Multiple Offers Are Back...Here We Go Again!

It is once again time to start flipping properties. For the first time in about 6 years, property demand in Arizona has outpaced supply. There is only about a 25 day supply of homes priced at $250,000 or less. The foreclosure market that everyone believed would dump excess supply of homes onto the market did not live up to the media's expectations (at least in AZ). The legal system has created a sort of bottle-necking of foreclosures and Short sales resulting in more of a trickle of distressed homes onto the market instead of a flood. This trickle of foreclosures and Short sales has caused a feeding frenzy among investors as they hit the market. To add fuel to the fire, HUD properties have put restrictions on investors by placing 15 day black out periods before an investor can submit an offer. The idea behind this policy is to give homeowners a chance to make an offer first (which really doesn't make much sense considering the government's overt policy is to try to find a way to decrease the country's inventory of distressed homes as fast as possible).

The current demand for cheap housing has had an effect on housing such that prices are starting to rise quite rapidly. As a result of the current supply/demand ratio, I decided that I would begin flipping properties at a very optimistic pace of 1 to 3 flips per month to take advantage of this move in the market. These flips would not be homes that had been completely destroyed but rather homes with very manageable rehabilitation turn around times of a week or two at most. I assembled a very competent team to handle everything that goes into the process, and I was ready to submit my first offer. After carefully scouring the MLS for homes that had the margins I could work with, I optimistically submitted offers on 3 homes. To my disappointment, there were no takers on my offers. Shrugging off the disappointment, I submitted offers on 4 more homes. Only 1 offer, out of the 4 submissions, ended in an acceptance by the sellers, but the seller's bank will still have to sign off on the Short sale before it goes to escrow.

So what's going on you may be asking? Well, the first obstacle I faced was trying to get an offer accepted before there were a dozen offers on the table. Selling agents are now expressing that only the highest and best offers will be accepted. What a change from about 6 months ago when an agent would jump up and down if they received just 1 offer in a timely manner from the date their property hit the MLS. Secondly, HUD restrictions (as mentioned above) have made it near impossible to get an accepted offer at a price worth investing in. So what's an investor to do? I'll keep you posted on what works and what doesn't in my next Blog.

Apartment Living Is Losing Steam to Single Family Home Rentals

There is an absolute flood of former homeowners choosing to rent single family homes over apartments in today's high foreclosure climate. For those of you that follow my blog, this is nothing new, but the media is finally catching on to tenant migration from apartment living to renting homes in residential communities throughout the nation. This presents a "Win, Win" opportunity for both Investors/Landlords and tenants.

Foreclosures are primarily centered around single family residences (SFRs) and not apartment buildings. Real estate investors like myself, have almost no inventory of apartment buildings to choose from, which leaves SFRs as the primary investment category in today's market. This isn't a bad thing, however, since more and more victims of the housing correction are turning to like-kind housing. In other words, wanting to live in a home comparable to the size, neighborhood, school district, and city they once lived in before losing their home to foreclosure.

Our government is planning on getting into the landlord business along side investors. There are plans to convert the huge inventory of Fannie Mae and Freddie Mac foreclosures into rentals. I don't believe our government can run a business better than the private sector, but there will be the added benefit of reducing the current inventory of homes for sale thus allowing property values to rise if they do indeed move forward with these plans. Reduced inventory equates to increased demand which is a good thing for the housing market.

To take it one step further, I've been offering a highly customized Rent To Own contract on all my rentals. Rent To Own contracts offer a beneficial arrangement for both Landlord and Tenant. The tenant gets the opportunity to buy down the principal month to month like a traditional mortgage without having to have a large down payment, if one at all, or the high FICO score that banks are looking for these days. With Rent To Own, the owner remains on title until he is bought out, which prevents the owner from having to file a foreclosure against the tenant if they don't make their payments on time. A simple eviction is all that's needed to regain control over the property. These types of contracts come with a fixed sales price, interest rate (for purposes of figuring out amortization principal), and a set term (usually 30 years). The sale price and interest rates provide a great return on the investment for the owner, and the tenant can buy down the house and eventually take title without all the red tape that banks and their underwriting staff put them through. This arrangement has been quite successful for me and the tenants I've contracted with.

Investors need to be creative these days to separate themselves from the norm. When tenants see value in your offerings, vacancy periods are minimized if not eliminated. Former homeowners are looking for a whole lot more than apartment living for their families. Renting SFRs is where the trend is these days. Rent To Own contracts, in my opinion, are the future.

A Very Valuable Investing Strategy For The New Investor Or The Investor That Has Failed

Investors, like me, invest for one purpose only - TO MAKE MONEY! Arguably, some methods of investing are better than others. In the stock market, you have the Bulls (optimistic about stocks going up in value) and the Bears (pessimistic about stocks going up in value). Bulls are likely to buy stocks with the hope that the price per share will increase over time, while Bears are likely to short stocks (a method of making money when the price per share of a stock goes down). In real estate, the goal is to buy low and sell high...pretty simple concept, but timing is everything if you want to be successful. Not all investors make money. As a matter of fact, many investors lose everything, because their method of investing is not well thought out and has no track record of success. I'm writing this article to share my method of investing with those of you that want to better your odds when it comes to investing in real estate or the stock market.

I am a Contrarian investor in both the real estate market and the stock market. A Contrarian investor is an investor who attempts to profit from an investment in a way that differs from the majority. When everyone is buying and creating a "Top" in a market, a Contrarian will sell into the making of that market top before it collapses. When everyone is selling and creating a "Bottom" in a market, a Contrarian will buy at the bottom, knowing that the investment is undervalued. A successful Contrarian investor buys and sells at the extremes of the pendulum swing. This requires patience and a solid understanding of the psychology of markets, be it real estate or stocks. The knowledge behind crowd behavior psychology is one of the most useful tools a Contrarian can use to make big profits. Crowds tend to invest in investments that have a confirmed positive bias. By the time an investment is perceived as being a good bet by the masses, the valuation of that investment is typically quite high or what we call "Top heavy". In other words, the majority of the appreciation is already baked into the investment by the time the crowd thinks it's a good time to invest in it. It's because of this novice investing, many lose everything when the investment runs out of steam and begins to lose value in a relatively short period of time. Contrarian investors, like myself, avoid these investment traps and focus on very undervalued investments that the masses are ignoring. As the crowd begins to rotate out of their bad investments and look for other sectors that have more appreciation potential, the Contrarian investor is already well positioned to enjoy the appreciation ride the masses will now bring to their investment. When the investment appears to show signs of high valuation, Contrarians will sell their investments (stocks or real estate) to a willing crowd of buyers who have come too late to the game, only to be left holding the bag of a soon to be overvalued liability.

Look for investments that have good fundamentals but are undervalued due to unsustainable trends by the masses. If you do this, and you have patience, you will be setting yourself up for great profits as the cycle unwinds in your favor. Contrarian investing is at the root of my success as an investor. I've made money in both up and down markets by using this strategy. There are many books and in-depth articles on the subject of contrarian investing. Please consider this type of strategy if you want to improve your investing acumen.

Happy investing!

The Greatest Investment Opportunity Of Your Lifetime Is Here

It's been some time since I've written an article for my blog. I felt like there was a bit of redundancy after 60+ articles, and I wanted some new factual data to inspire me. We are now in our 4th year of the real estate market correction, and I have found factual evidence that supports my assertion that this is the greatest investment opportunity of a lifetime but not in the way you might think, based on the majority of my posts. Although buying real estate is still my primary investment focus, I'm going to highlight the reasons why you should now be buying homebuilder stocks.

Before I get to the facts, I'm sure you are hearing or reading, on a daily basis, that the recovery in the real estate market is going to take years to get back to some sort of normalcy. High inventory, due to foreclosures and short sales, has been the leading reason that's given for the negative outlook. On the surface, that would seem to be a prudent position to take. The law of supply and demand would seem to support this hypothesis, but you have to look below the surface to see what will drive the next appreciation cycle. It is in looking below the surface, that I have uncovered facts that are history making and will impact the real estate world in the very near future in a positive way, at least from an investor's perspective.

Homebuilders contributed to the high inventory of homes by overbuilding during the housing boom. In 2005, there were 2,068,000 housing starts. In contrast, if you average housing starts between the years of 1980 through 2010, you get about 1,454,800 starts per year. It's clear to see, that there was definitely a huge increase in the number of housing starts during the boom, that contributed to the excess inventory. But lets dig a little deeper into the stats. Between 1980 and 2005, the lowest number of housing starts occurred in 1982 (1,062,000) and 1991 (1,014,000). These two periods in time had a lot in common with the depressed market conditions we're facing now. In 2009, there were 554,000 housing starts and in 2010, we are on pace for approximately 540,000 housing starts, which marks the LOWEST housing starts in 30 years. Now what makes this even more potent, is that the population today is about 25% greater than it was during the depressed housing market in 1991. Can you say "supply and demand"? To recap, in 2010, we have about 1/2 the homes being built than we had in the early 1990's but an increase in population by 25%. At this rate, once the inventory of foreclosures are eliminated from the banks books, we may actually have a SHORTAGE of homes if this depressed level of building continues. Inventory will not be able to meet the populations demand for housing which will lead to rapid price increases and massive profits for the public homebuilders that stand to take their market share.

