So, should I be concerned if trying to buy, rehab, refi, and rent?
I am have it refi’d for more than it is worth.
If you want to survive the next few years, you should be thoroughly educated about your ocal market. Obviously, anything you buy should be purchased at a BIG discount. I certainly would not refi anything for even close to what it’s worth. Personally, I’m below 70% LTV on all my properties.
Mike
Thanks.
Sorry, I guess I’m having a typical Monday Morning Moment – does “below 70% LTV” mean you have at least 30% equity in each of your properties?
YES
Hey, thanks.
I’ll second that motion! I’m in a couple of different markets and I have positioned myself to ride out at least 5yrs of really crappy market (i.e. keep fianancing structured such that payments are very manageable even with vacancy, no re-fis need to get out of trouble, etc). However, I think some really tasty deals will come about in the next 12+ months. The trick is to have patience to wait for this thing to completely unravel.
When things go bad someone always gets screwed/loses money…as long as you’re smart it won’t be you. Profit off the stupidity of others, if there is anything in life you can count on its that someone will do something stupid. 8)
Propertymgmr…even though I am leveraging these properties, I still have about 40% equity in these properties. I just got them at great prices and pulled money out of them. Most are about 65%LTV right now, so if market declines, I still have equity. Will market decline 35% in 2 yrs, I doubt it…If it declines 10% in 2006, I can still sell it with 20% equity to end user and still have made money really…
I don’t believe in market cycles. Maybe history shows some type of pattern but it’s not a magical cycle that just happens. There are numerous economic factors that apply to local, regional, and national markets that can never be graphed with any certainty. It gets to be too much like stocks when you start making predictions based on graphs.
Plus real estate markets dont operate like stock market. The stockmarket has a different type of control on the economy. In real estate ,each area is different. Remember so cities never saw growth at all or less than 10% during the boom.
It doesn’t matter whether anyone believes in cycles or not. They are a fundamental of business and they do occur. They are not “magical” in any way. They are simply a result of the shifting of money that results from greed and fear (pain).
Here’s what has happened in the real estate market. First, the stock market crashed and millions of investors lost a lot of money. These people will remember this event for years if not decades. These investors were looking for somewhere to make some money. Real estate became the next get rich quick fad and millions of people started throwing their money at real estate. For a period of time (prior to 2006), you could pick a property by throwing a dart at the real estate section and almost be assured of making money. It got so ridiculous that people would stand in line for a chance at a preconstruction buy in Las Vegas. After 5 years of this pattern, the supply of irrational newbies has dried up and the supply of properties is greatly increasing. Prices are just now starting to drop due to the decreased demand and will take 2 years to reach bottom. (It happens every time). Millions of newbies will lose a bunch of money and they will remember it for years or decades. That is happening right now. This entire cycle has repeated itself many times in the past.
Yes, the real estate market is different than the stock market. For one thing, it is much slower. For another, property will not lose all of its value like individual stocks do. However, for those that are highly leveraged; that don’t have reserves; that don’t run their investments like a business; that don’t understand the real costs; that count on appreciation; etc - those people will all be out of business and will lose a bunch of money.
You can pretend that business cycles (the real estate cycle) don’t exist, but that doesn’t change the facts.
Good Luck,
Mike
Good perspective on things Mike…
I thought this article on interest rates also give a good take on things:
http://recenter.tamu.edu/tgrande/vol13-3/1781.html
-Mike
Real estate as an investment and real estate for retail buyers are two separate things. The reason housing has slowed down, as it must, is because the rapid appreciation exceeds household income.
All bets are off if the military decides to build a base in your town or GM decides to build a plant. Or a natural disaster destroys the whole state of Florida and suddenly millions of people need a place to live. These are things history can’t predict. These are the real conditions of a real estate market. To say all of the countless other conditions of a local real estate market line up everytime in the right place time after time to form a cycle is crazy.
If a new law in China is passed to allow toddlers to work in sweat shops, suddenly the price of most goods are lowered and people have more money buy a bigger house in America.
The only reason why real estate markets and all other markets flucuate is because of external factors. There is only so much value in the world, just like matter (Global GDP/ Global Population). Value is neither created nor destroyed but simply changes form. In an ideal world economy, their should be no growth. For every dollar more you have, someone else has a dollar less. It’s the external factors that make the money change hands. Maybe after studying graphs you can find a pattern but the forces that change markets are individual, not a reoccuring phenomenon. Predicting real estate markets is nothing more than an educated guess. Lucky for us, like you said, real estate moves slow enough that nothings a surprise.
Could you elaborate on this (running investments like a business)?
Also, would you agree that the real estate boom from 2001 to 2005 had a lot to do with the Fed slashing rates after September 11th?
Beem,
There are two types of real estate investors; those that treat real estate in a hands-off manner (like a stock) and those that operate a real estate business.
Many people errantly believe that you can put up a little money and with no effort make a lot of money. These “investors” usually have only a very few properties and have more of a forced savings plan than a business. By “forced savings plan”, I mean that they are in a negative cash flow position (although they may not realize it) and must come out of pocket to keep things going. A great example of these people are the California investors that have bought out of state rentals by the thousands. The VAST majority of these “investors” are losing money. In my area alone, there are dozens of California investors that are now motivated sellers!
The other group of investors are those that realize that real estate is a business and all of the principles that apply to any other business also apply to real estate. This is true whether you’re operating a rental business, rehab business, wholesale business, or anything else you can think of. The big difference between those that are running a real estate business and those that have a forced savings plan (or a failing REI hobby) is whether the investor is accounting for all expenses. To stay in business, you must allow for daily operating expenses, capital expenses, and non-recurring expenses.
If you buy almost any “guru” course or attend almost any “guru” seminar, they will paint an overly-optimistic view of REI. They do this by underestimating the work involved and underestimating the costs involved. For example, nearly every “guru” uses the same formula to calculate cash flow for rentals: gross rents minus principle, interest, taxes, insurance, maintenance allowance, vacancy allowance, and management equals cash flow. That sounds great! Unfortunately, it is blatantly wrong. The “gurus” either don’t know any better or they are intentionally misleading their “students”.
Real expenses include legal fees, office expenses, gas for your truck, eviction costs, court costs, lawsuits, telephone expenses, advertising, damage caused by tenants, replacement of roofs and major appliances, exterminations, vandalism, and much more!!! If you have more than a few rentals and are in business for any period of time, you will have each and every one of these expenses! Failing to account for these expenses will result in failure of your business. This is a major reason that 80% of new businesses fail in a short period of time!
On the other subject, yes I do agree that lower interest rates was a factor in the recent real estate boom, although certainly not the only factor. Other factors are overly-lenient lending practices, an influx of disillusioned stock market investors, REI becoming the latest fad, timing of the normal real estate cycle, etc. Rising interest rates are likewise a factor in the impending RE bust.
Mike