Freddie and Fannie stuff scaring me - what to do?
Member since 2008 · 155 posts · 2 votes
what does this government bail out mean to us? Should I put a hold on looking at property? Should I stop trying to pay down my house? Should I consider pulling out the 25k+ equity i have in it already? What do you all think???
I am:
Paying off debt
watching the banks I have money in
saving money
paying extra principal to mortgages
not borrowing money
The less debt I carry I figure it will help the banks, and yes I want to be responsible and also own my -property free and clear one day.
It's not a good time to sell our personal residence if you don't have to.
It's probably a good time to take out a fixed rate mortgage. Rates are still low, and if the inflation rate gets out of hand, which I suspect is very likely, you will pay back that mortgage with cheaper dollars.
Buy physical precious metals. Buy guns and bullets. Cash is king (though subject to debasement by our elected officials and central bank). Long term food storage is always a good idea along with a good water purifier. Avoid debt. Buy real estate for investment purposes only if it makes abundant sense without factoring in any appreciation. Assess what is truly important in your life, what you need not what you want. Standard of living in the US may very well be in line for an adjustment downward, be prepared.
Am I a pessimist? I'd say realist given our present circumstances. The **** has only begun to hit the fan, we've got a long way to go. And here is a little nugget of insight often attributed to Alexander Tytler but unsubstantiated:
A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.
The average age of the world's greatest civilizations from the beginning of history has been about 200 years. During those 200 years, these nations always progressed through the following sequence:
* From bondage to spiritual faith;
* From spiritual faith to great courage;
* From courage to liberty;
* From liberty to abundance;
* From abundance to complacency;
* From complacency to apathy;
* From apathy to dependence;
* From dependence back into bondage.
Holding a large amount of equity in your home, all the way to free and clear, amounts to that money earning you 0% in financial gain. Your home will remain a liability even when you own it free and clear. (Taxes, insurance, maintenance, utilities are all liabilities) Why not put that money into an income producing asset?
I'm borrowing as much as I can, not making any pre-payments on my mortgages, buying as much RE as possible. When this inflation really kicks in I want to have as much mortgage debt as possible. :mrgreen:
As to is is scaring me? Absolutely not, it's getting me excited!!! I'm thinking in the near future I'm going to be completely swamped with work to do because the opportunities are going to be so outlandish it'll make your head spin!
-Michael
The bail out means that taxpayers (you and I) will be paying this debt for generations to come.
Instead of paying down principal I have leveraged what I can from my properties and put it in other investments almost all real estate based. Don't do this blindly as there is risk involved. Be sure you can afford your payments and be educated about the structure of your mortgage. The last thing you want is an adjustable you cannot afford and all the sudden be another foreclosure.
I believe Cash is King and dormant equity is wasted time.
I've read the arguments for and against owning a place outright/paying down the mortgage/carrying for the long term. The points are valid for some, but I don't think I fit into those situations.
I'm pretty small time still. When the numbers aren't that big, I don't think it always makes sense to carry it for the long term. But the mortgage is still my largest payment each month, so it's actually more of a nuisance since I know I can get it out of the way. When I do that, I'm not paying interest on the principal that I'm no longer paying, and saving much quicker for the next place.
So to get back on topic, that's my plan right now: pay this place off, start saving for the next venture. When things began to unravel, I felt kind of rushed, like I had to get into the game before I missed it! The, I realized that this one isn't going away anytime soon.
Just think about it for a minute to decide if paying off your mortgage is the right thing to do. The current admitted inflation rate is 5% and the government expects it to continue to rise because of fuel cost. If you have a fixed rate mortgage at 5.6% your mortgage is only costing you 0.6%. If you factor your tax deduction into the equation it's easy to see that you are actually earning interest on your mortgage. If your earning money on your fixed rate mortgage why would you want to pay it off quicker?
-Michael
Because a house you live in is a liability, not an asset. An asset is something that earns you money. I'll buy adjusting nominal rates of return for inflation to get to a real rate of return.
But I don't buy adjusting interest you pay by the inflation rate. The proper adjustment is to reduce the value of the dollars you're paying. When paying back a loan, you're paying back the more valuable dollars you borrowed with less valuable dollars. Think of it from the lenders perspective. They're getting a 5.6% return and inflation is eating 5% of that. Leaving them with a 0.6% real return. As the borrower, you are STILL paying out all that interest, its just less of a hit than without inflation.