Many of the private homebuilders have gone into bankruptcy. The land they once owned has gone into foreclosure and is being purchased for pennies on the dollar by the bigger publicly traded homebuilders like Pulte, KB, Lennar, D.R. Horton, and MDC Holdings (Richmond American). What this means for the investor willing to buy these homebuilders' stocks now is great appreciation in future stock value. Almost all of the fore mentioned homebuilders I've listed here, are trading at a fraction of their 2004 & 2005 values. I believe the potential for 300% to 500% returns on your investment in homebuilder stocks is not only possible but probable due to the current population growth and record low housing starts. You want to invest in sectors that are the most depressed, if you want to invest in sectors that have the greatest upside potential. Remember, the key to investing is to buy low and sell high. I believe there is light at the end of the tunnel for homebuilders within the next 1 to 2 years, so I'm making my investment buys now.

3rd Year Aniversary

Wow, it has been 3 years already. I haven't been as prolific as I would have liked, but the information is still relevant, and there has never been a more exciting time to buy real estate. We are in a very rare period in history, where interest rates are at a 50 year low coupled with real estate being sold for pennies on the dollar. Enjoy this opportunity, because it may be a once in a lifetime opportunity.

The Train Is Leaving The Station...Are You On-Board ?

We've been in a real estate market correction for just over 3 years now. My prediction has been that the market will correct for 4 years before it starts to appreciate again. The typical real estate cycle appreciates for roughly 5 years and then corrects for about 2... a kind of 5 steps forward, 2 steps back scenario. Since we had an extraordinarily long appreciation cycle this time around (1996 -2006), it shouldn't surprise real estate cycle followers that 4 years of correction is proper and in line.

Signs of investor bottle-necking are here. Multiple offers on foreclosures are now the norm, especially aggressively reduced REO's looking to clear themselves from the books. The laws of Supply and Demand dictate the climate of offers, whether it be few to none or a dozen offers on one listing. I've witnessed the latter being the case, finding offers of a few thousand or more over asking price being the norm rather than the exception. This domino effect leads to the bottle-necking I was referring to, where everyone has the same subdivisions and homes in their sights with only one to emerge the victor. Is this the proverbial, "The train is leaving the station...are you on board?". I think it is, and it is important that you give it some consideration if you've been sitting on the sidelines waiting to make an investment move. Timing is everything in investing, and this period of amazing opportunity to buy real estate for pennies on the dollar is quickly eroding away.

The Rental Market Is Picking Up In A Major Way

I've never seen rental properties rent as quickly as they have been lately. With almost no vacancies to speak of, I find myself looking to add additional properties to the portfolio.

As I've mentioned before, investing in today's real estate market is setting the stage for phenomenal returns. Price appreciation will come in due time, but renting your investment property for profit has never been better if you've been buying distressed priced foreclosures and short sales. In the Arizona market, homes in the 1,200 - 1,500 Sq.Ft. range are selling for as little as $40,000. These aren't old fixer uppers either, these are homes that are only 3-5 years old. At that price, you could charge as little as $750 per month rent and still draw a 22% return per year or a 100% return of principal in just over 4 years.

Todays rental environment is very different from years past. In a normal rental market, there is a stable and fairly predictable movement of tenants in and out of rental properties. Today, the rental market has been flooded with families that have lost their homes due to foreclosure, short sale, and bankruptcy. This increase in renters into a once stable market has created a shortage of desirable rental properties (SFR's, not apartments), and it's not unusual to get a dozen or more calls within hours of a vacancy being advertised. Since foreclosures, bankruptcies, and short sales have the potential to tarnish one's credit report and FICO score for as long as a decade, the rental market for investors looks to be quite lucrative for some time.

Just Closed On Another Great Deal Today

I received a call today from the Title Company letting me know that the foreclosure I was buying had just closed escrow and had recorded in my name. This was a GMAC bank foreclosure purchase, and the process was quite smooth contrary to what you may have heard about buying bank owned properties. Escrow took about 4 weeks to close and there were no major hiccups to speak of.

This investment home is Approx. 3200 Sq.Ft., has 5 bedrooms, a den, loft, family room, dinning room, living room, 3 car garage, and kitchen with a pass through bar and Island. The original purchase price for this home in 2005 was $252,000. Over the course of just months, the home had reached an appraised value of over $350,000 as did most of the homes of comparable square footage in the neighborhood. Fast forward to today, the foreclosure purchase price was 50% less than the original purchase price. This was an incredible investment opportunity considering the home's previous values. Rental income should bring in Approx. $1,800 per month which is a R.O.I (return on investment) of 18% per year... not to mention the future appreciation value which will easily double in value during the next appreciation cycle . If the money used to purchase the home had been left in a Money Market account at today's interest rates, it would have had a return of Approx. $280 per month or $3,360 per year. That's a loss of $18,240 of potential income a year when compared to renting the home out.

Banks are simply liquidating homes at this point. You still have an opportunity to take advantage of today's foreclosure and short sale market. High returns and substantial appreciation value are yours for the taking. You just have to be proactive and realize that this is the time to invest in real estate if you want to maximize your R.O.I.

Today's Real Estate - Modern Day Gold Rush

Today's real estate market is our modern-day Gold Rush. Instead of setting up camp along the banks of the river to stake one's claim to potential ounces of gold yet to be found, investors are lining up to stake their claims on the bounty of foreclosures and short sales being offered by banks. Throw in a few Trust Deed sales and well oiled auctions, and the picture is complete; a real estate Gold Rush of a magnitude we haven't seen in more than a decade.

This real estate Gold Rush, however, isn't without it's flaws. The system that pushes these properties through is quite clogged. Agents and investors can be found pulling their hair out at times due to the frustrations a clogged system can bring. Long escrows and underwriting procedures can delay any hopes for expediency in the process, but the rewards are worth it.

Cash is still king in this kind of market. In my blog post, The Cash Investor vs. The Leveraged Investor...Who Wins?, I write about why I prefer the cash investing strategy over the leveraged strategy. In my opinion, this moment in time proves my point. The system is so backed up that the last thing you want to do is wait for a bank to approve your loan so you can try to buy a discounted property. Cash offers are given PRIORITY in this kind of market, and the leveraged investor just doesn't stand a chance when an offer is on the table. Sellers (often the banks in today's market) want to be sure the deal will close, and cash buyers give them that sense of security they seek to make things happen.

I'm currently working on several more deals in the state of Arizona. I believe there are phenomenal deals to be had that have huge upside potential and when I say upside potential, I mean profits that exceed 100% of the initial investment. It's up to you to participate in this modern day Gold Rush. This is the kind of market that will produce real estate millionaires...will you be one?

High Investment Returns Blossom In Today's Market

Profits of 10% to 15% are becoming commonplace in today's investment rental market. Investors are gobbling up properties in the sub $100,000 market as fast as they can, putting them in a position to capitalize on fair market rents that command very lucrative returns.

Consider the following: Investment rental home purchased for $85,000 (In Arizona); fair market rent on rental home = $850 per month or $10,200 per year; total 12 month return on investment property = 12%. How many investments do you know of that are paying that kind of return? There are also tax benefits that come with rental properties like depreciation that can keep more of your profits out of the hands of Uncle Sam. And by the way, the cherry on the cake is the future appreciation of the property that could easily double in value during the next appreciation cycle. The name of the game has always been to buy low and sell high, but investors are riding out this correction period with decent returns from the rents their properties are bringing in.

2nd Year Anniversary

It has been 2 years, to the day, since my first Blog post. There have been a little over 4,750 site hits which is about a 40% increase in hits over the 1st year...not bad at all! I'd like to thank those of you who have written to me over the year. Keep the comments coming.

First Court Eviction...Not As Bad As You'd Think

Well my friends, I finally had to file a Forcible Detainer (eviction) with the Justice court to rid myself of tenants who failed to pay their rent and wanted to remain in the home. I've never had to evict a tenant before and took great pride in that fact. You see, if you screen your tenants properly, eviction will be a rarity and not the norm. "What went wrong with these tenants?", you may be asking. Well, a big heart often makes for a big target and in this rare instance, I let my heart make the wrong decision of accepting these tenants instead of my usual method of using hard core numbers and prerequisites.

The tenants were in their late 50's early 60's and owned their own business. What struck me as unusual was their lack of reserves in their checking and savings account. They only had enough to cover 2 months rent if they had to stop working for whatever reason. This was a major red flag to me, but those close to me thought that their reserves were more in line with the average family than not, and thought that I was being a bit harsh when I was preparing to reject their application. The tenants promised they would not have a problem paying the rent, and that they were getting ready to start on a major contract that would bring their reserves up to 6 months worth of rent. They were so sure they would be fine, they entered into a lease with option to buy and paid a small non refundable lease option fee. Against my better judgment, I accepted their application and let them move in.

About 8 months into the lease, they were late on their rent. A few days later, they paid the rent plus the late fee. The following month, they were late again only this time they were 4 days late. This late paying behavior now became the norm and the delinquency in payment grew longer and longer to the point that I was now posting a "5 Day Notice" on the premises almost every month while waiting for payment. Then in May of this year, I was not paid the rent after serving the tenants with the procedural 5 Day Notice. After several attempts to rectify the delinquency with the tenants failed, it was clear to me what the next step would be...EVICTION!

