interest rates find support, property taxes in particularly heated markets are reassessed and home heating bills again reach record highs.

The current danger in my opinion

In the last year I’ve originated a large number of I/O, Adjustable Rate Mortgages (and Pay Option ARMS) with LTVs generally above 95% to stated income borrowers. In many cases these borrowers’ actual Debt-to-income ratios are 60%+. Keep in mind that the DTI ratio used by lenders does not take into account; utilities, gas for vehicles, insurance for vehicles, health insurance, groceries, child care, or local, state and federal tax liabilities!

Example:
In July of 2004 John Doe purchase 123 Main Street for $150,000. The property taxes are $100/month and the home insurance is $50/month. The average annual utility bills total $1,500. The borrower purchases the home 0% down on a Two-Year ARM with a start rate of 6% and a principal and interest payment of $899/month. The PITI payment is $1,049/month. John Does gross monthly income is $2,700 a month and his FICO score is 720. He has a car payment of $250/month and other monthly liabilities on his credit report of $140/month. His DTI is 53%…two high for the 100% financing at the rate he desires so he goes “stated”. John closes the deal…. Did I mention John is a single father of two?

Let’s look at the real numbers (2004):
GROSS Income: $2,700/month
Principal & Interest: $899/month
Taxes: $100/month
Insurance $50/month
Credit Cards: $140/month
Car payment: $250/month
Vehicle Ins: $50/month
Groceries: $300/month
Utilities: $125/month
Gas: $120/month
Misc. $200/month
Remainder $466/month
……Oh wait….I forgot….Johns employer withholds 20% of his paycheck for taxes, Social Security, etc.
Adjustment: $540/month (don’t worry since John is obviously poor his taxes will be refunded at the end of the year)

Actual Remainder -$74/month

So, if John’s actual cash flow is negative what does he do to get by? That’s right….He charges it!

Now let’s look at the numbers for 2006 and let’s assume that:
A. John was a real asset to his company the last two years and they increased his pay by 15% over 2004.
B. Taxes increase by 10% since John bought the property…after all it is a hot market.
C. Insurance stayed the same.
D. All that charging over the last two years and the new BK laws increased John’s monthly min payment on his credit cards to $275/month
C. Johns car in still 2 years away from being paid off.
D. Johns vehicle insurance has remained the same
E Due to higher transportation costs johns grocery bill has increased by 15% over 2004
F. John’s average annual utility bill has increased 30% over 2004
G. Johns monthly vehicle fuel bill has increased by 20% over 2004
H. Johns misc. spending has stayed the same.

John’s income has increased by $405/month…$324 after taxes.
John’s expenses have increased by $251/month…
Now John only has a net monthly negative cash flow of $1.00….But wait we forgot about that mortgage.

People like John don’t pay taxes. People like John have no chance of saving for retirement. People like John face total financial ruin should they no longer be able to finance their personal deficit spending with their homes….People like John are EVERYWHERE!

What I think it means for the Real Estate Investor

  1. Energy efficient properties located close to major employers (preferably exporters) in urban settings are great buy-hold investments.
  2. High LTV ARM’S should be avoided at all costs…unless it’s a buy-flip with a hold time of less than 6 months.

I think a lot of the “First Time Homeowners” and “Newbie” real estate investors from the last 3-4 years are going to be renters. This is great for buy-hold investors who bank on cash flow, NOT APPRECIATION.

The caveat is this: If you agree and you think energy costs are going to continue to climb as well as core inflation does it makes sense to own properties where your renters have to commute a ½ hour + to work everyday? DO NOT include you tenants’ utility costs into the rent!

I’M NOT A “BUBBLE HEAD” BUT I AM WATCHING THE MARKETS WITH GREAT INTEREST/CONCERN THESE DAYS.

9

That has to be one of the most lucid, concise and immaculately researched reports I’ve ever had the pleasure to read. I concur wholeheartedly. I think your true calling might be as a national journalist/research analyst. I stand humbled before greatness…BRAVO!!!
Where are you at in the country? I feel the need to buy you a beer or two or dozen. Well done, sir…
Regards,
Dave

10

First off I dont think the Iran oil bourse will go into effect. I do not think they can get it up and running. Their system is in a shambles. China holds a lot of our debt but they need us, as we are what keeps their economy going since all of our products are shipped from there. We do need to bring manufacturing back to the united states, get rid of attorneys or at least their ridiculous lawsuits so business can do business without having to worry about litigation for every little stupid thing that people dont want to be responsible for in their own lives. Our economy is pretty much fluff and by this I mean service oriented. The labor unions ask for too much which is another reason businesses leave the country. All of these doomsday scenarios have been around for a long time. Poeple were still making money in real estate when carter was in office when interest rates were sky high. We do need to wean ourselves off personal debt and congress needs to cut spending on things as cow farts and why catsup flows slowly out of the bottle as well as many other silly projects they have going. John Kerry and Ted Kennedy need to keep their mouths shut but thats a different story. Anyway dont let the doomsday scenario stop you from your dreams. If the future ever gets to the point of these terrible scenarios it would not matter anyway because everyone will be in the same boat. Dont let that stop you.

11

I have to give all the credit to The Ohio State University… ;D
I paid my way through school as an independent contractor working on rentals in the university area.
I still live in Columbus, Ohio.
…and yes, I work on the barter system at times and payment in beers is not uncommon and much appreciated. ;D

In the interest of full disclosure I will say that a lot of my personal insight into the markets has come from the FOREX market. I trade currencies to hedge my income. The FOREX market is the largest and most responsive market in the world almost 2 Trillion in transactions a day! The “squawk” on the FOREX market is a great indicator of how the world views the US market. Keep in mind that foreigner investors are the primary buyers of US treasuries and Mortgage Backed Securities.