The tax deduction for interest doesn't offset the cash used to pay it. The highest current rate is 35%, IIRC. So, the post-tax hit is only 65% of what it would be without the deduction. But its still a hit.
If you can borrow money at one rate, and use it to generate a higher rate of return, then you're really making money off the debt. That's why cap rate is so commonly used for commercial real estate. If you can borrow at 7% and buy a property with a honest-to-goodness cap rate of 10%, you're making 3% on that money. That's how banks work, although they're learning (to all of our pain), leverage is a tool that cuts both ways.
Personally, I want my residence paid off. That allows me to greatly reduce my personal operating expenses.
Both parties make money off the same stash all the time, it's called partnerships. I'm doing it right now. My tenants are covering all my expenses and putting money in my pocket (read: I am making money off of the property). I in turn pay the bank the mortgage payments to the bank and they make money from the interest. I am in a partnership with my bank and every single day (including weekends and holidays) both of us are making money off of the property that I own. It's called arbitrage, the bank is loaning me money and making 6% APR on it and I am using that money along with my cash (20% of the purchase price) to earn 45% ROI on the property.
I don't care if I'm renting the money from my bank for the first 12 years, the people that are renting my apartments from me are paying that rent and paying for the up keep of the building, and paying the utility expenses, and paying the taxes, and paying the insurance, and paying me money for my time to work on it, and leaving cash in the bank called profit that I can use to grow the business.
-Michael
Yes my income is higher while in the partnership with my bank. I didn't have enough cash to buy the property outright so I needed help from the bank. And the real number we're trying to get to the bottom here is ROI. So the goal is to put the least amount of money into your investment and get the most back out.
Since I bought the properties at the right price then after I fixed all the management and maintenance issues they had I had them re-appraised and did a cash out refi and got all of my cash back in less than 6 months. I got 100% of my invested capital back, my ROI went to infinity and my properties still have positive cash flow. None of this would have been possible with out the bank.
Every person you work with in your REI business (be it flipping, rentals, wholesaling, etc) is your partner and they need to be treated that way. If you don't view them that way then you won't have near the growth you could have if you helped those that are helping you to create money for themselves also.
-Michael
The bail out means that we get to pay for the greed and bad decision making of other people. Once again, intelligent and responsible people are being punished because our government seems to protect the lazy and stupid.
I agree with Michaels strategy because I've seen investors make it work for themselves over and over again. It works, but it can also get very complex to keep all your ducks in line and I've seen many of the best entrepreneurs lose control due to their own success. I also understand Daniels frustrations at seeing some of the biggest speculators on credit get bailed out. Best of both worlds, take advantage of the rules of the game, (and take a risk occasionally with your money or the banks), and you will succeed. But let the market work properly and thin the herd a bit, all the irrational exuberience of the ineffecient investors using other peoples money is killing my investment chances.
I agree with Michael's strategy as well. It works. I began 20 yrs ago with one condo using OPM and am now at 54 units. My part-time job became a full-time steady income. If I go back that 20 yrs and bought each unit with cash earned as a legal secretary with a high school education I don't think I would be in the same place today.
We agree and utilize Michael's strategy as well. We believe if a person(s) become efficient at intelligently using OPM and OPR the rewards will be greater and faster than most people can fund using only their individual "employee income".
We have learned to get our "OPM" $$ back within a short period of purchasing RE so our returns are also infinite...
If a house costs $0 out of YOUR pocket to purchase/ rehab/ rent and this same house earns a cashflow of $200/ month (utilizing tenant's funds), shouldn't that be a deal we all want to be part of? Leverage, leverage, leverage!
Using OPM (i.e. the bank's) is a great deal if used properly.....
"Be fearful when others are greedy and greedy when others are fearfulâ€
-Warren Buffett
When has this been more true? With all the fear mongering going on, it's just as easy to get caught up in the doomsday scenario as it was to get hyped about the "boom" years.
If the sum of all fears does occur, stocking up on beans and bullets won't do any good.
If the mortgage giants go away, either new company's will move in or the giants will be reorganized in a new way. there is too much money in that business(25 Trillion) for that business to go away.
its a good time to buy.
The smart thing to do now is to pay off debts as quickly as possible and to start saving as much as possible. It's going to be a rocky ride ahead.