Eviction can be a long, arduous, time consuming process depending on the state your property is located in. Certain states also tend to be somewhat biased on the side of the tenant. Arizona, where this eviction took place, is just the opposite. Arizona, in my opinion , is very pro-landlord and has a very expeditious procedure to evict non paying tenants. The process in Arizona is so fast, as a matter of fact, that it only takes about 17 days from start to finish to regain control of your property.

I made the decision to file the Forcible Detainer Complaint and Summons myself rather than use an attorney. I found the process very clear and easy to understand and would not hesitate to represent myself in any future court hearings. All of the necessary court forms and instructions were on the county website which allowed you to fill the forms out and print them. The tenants did not show up to the hearing, and as a result of their no-show, a Default Judgment was awarded to me. The Default Judgment included all past due rent owed, late fees, court costs, and a 10% penalty per year until the tenants have paid the judgment in full.

I hope I never have to evict anyone else again in the future but as an investor / landlord, it comes with the territory. I will definitely not make the same mistake I made with these tenants during the screening phase again. Decisions have to be made using objective criteria and not with emotion. In my blog article titled, "Picking Good Tenants Requires Some Discipline", you will find the tools I've used to minimize the possibility of having to go through the process of evicting your tenants.

Investing Sentiment In Real Estate Is Changing Rapidly

I got a call the other night from a fellow investor friend of mine. He was calling from a very crowded Real Estate auction in the Tempe, AZ area. He seemed a bit frustrated as he relayed what was happening at the auction. According to him, just about every property he had an interest in was selling for 25% or more than the auction list price. As a result, he was basically shut out of the bidding and by the end of the night, he had left the auction with nothing. I've also had multiple conversations with Realtor friends who work in California and Arizona. In those conversations, it was clear to me that things were beginning to change in a price appreciation kind of way. Multiple offers on properties are making a come-back, and the days of making a low-ball offer are beginning to wane.

It appears to me, that the signs of changing sentiment are just about everywhere you look. People are slowly but surely coming off the side-lines with the belief that the market has reached a bottom. This is a crucial part of any plateau and future appreciation cycle. When fear in real estate investing begins to go away due to changing psychology in the potential profit expectation, you can believe with certainty there will be a resulting effect that reduces the available inventory of homes as investors and soon to be homeowners start making purchases in mass.

Low interest rates are still available and will definitely help contribute to reducing inventory, but I do think their days are numbered. I still believe, as I mentioned in an earlier blog , that mortgage interest rates have the potential of reaching 18% as they did in October of 1981. I also believe this probable rise in rates may hasten the next appreciation cycle as home buyers scramble to buy before the rates reach double digits. We are already seeing credit card companies engage in the practice of raising rates, so I don't think my prediction of 18% mortgage rates is too far off the track. Time will tell, but I think all of the fore mentioned points in this blog show the tide is beginning to turn and that's a good thing for home values.

California Home Sales Up 83 Percent

According to the California Association of Realtors, California home sales were up 83% in February 2009 over the previous year. Statewide sales numbers in CA hit 620,410 in February. According to C.A.R. president James Liptak, “Home sales in California continue to be considerably stronger than the nationwide sales figures...The market will continue to register large, but diminishing year-to-year percentage gains in the coming months, as current sales are compared against the extremely low numbers that prevailed during the early months of the credit crunch.”

In February 2009, the state's unsold inventory index was 6.5 months, compared to 15.3 months in February 2008. It took a median of 51.5 days to sell a SFR home in February, compared to 69.3 days in February 2008. The inventory index tells you how many months it would take to deplete the current inventory. A 3 month inventory index signals an appreciation cycle, so we can conclude at the very least, we are in a plateau phase with a hint of appreciation brewing in the not so distant future.

Investors know the signs of a turning market. If you are new to investing, know that the window of opportunity is slowly closing on deals of up to 70% off of 2005 list prices. Make your offers now because the unsold inventory index is slowly but surely shrinking.

Enormous Wealth Will Be Generated By Investors Who Buy In This Market

Between foreclosure auctions and short sales, some homes are being sold for no more than the cost of a typical luxury car. Some AZ Home builders are even advertising newly built homes for as low as $70,000. The huge drop in home values presents a unique opportunity for investors to make a lot of money. Unfortunately, everyone will not be able to participate in this wealth building moment in time due to a variety of reasons including bad credit, job loss, bankruptcy, or the lack of savings for a down payment.

Investors who have kept a generous cash position in their portfolios will be in a great position to take advantage of current real estate prices. I've had several conversations with fellow investors wanting to know if I'm buying now and whether or not it's a good idea to add to their current inventory of properties. My reply has been, "How can you not buy at these prices?". Opportunities to buy real estate come and go but opportunities to save up to 60% on real estate are rare. In future years, investors will look back on 2008 -2009 as one of the greatest buying opportunities they've ever experienced. Real Estate profits reaching 200% - 500% of the purchase price will be the norm as we approach the top of the next appreciation cycle. Risks in real estate investments taken now will be greatly rewarded over the next decade, and I believe the profits will exponentially out pace the stock market and retirement accounts that have seen massive losses.

Walking Away From Your Mortgage May Be One Of The Biggest Mistakes You'll Ever Make

While out-and-about, I'm hearing more and more conversations about real estate than I've ever heard before. Whether at the gym or standing in line at the grocery store, real estate appears to be the topic of choice. The recurring themes are centered around property values, neighborhood foreclosures, and who's going through a Short Sale. Those kinds of conversations are innocent enough, but there is a far more insidious kind of conversation that takes place that gets me a little hot under the collar every time it comes up. Many people talk about walking away from their mortgages even though they can afford them and even though they had not planned on selling their homes anytime soon. They somehow feel they have been financially screwed, and the resolve will come in the form of abandonment of their responsibilities.

Ignorance, defined as the lack of knowledge or education, as it pertains to real estate is running rampant through all classes of people. There is a huge difference between buying a home to live and raise your family in and buying an investment property to flip and make a buck off of. Unfortunately, many homeowners have blurred these reasons to buy a home which has contributed to their pretense of losing money. If everyone who could afford their mortgage would spend as much time researching real estate cycles and trends as they do coming up with all the reasons they should shun their financial commitments, they might find that their time line to live in their home is long enough to see the next appreciation cycle which will reward them handsomely with increased equity.

On July 5, 2008, I authored a Blog post (on this site) titled, "Real Estate Cycle Trends Can Be Your Friend". In my post, I detailed the increase of the median home price from 1960 through 2006. The median price of a home based on year was as follows: In 1960 $15,000; 1979- $50,000; 1987- $75,000; 1997- $100,000; 2000- $125,000; 2002- $150,000; 2004- $175,000; 2005- $200,000, and in 2006- $230,000. In between many of these median price increases were corrections that gave back a percentage of the appreciation gain, but that correction has always leveled off and made way for higher highs in the following appreciation cycle. The only irregularity to today's real estate cycle is that the correction cycle and plateau of property values will be approximately 4 years in length instead of 2. The reason for the extended correction cycle is because we're coming off of one of the longest appreciation cycles in history. Because we benefited from 45 year lows in interest rates, the normal 5 year appreciation cycle was replaced with an unprecedented 10 year appreciation cycle. Anyone buying into the 6th - 10th year of this past appreciation cycle was playing with fire because the chance of buying at the top (which you never want to do) grew with each and every year beyond the 5th year. If you were buying in late 2005 thinking you were going to see a huge profit in a few months to a year, you my friend didn't do your due diligence when it came to researching real estate trends and cycles. On the other hand, if you bought a home to live in and raise your family in and bought a home you could comfortably afford (meaning you didn't lie on your mortgage application), and you plan on living in your home for 7 to 10 years which is the national average, you my friend will do OK and will probably make a profit on the sale of your home after weathering the storm.

Another appreciation cycle will come, and when it does, it will exceed the price values of the former cycle. The question you need to ask yourself is, "will I be a homeowner getting to enjoy the ride to the next value peak or will I be renting an apartment while the home I walked away from makes someone else a sizable profit?". You see, if you ruin your credit, you probably won't get the opportunity to participate in the next housing boom. Don't make ignorant decisions that can affect the rest of your life, especially when it's preventable. If you like your home and can afford it, don't worry about it's current "on paper value" because it's value can change on a dime as soon as home value perception turns optimistic. The population is growing exponentially and thousands of young, new homeowners are entering the home buying market everyday. The current inventory of homes will diminish over time and when it does, hold on, because the market will be poised to take off like a rocket. Don't believe me?...take another look at those median home prices again and ask yourself how that happened decade after decade with the same economic and unemployment stress' we have today.

