Rates are Falling Again
Wednesday, April 30th, 2008Recent Fed Rate Cuts are music to my ears. In my estimation, the Fed increased rates far too swiftly and far too high over the last couple of years. Today’s rate cuts bring us back to the lowest level they’ve been since December 2004. Recent talk of recession and mounting foreclosures have induced the Fed to cut rates at a rapid pace. Whether you’re a homeowner with a home equity line of credit, or a commercial borrower who floats with a Prime based product, you will save interest costs as a result of these recent rate cuts. Investing in this market has become incredibly exciting. I have purchased several homes lately as the perfect storm of Falling Rates, Falling Prices and Increasing Rents has forced my hand. If you’re not buying now, you’re almost certainly missing out. The “bottom” is difficult to gage, but I have to imagine that my experiences are an indication that the bottom is here, near or passed us. A recent up tick in the amount of competition for these units has signaled to me that investors are nearly forced to take advantage of these incredible opportunities. Many investors who were unilaterally focused on buy/sell or “flipping” crashed and burned. For those of us who realize that successful real estate investors own (and hold) real estate, this has been an incredible opportunity. If you consider the following, you will see why I have always done extremely well with real estate in both “good” and “bad” markets.
“Bad Real Estate Markets” are largely caused by Interest Rates Increasing = Prices go down, Rents go up
“Good Real Estate Markets” are largely caused by Interest Rates Decreasing = Prices go up, Rents go down
In good markets, I can sell projects that I’ve purchased previously and generate profits. In bad markets, rents typically increase in collaboration with interest rates dropping, which results in better cash flow. Either way, as an investor, money can be made in either “good” or “bad” markets.
There are some qualifiers that allow this process to work for me, and should help guide anyone buying investment real estate.
1. I buy low end real estate - I have 2 nice homes…both are for personal use. I have 18 other homes ( I have had as many as 31 at one time) that are all valued under $250,000, most of which were purchased around $100,000. These homes are generally in Aurora, Elgin, Joliet and Dekalb.
2. I rent the properties out - With rentals I’m able to cash out (refinance all of my invested capital, often creating even more capital at my disposal) and cash flow, which allows me to utilize the banks money rather than my own. Another key to my success is that I take advantage of the taxation surrounding long term capital gains. Much of my income comes from the sale of homes I have purchased previously. This income is taxed at 15% rather than my ordinary income tax bracket.
3. I don’t get emotionally attached to homes - When I want to sell a home, I simply price it right and sell it. I don’t argue with the market. I don’t demand a price. I simply take what I can get. With that being said, I also don’t “need” to sell anything. If I “need” capital, I often borrow from my portfolio rather than selling my portfolio.
4. I have multiple income streams - Many folks wonder why I broker these homes, rather then buying them myself. I broker 100 - 200 homes per year. There is no bank around that will lend me $10M - $20M. They will however lend me several million. When I reach their lending limits or comfort level I focus on brokerage. My brokerage business is a lot like many of my investor’s full time jobs. Real Estate is likely a 2nd or 3rd profit center for most investors. For me I need both Brokerage (Income for the Banks) and my projects. My typical project yields me 5 to 10 times what brokering a project yields me, so it is advantageous for me to actually own the project rather than brokering it, however there are limitations to my purchasing power. This is one of the principles that has kept me successful. I never stopped “working” simply to invest. A key here however, is that I’ve also never stopped investing either.
5. I have stayed with what works - In 2005 many of my peers started building homes and focusing on high end real estate. I’ve never built a home, although originally I wanted to become a custom home builder. I did not however do this because the risk was not justified. I could buy a lot for $175K next store to my home, general the project, build the home for roughly $100 - $125/sq. ft. 4500 sq. ft. later I’d owe $625,000 - $740,000 on a home that is not rentable. That same $625,000 could be used to buy 6 or 7 rentals, that would almost certainly yield $7,000/mo. in rental income. This safety net of rental income provides me incredible security. At the high end of the spectrum, you are limited to selling the home. Having a plan B is priceless.