Investment Real Estate and Einstein’s Theory of Relativity
A highly simplified version of Einstein’s theory of relativity says that in order for low to exist, there must be also be high. In order for Winter to exist, there must be Spring. One extreme cannot exist without the existence of its opposite. As the great Jim Rohn says, “How often does Spring follow Winter? Every time! “ This means that if we are living in an economic Winter, Spring MUST be around the corner.
As inflation and interest rates increase, rents are very likely to increase at the same rate. If you acquire positive cash flow investment properties using today’s long term low interest rates, your ownership costs should stay the same while rental income should increase with inflation. Now is the perfect time to set yourself up to receive very high investment yields from positive cash flow real estate.
Investment Real Estate Money Making Action Items:
1) DO acquire positive cash flow properties with cheap long term fixed rate financing.2) DON’T sit on cash for too long as its buying power will soon be eroded with inflation.
3) DON’T sit out of the real estate market waiting prices to come down. Interest rates are eventually going up and the cost of a $125,000 mortgage payment at 5% is LESS than a $100,000 mortgage payment at 6.75%
4) If you own negative cash flow real estate with NO EQUITY, consider buying more positive cash flow properties using your currently good credit, and AFTER you’ve monetized your good credit, consider doing a short sale or strategic default on your negative cash flow / negative equity properties.
5) If you own negative cash flow real estate WITH equity, consider using your equity as the down payment on a positive cash flow or neutral cash flow asset. You can stimulate the sale of your property and probably achieve a premium price for it by being a buyer of someone else's property. As a condition of purchasing the Seller's property require that the Seller must purchase the property you want to get rid of. This is called a "must take" in equity marketing and is a great way if you are trading up in asset value and adding cash to the transaction. For example, if you have a $100,000 property that is negative cash flow but has $25,000 of equity, you can buy a $300,000 positive cash flow property by bringing in additional cash and financing to the table. The person buying your property will get $275,000 cash and $25,000 of equity in your "must take" house.
Comments (3)
Jeff - regardless of whether you use conventional (fannie freddie) debt or commercial loans you still want to get the longest term fixed interest rates whenever you can. Matching the rate lock to the term of property ownership can make sense, but it's pretty cheap insurance these days to buy a longer term rate.
David Campbell, over 12 years ago
Jeff - some investors in California lost 80% of their property value from peak to trough. I know of condos purchased for $190,000 in 2006 that are now selling for $25,000. If you have $160,000 of debt on a $25,000 property, you need a reset mechanism because that $190,000 value may never come back in that investor's lifetime. Using a label like "scumbag" takes this out of a business decision (which investing is) into a moral and character judgment. If a borrower and lender get into a contractual relationship and both parties play by those rules, it is not unethical or illegal. If you don't pay your mortgage the lender will take your property (and potentially a deficiency judgment on top). In a short sale, lenders are happy to take less than the loan balance because it is in their financial interest to do so. In bullet point #3 - tax assessment varies on geography, but usually when a value goes down there is a mechanism to lower your property taxes accordingly. Insurance is usually based on replacement value which is somewhat independent of purchase price. The same house purchased for $100k or $125k might be insured for $130k because that is the replacement cost. You can potentially insure it for less than replacement cost if you lender agrees. Either way the price difference is negligible.
David Campbell, over 12 years ago
I think your #4 sounds like a scumbag thing to do. This may even be illegal. Can you also expand on the cost of ownership staying the same? I understand how your P&I stays the same but everything else should go up. What do you say to people who are more serious investors and are not using 30 year money anymore?
Jeffrey K., over 12 years ago