New IRS Tax Rules Will Have Negative Tax Consequences For Investors

With the housing slump being as bad as it is, you would think our government would try to provide incentives for investors and buyers of second homes to help reduce the massive inventory of homes. Instead, new IRS rules are making it less tax friendly to profit from the sale of a second home or rental property. As of January 1, 2009, due to a provision of the Housing Assistance Act of 2008, owners of 2 or more properties will reap far less profit when selling their second home or investment property. As it was before, and as it stands now, owners may still sell their primary residences and not pay any capital gains on up to $250,000 of profit (if single) or $500,000 of profit (if married) if they have lived in their home for 2 of the last 5 years before the sale. This is known as the Primary Home Sale Exclusion. The old rules would allow you to sell your primary residence tax free up to the fore mentioned limits and move into your second home or investment property (for 2 years) making it your new primary residence which when sold, would allow the same tax benefits your previous primary residence offered. Technically, under the old rules, you could move into each investment property you own for a period of 2 years per property and sell them at a profit of up to the 250k & 500k profit limits without paying a dollar in capital gains. Sadly, those days are over.

As of January 1, 2009, second homes and investment properties that you later move into and convert to a primary residence will now be subject to capital gains tax on the percentage of time the house was owned by you but wasn't considered your primary residence. For example, if you owned a second home or rental property for 10 years and you converted it to a primary residence during the last 5 years of the 10 year ownership and you sell the home at a $100,000 profit, you will now have to pay capital gains on 50% of the profit since half the time you owned it, it wasn't your primary residence. Example 2: You owned the rental property for 10 years but only lived in it the last 2 years. You would have to pay capital gains on 80% of the the profit since it was your primary residence only 20% of the time you owned it before selling it.

Why is the government doing this you might ask. It's simple...MONEY! The old rules kept millions of dollars out of the hands of the U.S. Treasury every time an investment property or second home was converted into a primary residence for 2 years and then sold. This new rule is estimated to put Approx. 1 1/2 billion in the hands of the treasury over the next 10 years according to the Senate Finance Committee.

Do you think this new IRS rule will help or hurt the housing market? Post your comment by clicking on the link at the bottom of this blog post.

Debt-To-Income Ratios Will be A Huge Factor In Determining How Much House You Can Afford

Banks have really screwed things up this time. Over the past 10 years, poor underwriting controls basically gave anyone with a pulse a loan. Banks have been known to throw caution to the wind when making money comes easy in a booming real estate market. In a seller's market, foreclosures are almost unheard of because home values grow so rapidly that a profit in selling is almost guaranteed. This is how the house of cards is built before reality comes in the form of a hurricane and unleashes it's furry on all that were irresponsible with their finances.

Improper lending standards have caused so much damage to the lending industry that lenders are now forced to change the way they do business. The great gatekeeper of prudent underwriting was the Debt-To-Income Ratio. This was used by lenders to keep the borrower from getting into financial turmoil. Unfortunately, this formula was altered to such an extent, that it no longer served it's original purpose.

Debt-to-income ratios are making a comeback and in a big way. There are 2 types of debt-to-income ratios. The first is the Standard or Front-End debt-to-income ratio which measures as a percentage, all of the costs associated with your monthly mortgage payment (principle, interest, property tax, homeowners insurance, PMI, etc...) against your monthly gross income. Your monthly mortgage payment should not exceed 28% of your monthly gross income.

The second type of ratio is the Total or Rear-End debt-to-income ratio. This is expressed as a percentage as well and includes all of your yearly debt (mortgage, car note, credit cards, alimony, student loans, etc...) against your yearly gross income. Your total yearly debt should not exceed 36% of your yearly gross income.

In figuring out how much house you can afford, use the ratios I've given above to give you a realistic idea of what today's lenders will approve. This is the method lenders should have chosen when making loans through the housing boom but they chose not to. Greed and a need to compete blindly with other lenders caused the deterioration of ratios and their usefulness in protecting not only the borrowers but the lenders and banks themselves. Debt-to-income ratios will be used as a main underwriting tool for current and future lending. This will translate into less house being purchased as a percentage of available income which will in effect keep more homeowners in their home and out of financial ruin. Isn't that the way it should be?

Definition Of Terms You'll Hear Daily During This Financial Crisis

Investing and financial terms are being thrown around in the media with very few people understanding what those terms mean. Many of you are left scratching your heads when you hear terms like "CDO's" and "Credit Default Swaps". I will explain these Financial Terms and others so you can clearly understand what is being reported by the financial and investment media.

The terms I will explain include: CPM-Commercial Paper Market, CDO-Collateralized Debt Obligations, Derivative, Securitization, LIBOR-London Interbank Offered Rate, Hedge Fund, CDS-Credit Default Swap, Equity, FDIC-Federal Deposit Insurance Corp., Basis Point, Debt, HELOC-Home Equity Line Of Credit, Leverage, MBS-Mortgage-backed Security, and Liquidity.

CPM- Commercial Paper Market: This is a low cost source of cash that companies take advantage of when they have short term financing needs. This funding source is preferred over bank lines of credit because it's a less expensive means of borrowing.

CDO- Collateralized Debt Obligations: This is a security backed by fixed-income assets and underlying bonds.

Derivative: A financial instrument whose value depends on its underlying assets, such as stocks, mortgages or any tradable commodities. Stock futures and Credit default swaps are types of derivatives.

CDS- Credit Default Swap: This is a contract that is a form of insurance that a debt security will be repaid in case of default.

Securitization: The practice of packaging hundreds or thousands of individual mortgages or other assets together and then selling ownership stakes to investors.

LIBOR- London Interbank Offered Rate: This is the rate that international banks charge for short term loans to each other.

Hedge Fund: These are privately held investment funds that gather investments from rich private investors, state retirement funds, pension funds and others and use techniques to try to produce high returns, usually with high levels of debt to increase leverage.

Equity: Current market value of one's home minus the amount the homeowner owes the bank on the mortgage. With stocks, it's the ownership in a company expressed in the shares of stock one owns.

FDIC-Federal Deposit Insurance Corp.: This is a government agency that insures deposits in banks and thrifts. The insured amount has temporarily been raised from $100,000 to $250,000 per qualified account.

Basis Point: A basis point equals One one-hundredth of 1 percentage point.

Debt: The money that a person or company owes a creditor through the use of bonds or loans.

HELOC-Home Equity Line Of Credit: A line of credit secured by a home. Borrowers can draw on the line of credit, With limits set by the lender, for a fixed period, usually 5 to 10 years.

Leverage: The use of borrowed money to invest or finance operations by individuals or companies. The more leveraged a company or individual is, the more risk they take on.

MBS-Mortgaged-backed Security: A bond or security backed by a pool of mortgages which provides a cash flow based on the principal and interest payments of the underlying mortgages.

Liquidity: The more quickly or easily an asset or an investment can be sold, the more liquid it is. Checking and savings accounts are examples of maximum liquidity shy of money under the mattress.

I hope I've helped you a little in understanding what these terms mean. It can be confusing, if you're not in the financial field, to get a grasp on what's going on in financial and investment markets. We are in a full fledged recession that may have dire consequences to the average household. Education is still the key to help you navigate through this critical time in our economy.

Hurt Finances? Here's An Affordable Way To Invest In Real Estate

Many real estate investors have taken a major hit in their finances due to bad timing. These are investors who got greedy at the top of the appreciation cycle and decided to buy while home prices were at record highs. Now that they are upside down in their investments, many are walking away having lost thousands of dollars in down payments and other related costs. With so much capital being lost, it can be very difficult to take advantage of today's bargain prices.

So, how do you take financial advantage of a crumbling real estate market when your pockets are relatively empty? The answer..home builder stocks and REITs! Home builder stocks and REITs are at decade lows due to the depressed real estate market. Some builders have gone bankrupt and others are being gobbled up by bigger builders. This presents a fantastic opportunity to invest in the builders that will survive this market downturn.

The following is a list of my top 3 REITs and top 3 home builders I feel will not only survive, but will be stronger due to the elimination of some of their competitors:

REITs
1) VNO - Vornado Realty Trust - Dividend Yield = 6.34%
2) BXP - Boston Properties - Dividend Yield = 4.4%
3) SPG - Simon Property Group, Inc. - Dividend Yield = 6.65%

Stocks
1) NVR - NVRLP
2) MDC - MDC Holdings, INC
3) RYL - The Ryland Group

The above companies are trading at multi-year lows as are all companies in their sector, but these companies will survive presenting substantial upside stock and unit appreciation once the real estate market starts to stabilize. Many of them also offer very attractive dividend yields of as much as 6.65%.

Stocks and REITs are a relatively inexpensive way to participate in real estate market swings. You can buy as much or as little as you can afford without having to qualify for a loan, or deal with the expenses required to maintain physical property.

THIS IS GETTING REALLY UGLY

Whether you turn on the news or open the newspaper, it's clear there is an ever growing deterioration in the mortgage industry. Fannie Mae and Freddie Mac have been taken over and bailed out by our government. On Friday, WAMU or Washington Mutual became the largest thrift bank to fail in United States history. Remember, IndyMac Bancorp was recently seized by the FDIC and OTS a few months ago, and it was considered one of the biggest bank failures in U.S. history. WAMU, like IndyMac, did not have a problem with being well capitalized but rather they suffered a blow to liquidity after depositors withdrew BILLIONS in deposits in fear the banks would not be able to weather the financial storm.

