News Flash: It Ain’t Happening!
rules of economics didn’t apply. These neophytes jumped in with both feet and paid a heavy price when reality returned to bite them. The answer: hopefully never. Like many investors, lenders were caught up in the hype and loosened credit standards in ways that were previously unimaginable. It wasn’t that long ago when you actually had to have a down payment to buy a house. In their haste to originate loans, lenders allowed people to buy without putting in any of their own money. When the market slowed it was very easy for people to walk away from houses that they had invested nothing in.
Answer: don’t hold your breath. Stated income loans were originally designed for the self-employed borrowers who had a difficult time verifying information. The paid the price for the convenience in the form of higher rates and fees. Somewhere along the way these loans became fairly routine and just about anyone could get them at rates that weren’t much worse than full documentation loans. These so called fog-a-mirror mortgages were a huge contributing factor in the meltdown of the real estate market. People who can’t afford to pay shouldn’t be allowed to have a loan, it seems that this logic was cast aside in the market euphoria.
Appreciation Is Not A Birthright
The cost of liquidating real estate may be as much as 10% when you factor in sales commissions, transfer taxes and other selling expenses. That means that a property has to appreciate about 10% just for you to break even on your investment. Let’s say you didn’t do your homework and paid 15% too mush when you purchased the investment. That means you will need a 25% gain just to get back to where you started. In this environment you could be waiting a very long time.
Reality
Investors need to accept the fact that a new reality is upon us. This new reality is very much like the reality of years ago. You need to make sound investment decisions and have a plan that isn’t a get-rich-quick scheme. Multitudes of people have become fabulously wealthy in real estate. They didn’t get-rich-quick, they did it the old fashioned way – hard work.
It’s true hard work never killed anybody, but I figure, why take the chance?
Ronald Reagan
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Article Author: Richard WarrenRichard has written 179 articles for us.
Visit Richard's Website: http://www.rehabberseye.com
Joshua Dorkin
{ 5 comments… read them below or add one }
In my nearly four decades of real estate investment brokering/investing there’s only been one short window of time I’ve ever advised a client to purposefully get into negative cash flow.
During the 80′s when Reagan gave us 15 year depreciation schedules. This made the 5% of investors making big money pretty big winners too. Remember, back then there was no ceiling on the amount of annual depreciation used against ordinary income.
This resulted in massive increases in after tax income, and in some cases a nearly 90% reduction in income taxes paid. Their choice back then was to pay the ‘cash flow’ into the black hole of the IRS, or into an appreciating asset. This strategy produced incredible results as long as the investor was in the highest tax bracket fed & state.
Alas, this short window of time in history is indeed the exception that proves the rule. Don’t intentionally invest in negative cash flow unless you know in your heart you can turn it around quickly into some black ink.
The idea is to remain as far as you can from the cliff’s edge — not how close.
As far as I am concerned, buying a rental property is like starting a business. Most businesses lose money for the first few years before they build momentum, and often take large amounts of capital to survive that period. Anyone getting into the rental business needs to be prepaired to go the distance and survive that inital first few years while they are building up a portolio that will eventually pay off. Far too many new investors get into the game and dont properly estimate the commitment to the rental property business.
No money down mortgages were one the dumbest products lenders ever offered. They were basically lending money to people without much concern that those borrowers had nothing to loose when they decided to stop sending mortgage payments. Can you say foreclosure? Now that’s a rocket science!
No money down = walk away mortgage. What were the lenders thinking! Actually I get guys trying to borrow 1 million + with no money down on a daily basis. Put some skin in the deal! Everyone these days wants something for nothing…and fast too!!! It’s the Mickey D mentality.
I agree; easy money is gone. But, only gone for now. We have seen cycles like this before and, I’m afraid, we will see them again.