OfflineNever has it been easier to make money in real estate than in 2008....that is until 2009 came along. The first part of 2009 will be different than the last part of 2009...much different. For the first few months of 2009 (4-6 months) the interest rates will be rock bottom. The government is trying to stimulate the economy by lowering interest rates. Here is the problem with that tactic. The lower the interest rates the higher inflation will run. To slow inflation down the interest rates have to rise. That rise will start sometime between April and July of 2009. What does that mean for you? That means you will need to lock in and refi all of your mortgages into 30 year fixed rates. If you decide to move any loans into a ARM make sure it is a 5 year ARM. When interst rates start to run (and they will) rates will be in the double digits by the end of 2010 (30 year fixed rates will be between 10%-14%) and they will stay there until the beginning of 2012 then they will begin to taper back down. When interest rates are high no one can afford to buy a house. For example, a $100,000 dollar house payment at 6% interest is about $600 per month. A $100,000 house payment at 12% is about $1050 per month! Do banks see all of this coming or do I have a crystal ball that nobody else has? The banks see all of this coming! The only reason I know this is because I study history and history always repeats itself. Since banks know what will happen they are going to do a couple of things. One is this, they need to control there losses as much as possible without going broke. To do that they want to sell all of their inventory (foreclosed homes) as quickly as possible. They are not going to give these houses away....at first. What they will do is put the houses up for sale at the recommended BPO (brokers price opinion) price but, if no offers come in they will slash prices, maybe by half, just to get them sold before the interest rates start to rise. Once interest rates start to rise these homes will not sell unless they are priced far below value. So knowing that, you will have competition many times if they slash the prices in half in one day. You will want to offer half price before they slash prices so you get the house before everyone else. I HAVE ALREADY STARTED TO SEE THIS HAPPEN IN MY AREA! And I live in an area where the economy is strong. Once you have the house, rent it out until the interest rates go way up. Once interest rates go way up, sell it as a lease option with interest rates slighty below the going rate. BUYERS WILL KNOCK DOWN YOUR DOOR TO BUY THESE PROPERTIES AS A LEASE OPTION! Example: You find a house that is worth $100,000 but you buy it at half price for $50,000. You lock in your rate at 6% interest. Your payment is $300 per month. You sell the house at value ($100,000) as a lease option at 10% interest. The new owners payment is $875 per month. Your positive cashflow difference is $575 per month! You will give your new buyer a rent credit of $175 per month. You will charge $5000 down as a non-refundable deposit to be applied toward the purchase price. You don't pay for management or repairs. The new owners pay the taxes. THEN 3 YEARS DOWN THE ROAD YOU GET A PAYDAY OF $40,000! YOU WANT ONE OF THESE PAYDAYS EVERY MONTH! To do that you want to buy a house every month in 2009. Imagine making $40,000 per month for a year in three years. And while you were waiting you were receiving $12,000 per month in cashflow and deposits! Wow! I skipped a lot of the small details but I think you get the point. That is the strategy for 2009. I will doing that along with holding a few as rentals. 2009 should be a great year! Get it done!
You've got to find your obstacles and call them out! Unsheath the sword, and do battle with whatever it is that holds you back!
I'm keeping this one posted by my computer, and will be following your advice. While I know you can't literally predict the future, I know you do your research and what you believe is most likely to happen (partly because you MAKE it happen. I like that.)
Rina
"Obstacles can slow you down, but they can only stop you with your permission." Dean Graziosi (BARM pg 101)
"For I know the plans I have for you," declares the Lord, "plans to prosper you and not to harm you, plans to give you hope and a future." Jeremiah 29:11
For a little about me, welcome to the site, and a few tips for new DG family members, click on this link: http://www.deangraziosi.com/user/3249
Indeed, we are experiencing massive monetary inflation, but the reduction in prices would make one think we are in total deflationary mode. If the Fed still reported M3 numbers we would probably be in total shock of what we find (which is why they don't).
I am not a economist, though that probably makes me just as qualified to speculate as one
... but it appears that we are currently and will continue to experience accelerated inflation.
The actual price decreases in things like oil are recessionary, while we see inflation safe commodities like gold spiking back up.
The money is leaving the paper markets and going into inflation friendly investments, generally non perishable (and generally non depreciating) tangible assets, whether metals, property/real estate, guns... there is a big list of things like these.
IMHO we are witnessing another example that fiat currencies are they flawed and unsustainable by mere mortals. Reserve requirements are now basically zero. Every dollar is levered many times over.
Not only does the situation CBR outlined make it mathematically sound to be in real estate, the condition of the debt, and thus the currency make it sound.
Picture this... Fed is basically down to 0.25%, money is being gobbled up, no reserve requirements... this leads to virtually unlimited money.
Land is limited, gold is limited... the more rare a commodity is, the more valuable.
Let's say based on TRUE inflation, not CPI, we're around 13%, though some estimate as high as 18%.
I go to the bank today and take a two year mortgage out at 0% interest (just for sake of argument) for $1,000,000.
In two years I repay that $1,000,000... but weighted against inflation I really only paid $740,000 back.