I've talked about Fear and the damage it causes at length in my blogs, and it's clear it has reared it's ugly head again. A run on the bank, as seen with WAMU, is only considered prudent if you have amounts in excess of $100,000 that would not be covered by FDIC insurance. Depositors with $100,000 or less are fully insured by the FDIC and are not at all at risk of losing a dime. This ignorance of the deposit protection offered by the FDIC has again led to liquidity squeezes that no bank, regardless of size, can bear. Even Investment Banks like Bear Sterns and Lehman Brothers have collapsed as a result of panic withdrawal of funds.

Real Estate Investors Beware. The rules are changing as you read this sentence. If you intend to take advantage of short sales and foreclosures, know that the government is passing a $700 billion bailout for the banks to supposedly unfreeze the credit markets. You and I, the tax payers, have just been hit in the gut again by what is turning out to be a very socialist style of governing. The free market place which allows you and I to invest at prices the market will bear is about to be replaced with pricing the government feels is "fair". This basically means our government is going to buy up all of the wholesale properties from the bank's books with absolutely no other competition, at tax payers' expense. You, the real estate investor, will now have to buy at much higher prices because our government is now the "middle man" with plans to get its cut off the top. I really question the government's interference with free market capitalism.

Suggestion... buy now if you're able. I really think the profit in buying low and selling high is going to be a one man show( our government ) in the near term. The novice real estate investor is going to face a more difficult investing climate with profit deterioration on the front end of the purchase of government owned properties. Deals are available NOW...go get them before our government does.

Keeping Up With The Jones' Can Have You Living In The Dog House

Investors, as well as homeowners and renters, should live beneath their means to truly enjoy financial freedom. The problem is, many individuals and families do not, and they eventually find themselves in severe debt.

Have you ever heard of the saying "Keeping up with Jones' " ? It simply means that someone is constantly purchasing material things of equal or greater value than their neighbors, friends, or family. For example, if the neighbor across the street adds a 20 foot deck to their backyard, the individual trying to keep pace with his neighbor will add a 30 foot deck to his backyard. They are more concerned with how others perceive them financially than how financially able they are to purchase such expenditures. This kind of behavior in individuals can have catastrophic results to their bank account.

Unfortunately, I know too many people who are trying to keep up with the "Jones' " with dire consequences. These are good people with lovely families and good intentions but unfortunately "debt" could care less how nice they are. Some are losing their homes, while others are being forced to liquidate many of the adult toys they've accumulated like motorcycles, Quads, boats, trailers, etc... Many have credit cards that are maxed out and very little savings to live on. You see, "keeping up with the Jones'" is a very short lived lifestyle offering only temporary feelings of grandeur.

To avoid the pitfalls of living above your means, here are several rules you should follow:
1) You should have no less than 6 months of cash reserves (living expenses) in the bank for emergency situations like an illness or loss of employment.
2) 1/4 of your income should be used to build the fore mentioned cash reserve.
3) If you have a monthly mortgage payment, it should not be more than 1/3 of your monthly household income including any impounds attached to the mortgage.
4) With the exception of a home, you should use cash for purchases or if you use a credit card, you should pay it off in full each month. If you can't pay for things you want in full, then be patient and wait until you've saved enough cash to make the purchase.
5) Create a monthly expenditure spreadsheet. When you see what you're spending each month, you'll become more sensitive to your spending habits.
6) Invest in assets not liabilities. Assets will make you money while liabilities will cost you money.

A True Story That Raised My Real Estate Investing IQ

Back in the late 80's, I had my own business in the fitness industry before attending college. The income I was bringing in was not where I wanted it to be. I knew the Physical Therapy degree I would receive after college would allow me to expand my business and afford me the opportunity to live in a nicer home and community. While attending college, I was renting a 1,000 Sq. Ft. duplex in a lower middle class neighborhood in Los Angeles, CA. I couldn't wait to graduate from college, because I knew it would be my ticket out of the "hood".

Fresh out of college, I was looking to celebrate in a big way. I wanted a much larger home and wanted to live in a nicer neighborhood. To make that happen, I grabbed a newspaper, looked in the Real Estate Rental section and called several listings in the Hollywood Hills section. Having a celebrity clientèle, I thought I should live in the neighborhood I serviced. I found a home that appeared to fit what I was looking for and so I set up an appointment with Gordon, the owner.

When I met Gordon at the home, I was surprised at what I saw. The home was simply stunning. The home was a 4 story designer home built into the side of a mountain with a list of prior celebrity residents. I thought to myself, "how in the world did this young dude acquire this property...I need to pick his brain". I moved into the home with my girlfriend at the time and signed a lease with option to buy contract. I befriended Gordon knowing he could teach me more about investing than I already knew.

The Lease Option price for the home was $450,000. Gordon, appearing a bit embarrassed, admitted he had been offered over $800,000 for the home just 4 years earlier and didn't sell it thinking it would fetch a million dollars. Thinking it may have been a ploy to justify the $450k sale price, I investigated his story and found that indeed the home values in the area 4 years earlier were in his stated price range. When I asked him why he didn't sell the property when it fell below the 800k he had once been offered, he said, "I thought the fall in price was just temporary and that it would go back up...but it didn't...it's just continued to drop and drop". After a year of renting, I decided not to exercise my option to buy the home...a BIG mistake as you will see.

My talks with Gordon marked the beginning of my research into real estate cycles. In the process of researching cycles, my investing IQ increased exponentially. I eventually began investing using this research and profited handsomely as a result. My only regret was that I didn't exercise my option to buy Gordon's home. I kept an eye on the value of his home over the years and in 2005, the home sold for a whopping 2 million dollars.

Real estate prices go up and down in the short term, but the long term trend is always to the up side. It really pays to buy and hold real estate.

Will You Succeed Or Fail? The Choice Is Yours

There is no such thing as staying the same; you are either striving to succeed or allowing yourself to fail. Real Estate investing is centered around one primary goal...the generation of short and/or long term capital gains. The failure or success of your investing efforts will depend on several factors. Some factors are beyond your control, so your focus should be on those factors you can control. A few controllable factors include education, acting on opportunities, taking advantage of timing, keeping fear under control, and preparing for worst case scenarios.

I know a lot of people who are interested in buying property, but they just can't seem to pull the trigger to make things happen. The greatest losses of all are those from missed opportunities. Unfortunately, potential investors let fear dictate their financial decisions and missed opportunities become the norm rather than the exception. Procrastination is deadly to investing because of the importance of "timing". If you don't act on opportunities that are in your best financial interest, then you will fail to reap the rewards that investing brings.

You've heard the saying, "Misery loves company". If you surround yourself with people who are financially ignorant, you can't expect their support when your ready to make a change to improve your financial picture. They just won't understand that the end (wealth) justifies the means (investing in real estate). It's important to surround yourself with financial optimists that use objective data and not emotion to invest. It is also important that they have a track record of successful investing in up and down markets. Mentors in the game of investing are extremely valuable and their knowledge and experience can help you avoid mistakes they may have made in their past.

The ultimate decision to financially succeed or fail is on you. Get off your butt and take advantage of this depressed real estate market. Stuffing your mattress with money won't make you rich, and yields on bank savings accounts are a financial JOKE! Mortgage interest rates are about to go through the roof. If you miss this buying opportunity, you may never again have the opportunity to have the combination of low interest rates and cheap housing all in one cycle.

18% Mortgage Interest Rates Are Going To Make A Comeback

Don't believe me? Then you my friend have forgotten your history. From late 1978 through 1986 , mortgage rates were in the double digits. In October of 1981, the average 30 year conventional mortgage rate had reached a whopping 18.45% according to the Board of Governors of the Federal Reserve System.

The Question you may be asking is "Why in the world would interest rates hit 18% again?". That's an easy question to answer. To explain it in a very simplistic manner, it goes a little something like this: When home prices drop, foreclosure rates rise. When foreclosure rates rise, banks lose a lot of money and their stock price gets hammered. When bank stocks get hammered, they can fail (IndyMac for example), get acquired (Countrywide was acquired by Bank of America), or continue with operations with a focus on boosting profits to get back on track. Bank profits come from the interest rates they charge the borrower. Now put yourself in the bank's position...fewer loans are being approved due to tighter lending rules. This means fewer customers to make a profit off of. So how do you increase your profits to make up for the billions lost in the housing bust? You increase the interest rates on the limited supply of borrowers that will qualify for a loan. This equates to higher and higher mortgage interest rates with each year to come. 18% interest rates on conventional mortgages a reality? Ohhh yes! It's coming and faster than you might think.

The Prime rate on December 19, 1980 was 21.50%. According to the Wall Street Journal, the "Prime Rate"can be defined as "the base rate on corporate loans posted by at least 75% of the nation's 30 largest banks". Still think this is a far fetched idea of mine? History doesn't lie. It is what it is and I can tell you we're in for a major interest rate explosion.

The question real estate investors should ask is, "Do I buy now when rates are in the low 6% range or do I wait a little longer for a better purchase price and risk a higher interest rate?". That will be the mantra heard throughout investor circles all over the country.

Just my 2 cents: Buy now and don't wait for interest rates to hit astronomical levels. Prices are incredible right now and with current rates in the 6% range, you'd be crazy not to rap up your last few investments before the tide turns.