Im going to be doing a good bit of travel this spring. If our paths cross I’ll definatly take you up on the beer offer.

12

The Buckeyes, right? I was born on the shores of Lake Erie in Sheffield Lake, Ohio. Never spent any time there since my dad was drafted to the oilpatch in Texas before I took my first steps. Seems like I missed a good college, though (could be premature sorrow since I haven’t met another alumni ;))I was in financial services and in tune many moons ago but I’m glad we have a brain trust working through our networking on this board. I’m out of Albuquerque, NM. Look me up anytime you’re in striking distance, cold beers on me…
Regards,
Dave

13

I agree…Asia has been the major buyer of US assets and are very much responsible for the currently low rates.

I also agree that the Iran Oil Bourse if going to meet a lot of dificulties.

My outlook on 2006 is not based on Asia selling off all thier US assets. If they do than thier exporters take a major hit and thier govt does not want to see that happen. I also have not factored in a sucessfull Iran Oil Bourse. The odds are higher that we will go to war with iran before that happens.

In the Mid 1990’s Allan Greenspan cautioned against what he called the “irrational exuberance” he saw in the stock market. The same could be said of the real estate market today.

I can’t think of any time in history when real estate was a bad investment. But, by same token the market is a zero-sum world. The gains of some come from the losses of others. In the last couple of years there has been an “irrational exuberance” about the real estate market and the fundamentals have been ignored or just given token acknowledgement.

It’s my personal opinion that a market correction is comming and it’s my professional opinion that this is good for the the serious real estate investor who never ignores the fundamentals.

In the broasist context we are all in the same boat. Something need to be done about this countries twin deficits and partisan politics will only exasperate the problem. Two address these major issue americans must come together and once again become respected world leaders in this new global economy.

I don’t want to discourage anyone from investing in real estate all I’m saying is if you are concerned about a “real estate bubble” than don’t get caught in a bubble and discount the global markets effect on real estate.

14

You bet…I’m going to headed to Texas in the first week of march.

15

beautifully stated 4eem. No matter how much the middle east or even the east wants to do us in they know that if they do they are also doing themselves in. We will not allow the oil bourse to go into effect. We will go to war with iran before that happens. That is a matter of national security in itself even though I dont think iran could pull it off anyway.

16

:-\ It’s a catch 22. It is definatly a matter of national security, but you can’t sell a war to the american people based on “a threat to the dollar” and other peoples in the world know exactly why we are going to war and when we tout the ideals of freedom or the threat of nuclear arms, etc. it makes us look like hipocrates and undermines our credibility. On top of that war is not cheap is the world willing to finance us further?

It’s definatly a head scratcher.

17

yes its definitely not a good situation but it also just so happens that irans radical president is rearing his ugly head at just the right time with the nuclear weapons fiasco so there you go. The world will back us on this one. Although I really think Israel is going to do the dirty work for us. That remains to be seen.

18

As an ex-military man formerly involved in high level planning and operations, I have to speak out here. Our
military isn’t staffed nor equipped for another conflict. Back in the military’s good old days (Reagan era) we had it going on. Clinton stripped the military to the bone. We still haven’t recovered. Under the old Warsaw Pact model we once planned ops against, we had the required resources. After the fall of the Iron Curtain, we focussed on the economy under Papa Bush. . Then we decided it was smart to dismantle the military (remember DON’T ASK, DON’T TELL?) under Clinton. Most of the true warriors bailed out, myself included after 8 years, We saw the writing on the walls that we wouldn’t be allowed to fight to our capabilities. Schwarzkopff, through his genius, proved us wrong. Point is, Reagan built a Special-Forces type militaty that everyone knew was the best in the world and could stand at 6-1 odds against the enemy. Troops like me could competently perform 5-8 different jobs. Sadly, we’re reduced to sending female truck drivers into harms way ala Jessica Lynch. Now we’re looking at fighting two major conflicts simultaneously. I pray we have a traditional war with Iran. Enough of a diatribe over the military. God bless the troops.
Dave

19

Hi David, thank you for your service to our country. I dont think we can thank you enough. My father was a marine in the early 60’s. In regards to the military you are right equal rights has nothing to do with war. Are woman different than men? Of course they are, they dont belong on the battlefiled. All of this started back in the 1960’ s which are now the people running our government, John Kerry as an example. If we do go into conflict with Iran I believe it will be air only just to knock out their nukes. Remember dont vote for hillary in 2008 she will further dismantle the military and instead throw some flower power at them. Again thanks for your service and God bless you and your family

20

I agree China is the real key. They are the biggest purchaser of US debt. They need us though because we buy their goods. As long as the cycle contintues then rates stay low. Fannie Mae is how we bundle up mortgage debt and sell if off as bonds. Their latest bond offering details are:

Pricing Date January 18, 2006
Settlement Date January 20, 2006
Maturity Date February 15, 2011
Issue Size $3.0 billion
Coupon 4.500%
Price 99.542
Yield 4.603%

As long as investors are willing to buy the bonds at 4.6% yield then mortgage rates will stay low. The problem is when investors stop buying the bonds on the secondary market.

Also, most of the mortgage bonds are now 5 and 10 year bonds. That helps keep the yields lower vs. a 30 year bond which keeps interest rates down. That’s relying on industry data saying people usually sell their home or refinance every 7 years.

The beauty of that for the mortgage industry is home owners have mostly paid interest over those 7 years. They get almost the full principal back. If inflation stays low they make a killing. If you take a $100k loan at 6% over 7 years you pay $40k in interest and under $11k in principal. Overwhelming what you pay goes right into their pockets as profit. They want people to sell or refinance often.