Investing And Failing Banks Don't Mix Well

IndyMac Bancorp was seized by the Office Of Thrift Supervision and taken over by the FDIC on Friday. This is one of the largest bank failures in U.S. history. There are at least 300 other banks that may suffer the same fate due to liquidity concerns and mounting foreclosures. Depositors are insured up to $100,000 by the FDIC, but for those with accounts over $100,000 it's bad times.

When banks fail, heightened lending restrictions from other banks tend to follow. These restrictions can have a devastating effect on Real Estate investors looking to borrow money. Fewer lending options are in the near term future as banks tighten up their lending practices. The days of exotic mortgages are over. The same can be said for stated income and negative amortization loans. I mentioned in a prior post that cash is king because cash investors don't have to worry about banks to fund their investments. With the current sign of the times, this could not be more true.

Property values are very attractive nowadays, but getting a loan is about to get really ugly as the potential for more bank failures exist. My advice to those of you interested in getting an investment loan is to get pre-approved as quickly as possible. Underwriting terms are about to change dramatically and current loan products may not be available in the coming months.

My Blog's 1 Year Anniversary

Today marks the 1 year anniversary of my Blog site. There have been 2,000 views of the site over the last 12 months. That's an amazing number of views considering it has all been word of mouth with no advertising.

To be honest with you, I wasn't sure I would be blogging beyond a month or two let alone a year. It is far more time consuming than I thought, and it doesn't help that I still type using only 2 of my fingers. Don't laugh, I'm probably the fastest 2 finger typer you'll ever know.

I plan to continue blogging in hopes that I can still offer a little insight for those looking to invest in real estate. Times are challenging now, but this is the time to take advantage of some of the best values in years.

Real Estate Cycle Trends Can Be Your Friend.

I've researched Real Estate cycles, trends, and related data for a number of years. It's fascinating to uncover the anatomy of real estate and expose what makes it tick. While doing a little research on trends, I found some interesting figures on median prices. In the United States, the median price of a home based on year was as follows: In 1960 $15,000; 1979- $50,000; 1987- $75,000; 1997- $100,000; 2000- $125,000; 2002- $150,000; 2004- $175,000; 2005- $200,000, and in 2006- $230,000. It is clear to see that real estate has been a great investment over the years, but down cycles do exist within the matrix of the ever growing up-side trend.

Throughout the course of history, there have been real estate corrections which have given back a portion of the gains made with each and every appreciation cycle. The long term trend however is always to the up side. These up and down cycles are very predictable because history details this predictability. Unfortunately, if you don't know your history, you may find yourself trapped in a cycle that can destroy a portion of your net worth.

The typical real estate cycle ratio is 5:2. This means for every 5 years of appreciation, we have 2 following years of correction. This is a very healthy part of the real estate cycle because it helps to prolong the affordability of homes. If homes only went up in value, the average person would not be able to afford the cost of homeownership. This correction also allows incomes to "catch up" with the cost of inflation thus allowing more potential homeowners to participate in the home buying process.

The most recent appreciation or "up" cycle was extremely stretched out. It technically started near the end of 1996 and terminated in late 2005 early 2006. This 10 year "up" cycle doubled the norm. One of the reasons for this record setting appreciation cycle was Interest rates. Interest rates were at 45 year lows thanks to the then Fed. Chairman Allan Greenspan who managed to keep the federal fund rate at 1%. Speculators also drove up prices resulting in multiple offers and lotteries. But what goes up does come down, and the ever growing bubble was destined to pop. By late 2005 early 2006 the signs of a correction were underway, and we have since been experiencing that which is known as a down cycle. Because we had an overextended appreciation cycle, the correction will be proportionate. This cycle if played right can be the buying opportunity of a decade because the homes are selling at 20% to 30% discounts compared to just 12 months ago. By buying in corrections, you stand to benefit from the future continuation of the median home price trend.

The Cash Investor V.S. The Leveraged Investor...Who Wins?

Other than inheritance, there are 2 main ways to acquire real estate...pay cash or get a loan. There has always been an ongoing debate by investors as to which is the better method. The truth of the matter is, both have their strengths and weakness' depending on the real estate cycle we're in. My bias is to the Cash investor methodology because it is my method of choice as it has allowed me to thrive in what has been a very difficult real estate climate for most. My Leveraged investor friends and associates have struggled in this climate and in some cases have failed to survive. For those of you fortunate enough to have a choice in you purchase method, I will lay out cases for each.

The Cash Investor: Have you ever heard of the saying, "Cash is king"? Cash is "King" and for good reason. A cash buyer doesn't have to worry about qualifying for a loan which could make or break his investment. Timing is everything and without cash, your time table is at the mercy of the lender's underwriting team and associated loan processing departments. Inversely, the seller doesn't have to worry about the buyer not being able to fund the purchase which adds a sense of seriousness and legitimacy to the Cash buyer's offer.

Cash investors who buy real estate for the purpose of generating rental income will be at an advantage over the leveraged investor due to lower overhead. If you take out a loan to purchase a rental property, you will have to come up with the monthly mortgage whether you have it rented out or not. Most mortgage payments are amortized which means the banks get their profits upfront with each and every payment (most monthly mortgage payments are comprised of 95% interest profit to the bank leaving only 5% going to decreasing your loan balance). If your rental is vacant, this money will come from your own reserves and when you include Property tax, insurance, maintenance, HOA dues, advertising, Property management fees, utilities and Misc. assessments, you can be out of pocket a pretty penny. The Cash investors in this situation have no monthly mortgage expense which allows them to save the profits the banks made on the Leveraged investor. Cash buyers can also be more competitive with their rents over the Leveraged investor since they don't have the additional monthly mortgage payment. The investor who has to get a loan will try to set a rent that covers the mortgage which may be quite high. Being a Cash investor allows far more price flexibility, and lower rents reduce rental vacancy periods which increase investor profits.

The Leveraged Investor: Donald Trump is famous for his ability to leverage (borrow) money for his Real Estate investment purposes. Although this technique has put a few bankruptcies in his file, he has managed to master the art of leverage and remain a dominant force in real estate. The idea behind borrowing other people's money to buy real estate is that you can make a profit from the sale of property purchased with the bank's money and not your own. This is a very attractive method for those investors with limited liquidity. In some cases, this is the only choice the investor has to invest in property but it must only be done when we're in an appreciation cycle. When the real estate market cycle is appreciating, money can be made if the property goes up in value enough to offset the following: Interest that you paid to the bank via mortgage payments, commissions to the Real Estate agents, escrow fees, closing costs on the buy and sell side, Capital Gains tax due to state and federal authorities, and any other costs related to the disposition of the property.

Leveraged buying in the right conditions can allow an investor to invest in many more properties than would have been possible otherwise. The profit potential can be substantial if timed right. If timed wrong though, it could lead to financial ruin. When you borrow from a lender, someone other than yourself is setting the terms of the contractual obligation. If these obligations aren't met, you could lose the property(s) to foreclosure. This is what is currently happening to investors all over the country. Putting someone else in control of your investments (the Banks) can be a blessing or a curse depending on market conditions beyond your control. I personally like to be in control over my investments making leveraged investing very unattractive for me. Time is not on the side of the Leveraged investor because payments are due the bank regardless of market conditions. If you don't have the reserves to weather the storm of market corrections and volatility, you should limit your risk by being conservative with the number of properties you buy through leveraged investing.

I believe the Cash investor wins over the Leveraged investor if the goal is to manage overhead expenses and reduce investment risk. The Leveraged investor has the potential to make substantially more money than the Cash investor due to the volume of investments that can be achieved but has a risk potential that can lead to financial ruin if the market drops in value. The choice is yours, make your decision wisely.

Picking Good Tenants Requires Some Discipline.

Finding a qualified tenant for your rental property can be a challenge at times. Although I've come close, I've never had to evict anyone from my rental properties. When talking to fellow investors about tenants and eviction, it's clear that my track record does not fall within the norm. I'd like to share with you a few guidelines I use in the tenant selection process. These guidelines may help you avoid the hassles involved in evicting future tenants.

1) One-Third Rule: People will often try to live beyond their means. The rent should not be more than 1/3 of the tenant's gross income. Requiring your future tenants to earn 3x the monthly rent will help assure consistent and timely rent payments. Tenants that live beneath their means tend to be the best tenants.

2) Landlord Reference: I've never understood the value of personal references on rental applications. Why would the applicant put down a reference that would speak badly of them? Right? References should be chosen by the landlord. You should always ask the applicant to list their last landlord as one of the references whenever possible. If the applicant can't give you this information, clearly this is a RED FLAG.

3) The Subtle Oral Interview: Liars will be very inconsistent with the things they tell you. During rental property showings, I ask many questions. Often, I will ask the same question in many different ways. It's amazing how often applicants will give you different answers to the same question. Again, another RED FLAG to watch out for.

4) Distance From Employment: Renting can often be an emotional decision for tenants and lack logic. If an applicant works 45 minutes to an hour away, there's a good chance they will tire of the drive and eventually want to live closer to their employment. This may not lead to eviction, but it may force the tenant to try to get out of their lease early.

The more common methods for assessing a tenant's qualifications such as credit score and criminal background checks are obviously useful, but the fore mentioned guidelines can be easily implemented to assess the likelihood of future problems.

You Can Bend, Twist and Skew Numbers, But You Can't Fool Me!

Turn on the news, radio, or open a newspaper and you'd think the majority of homeowners are out on the street or close to losing their homes.

Hmmm, something is very, very fishy here. You see, I like to engage in this little thing called "Fact Finding" before I get my underwear all up in a bunch. In 2007, there were 2.2 million households going through foreclosure. Now you may be saying, "WOW, that's an incredible number of people losing their homes", but what you should be asking is, "What percentage of American homeowners does that figure represent?". At the end of 2007, there were 128.6 million homes in the USA. The 2.2 million households losing their homes to foreclosure in 2007 made up only 1.7% of all homeowners. Do you see how unimpressive the true number of foreclosures are when compared to the overall number of households?

Truth in numbers doesn't make for exciting headlines, so the media will bend, twist and skew numbers to support their agenda which is sensationalism. Foreclosure numbers are just one example of how things aren't always what they seem. In 2007, 98.3% of Americans were not in default on their mortgages...WOW, 98.3%...now that's impressive, but you'll never hear or see that figure in the media. I'll make sure to give you the truth when I blog not sensationalized fiction. Trust me, there is a lot of hype out there that is presented with no relativity.

I've mentioned before that "fear" is to blame for real estate collapses. If you think a home you're interested in buying is going to be worth less next month than more, you will probably wait on the side lines hoping for a better price. When everyone interested in buying thinks the same way, this can cause a domino effect of declining prices that can snowball out of control. Now why would potential home buyers think a property they're interested in would be worth less in the future? I have the answer...they believe the ratings motivated twist on numbers put out by news sources that leave them feeling like a housing crisis is either here or eminent. This fear becomes a self fulfilling prophecy that is responsible for each and every down cycle in recorded history. There lies the opportunity for the Real Estate Investor. When Warren Buffet, arguably the greatest investor of our time, says "Be fearful when people are greedy and greedy when people are fearful", what he's saying is fear is temporary and in fearful times, the best investment opportunities lie in it's wake.

When people make their way out of the cloud of fear, it can be a very painful reality. They will have a front row seat to the price appreciation cycle that follows every down cycle and in more cases than not, they will witness their once owned property rise rapidly in value, potentially costing them hundreds of thousands of dollars in lost equity. When a homeowner buys a property for lets say $300,000 and sells it for $250,000 because of fearful market conditions, it can be very painful to see the new owners enjoy a rise in value to $400,000 or more during the following appreciation cycle. That's when the second guessing comes in and you start to get this sick feeling in the pit of your stomach. I've talked to many homeowners that have experienced the mistake of selling into fear and I can tell you it has left an indelible mark on their lives.

Don't make the mistakes others have made when it comes to your real estate investments. Do your homework and invest with facts not emotion or media twisted numbers. This will separate the successful investor from the money losing speculator.

The Questions Keep Coming

"Is it time to buy?"; "Is this the right time to invest in property?"; "Are you doing OK in this real estate crisis?"; "Are you upside down on any of your properties?"; "Should I sell my property or try to rent it out?"; "Are you buying now?".........these are just some of the questions I hear on a daily basis.

From Donald Trump to the small time investor, there is a uniformity of thought that this is the right time to buy. I wish I had a nickel for every time I've said, "Buy low and sell high". Doesn't it just make sense to buy real estate when it's substantially lower than it once was? I've said this before, "God isn't making any more land and the population is growing exponentially". This is the perfect recipe for making money.

Real estate is cyclical; it typically goes up in value for 5 years then corrects for 2 years. When I say, "corrects", I mean it gives back some of the appreciated value (usually 15 to 20%) from the current uptrend. This is actually a healthy part of the cycle because without corrections, real estate would be out of reach for the average person. Imagine if real estate went up each and every year. Homes would be in the millions making home ownership an elite only possibility. Granted, it sucks if you're trying to sell a property in a down market, but remember, if you're selling in a down market, you can purchase in the same environment which will save you thousands of dollars.

In my opinion, YES...this is the time to buy!

Investing With A Partner Can Be A Smart Move

I try to invest in Real Estate in different areas to avoid putting all of my eggs in one basket. Spreading your investments around can help you hedge against the possibility of declining value in a particular neighborhood. If you were to buy all of your Real Estate in one area, and it became a bad neighborhood over time, it could present disastrous results to your Investment Portfolio.

An Investment Partner could be the key to multi-property diversification. A partner can cut your expenses in half allowing more property deals to take place. For example, lets say you had $200,000 cash to invest. You could buy 1 moderately sized home using all of your capital or you could use the money to buy 2 small homes for $100,000 each. An Investment Partner contributing 50% of his own capital would allow you to double the number of homes in the fore mentioned example thus allowing you to spread your capital investment over a wider area. The cost of ownership is also cut in half making this type of investing attractive to those with limited cash reserves.

It is important to note that Partnerships don't always work out. It is important to find a partner who thinks the way you think. If your partner's personality is very different from your own, it could spell trouble. A plan should also be implemented so all parties know what their responsibilities are. Someone will usually take the lead due to location of the property or because they have an expertise or skill the other may not have. Accounting is a major area of importance with Partnerships. Tax liabilities are split between both parties as well as profits. Record keeping becomes crucial when 2 parties are involved.

Investing with a partner can be a smart move but make sure you pick your partner wisely.

Current Housing Unit Numbers

At the end of 2007, there were 128.6 million homes in the good ol' USA. 17.7 million of those homes were vacant, 75.2 million of those homes were homeowner occupied, and 35.7 million were occupied by renters.

Note that 35.7 million were occupied by "Renters". As I mentioned in earlier posts, people are being forced to rent as a result of losing their homes or having less than perfect credit making it difficult to buy a home. This is a factual overview that supports the notion that renting your investment property can be a great alternative to trying to sell it in this depressed market.

Rents are on the rise, and an investment in rental property now will not only allow you to capitalize on the cheap prices, but also allow you to make an 8% to 10% return annually from the rents you can now command.

Home Sales...1st Gain In Seven Months

The National Association of Realtors reported today that for the first time in 7 months, home sales increased 2.9 percent. In February, 5.03 million units sold compared to 4.89 million units sold in January. In my opinion, this is another signal that the housing correction is plateauing and an appreciation cycle is on it's way.

The Federal Reserve has been very proactive in recent weeks to help stimulate the economy. Last week, Fed. Chairman reduced the Fed Fund Rate by 3/4 basis points.

The Congress has pushed through the new Conforming loan limit which has been raised from $417,000 to $625,000. This should stimulate the refinancing sector as those with higher Jumbo rates look to reduce their interest rate to a conforming one.

If we get another increase in home sales next month, I think it'll be the confirmation that the bottom has not only been reached, but an appreciation cycle is on it's way.

Lower Home Values Have A Tax Benefit

Property Tax is based on the County Assessor's valuation of your home. Typically, Property Taxes go up each year as the value of your home appreciates, but what happens to your tax bill when property values decline? Typically, the average Property Tax bill will still go up in a declining market. Doesn't seem fair, does it?

There is a way around this unfair Property Tax increase in a declining market. Did you know that most counties have an appeal process to inform the county that your home is being taxed on an inaccurate valuation? It's true...The "Petition for Review of Valuation" form can be picked up from your local County Assessors office. There is usually a deadline to file the petition so don't procrastinate. The county will then notify you of their reassessed valuation of your property. In most cases, your property taxes will be substantially lower saving you money.

Home Rental Prices Are On The Rise

If people can't get loans to buy homes, they're forced into the Rental market...whether they like it or not!. Hundreds of thousands of potential home buyers have been shut out of the home buying experience as a result of the Sub-prime crisis. Foreclosures have forced banks and mortgage companies to tighten up their Underwriting guidelines and abandon the once sought after Low to No Documentation loan programs. Although this is quite unfortunate for those wanting to buy a home, it provides a JACK POT of opportunity for investors with homes to rent.

Over the last 12 months, I've noticed a 25% increase in the number of calls I get when I advertise a vacancy. I've also noticed an increase in home rental prices from my competitors as more and more people compete for the rental home inventory that remains. The volume appears to be coming not only from those unable to get a loan, but from those losing their homes to foreclosure.

Apartments are an option for renters, but homes offer many more advantages such as increased square footage, yards for kids to play in, and garages to park vehicles or provide storage. Rental Homes also offer renters the possibility of future home ownership through Option To Buy programs. These programs often give renters a credit from rents paid toward the purchase. Apartments just can't compete with that.

This a great time to buy an investment property for purposes of generating rental income. The added benefit will be the increased gain in property value as we move into the next appreciation cycle. This is a Win-Win situation for most investors.

The Bottom Of The Real Estate Cycle Has Finally Arrived.

Finally...the signs of a Real Estate cyclical bottom have arrived. In December of 2007 Home Builder stocks across the board hit 52 week lows. In January of 2008, about a dozen Home Builders saw their stock increase as much as 100% off their December lows. This is one of the first signs that the tide is turning. Stock Investors feel the worst has already been factored into Real Estate stocks. This psychology leaves investors seeking very attractive entry points in home builder stocks which in turn drives up stock prices.

The Federal Reserve Board, led by Fed. Chairman Ben Bernanke helped stimulate the economy by lowering the Federal Fund Rate and the Discount Rate by a total of 125 basis points in less than 2 weeks. This bodes extremely well for real estate recovery. Homeowners on the cusp of foreclosure may now refinance at lower rates which may reduce the number of inventory homes on the market. High home inventories put downward pressure on home values, so anything that reduces inventory is a good thing. There is also a move by congress to increase the conforming loan limit of $417,000 to $625,000. This will move home buyers out of higher interest Jumbo loan rates into lower interest conforming loan rates. Again, great for a housing recovery.

A cyclical bottom doesn't mean that home prices will not drift lower in some areas, but what it does mean is that the bias is to the plateauing of the market which will soon be followed by a trend to the upside. I believe the second quarter of 2009 will be the beginning of a 5% - 7% upward move in home prices. There is still a substantial number of inventory homes to work through and foreclosures yet to come, but the worst is behind us.

To paraphrase Warren Buffet, "Be fearful when people are greedy and be greedy when people are fearful." In other words, the best time to invest is when prices have been driven down by mass fear. When people are no longer fearful of continued price depreciation, values will begin to rebound. By investing during the lows of the market, you stand to profit greatly from the rebound. This is how REAL wealth is achieved. Wealthy individuals tend to do the opposite of whatever the masses are doing. I have personally benefited from this contrarian point of you, and I frequently tell friends and associates to adopt this way of thinking.

FEAR alone is to blame for dropping home values

What has changed in Real Estate over the last 24 months?...nothing but fear. The house you bought for $300,000 2 years ago is probably worth about $225,000 today. Nothing has changed about the home or the land it sits on, but there is a very menacing emotion that can destroy the most valuable asset you own...it's called FEAR.

The "MEDIA" is notorious for instigating this fear. In it's attempt to provide material worth viewing and reading, the MEDIA can single handedly destroy any and all confidence people have in purchasing a home. It actually starts when things are going extremely well in the housing market. The media will flirt with the idea that rising home prices can't continue forever and that a bubble in housing "appears' to be on the horizon. Then they focus on unsustainable percentage gains people are realizing when they sell their homes. Once you hear that repeated over and over again, you can be sure that the "_ hit" is about to hit the fan. People start to become fearful when they constantly hear of the potential of a bubble bursting in real estate. They start to second guess their decision to buy a home and eventually this fear spreads to the masses causing an exodus out of the home buying experience. This domino effect is completely fear driven causing trillions in lost asset value throughout the country.

As values sink, people become "upside down" in their mortgages forcing many into foreclosure when their homes are worth less than they owe. Adjustable rate mortgages only compound the problem because when they adjust, the interest rate can add hundreds of additional dollars to each payment even though the home is now worth far less. The correction in house values also takes a toll on all those homeowners who took out Home Equity Lines of Credit (HELOC's) when their homes were worth far more than they're worth today.

Unfortunately, logic in housing is trumped by the emotion called fear. It doesn't matter that nothing materially changed in the home you bought or the land you had it built on...if the bulls (the frightened home buyers) are running you better get out of the way...or should you?

I still believe that when fear causes home prices to drop to ridiculous levels, this becomes an opportunity of a lifetime time to buy Real Estate. Smart investing is about buying low and selling high. What better time to buy real estate when there are discounts of up to 50% in some areas. If you're able, start adding to your real estate portfolio during this period of the cycle. Your rewards will be great in the long run.

Home Builders...Some Good...Some Bad

Some builders have lost sight of their life-line...the customer. I'm currently adding 2 new homes to my investment portfolio. One home is being built by the home builder "Pulte Homes" and the other is being built by "Richmond American". It's amazing how different the experience can be from builder to builder.

The Sales Associates for both builders are nice, professional, and make an effort to accommodate within their limits. I call the Sales Associates "Foot Soldiers" because they're on the front line and understand the "buyers" needs more so than the big wigs above them.

The biggest difference between Pulte Homes and Richmond American is how the superintendents and their superiors interacted with me during the construction of the homes.

Pulte Homes is by far the best of the 2 builders. I've purchased several homes from Pulte in the past because of my favorable experience with them. Pulte makes sure the buyer is satisfied and happy with their service.. Pulte has consistently made sure that all issues of concern were addressed and taken care of in a timely manner.

Richmond American, (sales associate excluded), has taken on a very arrogant attitude during the construction of my home. A kind of "take it or leave it" attitude that absolutely has no place in the home buying and construction experience. A "Quality Build" should be the priority of any home builder, but my experience with Richmond American leads me to believe that production time lines are their priority...not quality. I've spent countless hours on the construction site making sure poor quality issues were uncovered and formally addressed (basically doing the superintendents job). You would think the superintendent would want to prove just how qualified they were by catching problems before the home buyer, but unfortunately that was not and is not the case with this new build.

I could literally write a small book on how disappointed I've been with the Richmond American home buying experience which leads me to the point of this post. When buying a home from a builder you have no history with, knock on the doors of people who live in the community or subdivision built by that builder. Ask the hard questions like, "Were you happy with the builder?", "Were you satisfied with the construction of your home?". The answers, if negative, could save you the stress of working with a builder that has no interest in making sure your buying experience is pleasant. In my case, it was the Lot and location that sold me...not the builder Richmond American. If the location is phenomenal, and you have no choice over the builder (as was the case with me) you may have to roll up your sleeves and fight the good fight to make sure your investment is built with the quality and workmanship you would expect.

The POT OF GOLD In Today's Housing Slump

This is one of the most amazing buying opportunities in over a decade. If you've ever considered investing in real estate but were afraid to pull the trigger because of high prices, YOUR DAY HAS COME!

Have you seen the housing data lately? Talk about blood in the streets, almost every home builder that is publicly traded in the stock market has hit a new 52 week low in their stock price this week. There is even talk that Beazer homes may go bankrupt. These are absolutely brutal times for home builders and for homeowners trying to sell their properties. There is another side of the coin however...a side that can make the participants a boat load of equity (CASH)!!! I've said this over and over, buy low and sell high. This market is priced to perfection for the investor with limited investment capital. Home builders have such high inventories, that they are practically giving them away. I've seen incentives that would just blow your mind...I'm talking about offers of a new car with home purchase, a swimming pool, first 6 months of your mortgage paid for you, it just goes on and on.

I'm starting to see home builders open up their doors to investors once again. During the appreciation cycle or "seller's market", investors were having doors slammed in their faces and were looked at as pariahs, responsible for the destruction of neighborhoods and the cause of overinflated pricing that kept families from being able to afford an entry level home. Investors, however, have always made up 25% of the buying public and when you say no to the investors, you're really allowing a potential 25% correction that in time will hurt the builders, as we see today. Saying "no" to the investors is not the only cause for a drop in home sales but it does make a substantial impact over the long term market cycle. Those investor bashing days appear to be behind us in this equity crushing sign of the times. Investors are now looked at as saviors and are welcomed with open arms with hopes of saving the day....which they will.

Miss this real estate buying opportunity, and I guarantee you will regret it. The if I would've, could've, should've mantras will ring loud 6 to 7 years from now when all of today's purchases have produced double and even triple digit percentage returns. History has shown that property values typically rise 3 - 5% per year but properties purchased in desired locations during the lowest part of a market correction can see values rise 100% to 200% in the following up cycle. You can either be in it to win it, or sit back and watch opportunity depart into the fog of ignorance.

The SECRET Dance Between The Stock Market And Real Estate

The Secret...I've spent a considerable amount of time studying current and past Real Estate trends, economic statistics, and all facets of the Stock Market. As a result of years of study, I've found something that I think my readers will find very interesting. There is an absolute inverse relationship between the Stock Market and the Real Estate Market.

The rich get richer for a reason. They understand money better than the masses and make financial moves that typically yield the highest returns possible from their investments. The #1 way to accomplish this in the Stock market and the Real Estate Market is to buy low and sell high. I'm sure this concept isn't new to most of you but did you know there is a predictable cyclical shift of cash out of the stock market which goes directly into the real estate market? Did you also know there is a predictable cyclical shift of cash flow out of the real estate market back into the stock market?

The stock market like the real estate market goes up and down. Some may find it a coincidence that the stock market is usually at its highest high at the same time the real estate market starts to crash and that the real estate market is at it's height when the stock market is experiencing a substantial correction. I'm here to tell you that it is no coincidence. When the stock market surges to higher highs, the smart money starts to liquidate their positions thus locking in their profits before the market corrects and takes it back. When you're sitting on a lot of cash, your money isn't growing. The wealthy will then look for alternative investments that will produce the highest potential returns. A down real estate market presents a great opportunity to buy low and eventually sell high in the next real estate up cycle. So that's where their capital goes. This will in turn result, over time, in a stock market correction. By the time the stock market hits it's bottom, the real estate market begins to hit it's highest high in the cycle. Properties are then sold at the high for a substantial return and placed back into the stock market because the stocks are trading at a huge discount. This is the Secret dance between the Stock Market and Real Estate.