Now, if you're locked in at 6%, while inflation has and continues to run well over that amount, you are actually in a arbitrage situation assuming inflation always remains above it. CBR is right, interest rates will have to rise to match true inflationary numbers.
Here is where the economy is in a conundrum though. Prices were too high for people to afford (really afford, not credit) or willing to pay for items. Producers (whether cars, houses, food, TVs, anything) have to cut prices until they get to point people will buy. If the price goes below the cost to produce the item, then we the economy actually shifts into reverse and unwinds itself. Producers have to cut costs (jobs, spending, etc) and it all contracts.
No one can forecast how things are going to play out, but a lot fingers point to real estate as being a safe investment, not only for the reasons CBR mentioned, but as an alternative to cash and to hedge against inflation with a locked in rate.
Everything is really tricky when you try to look hard at it, there are a ton of variables. I'm with CBR on this one... I've got my money on real estate.
For those of you who want to see the numbers crunched into historical graphs there is a team still (doing their best at) tracking M3 along with other very important inflationary/economic indicators.
http://www.nowandfutures.com/key_stats.html
Great post cbr. I've been getting kind of heated lately in negotiations. Let's just say I've been lowballing several offers and then I get into a philosophical discussion that all the money used to buy homes during the house boom was fake. Therefore all their numbers and estimated value of the homes is hypainflated when we are in a recession and deflation is widespread across all comodities and that their prices should reflect that
.
I been driving around looking for properties and everyday i see brand new high end cars being drivin off the lot with new plates and it got me thinking there still money to be mad out there alot of money and cbr is right 2009 will be a good year a great year for REI
Great post and as "bad" as things are right now there's always money to be made and people to help. Thanks again cbr for that insightful post and a reminder to take action before this all passes by. I also want to say that this site and it's people have been a great blessing to have and I am greatful for it.
Good job guys...
John 14:6
Great post and as "bad" as things are right now there's always money to be made and people to help. Thanks again cbr for that insightful post and a reminder to take action before this all passes by. I also want to say that this site and it's people have been a great blessing to have and I am greatful for it.
Good job guys...
John 14:6
Always with you finger on the pulse of REI. Great post, and I know there is more to come for 2009...Jan
CBR, like they say, you are the man. Keep the crystal ball going, cannot wait for the next script. Thanks a million.
Sandra
"You can never get to the top, if you are not willing to climb. Do not look at the difficulty of the climb, only anticipate the view from the top."
"Can't even walk without you holding my hand." (Song)
"Is anything too hard for the Lord ..." Genesis 19:14
"In all things, wait on the Lord."
"Think not of your own deliverance, but trust in God who will give in abundance."
"When you are down to nothing, God is up to something." Unknown
"Our lives begin to end, the day we become silent about those things that really matters." Dr. Martin Luther King Jr.
that is good, i am with you. thanx.
As always - I come to this site and get all fired up and reaffirm my belief that real estate is where its at!!! On Monday I HOPE to get my next property locked up - at 45% below FMV! I am seeing the shift in the market here just like you say CBR, and while I have had my last 3 'accepted' bank offers scooped out from under me by cash buyers I am just continuing to put in the offers and when I'm meant to get the deal, I will. But patience is NOT one of my virtues since beginning REI! I want my next deal NOW haha....
thanks again for sharing your amazing insight!
Laura
www.adeptpropertiesllc.com
my story:
http://www.deangraziosi.com/node/10404
sorry, I almost hijacked the thread.
"Obstacles can slow you down, but they can only stop you with your permission." Dean Graziosi (BARM pg 101)
"For I know the plans I have for you," declares the Lord, "plans to prosper you and not to harm you, plans to give you hope and a future." Jeremiah 29:11
For a little about me, welcome to the site, and a few tips for new DG family members, click on this link: http://www.deangraziosi.com/user/3249
Everything sounds very exciting. But how do you finance one house a month?
CBR - thoughtful prognostications. I'm a rookie (first day on the site) and I was wondering if you could put some thought into (and post) what would happen under your described scenario should disinflation set in vs. inflationary pressures as you suggest. I'm not disagreeing with your future view, but it seems to me there are a range of possible outcomes with interest rates, inflation, etc.
I'd like to understand what would happen in your view if we get deflation for an extended period of time and how that could impact the real estate transactions that you're doing today when it comes to cash flow, refinancing, lease options and resale. Is there anything you do that acts as a hedge against this?
How did u get started? I keep asking this question and no one never response.
ARLENE
Please dont post my hold name out there.
If deflation were to happen (which I don't think will) then I am still safe due to the fact that I buy real estate at 40%-50% below todays current market value. On top of that I have cashflow of around $300-$600 per single family home which would allow a price reduction on rents if needed. Right now true inflation is running at around 8%. If deflation were to ever start I don't see it lasting very long. If deflation does start that might create another buying opportunity. The main reason I don't see deflation happening is due to the fact that the government continues to devalue the dollar like has never been seen before.
The main thing to remember is that when things are bad in the economy then things are good for the real estate investors. I invest in areas with strong job creation and very low unemployment and I suggest everyone follow this strategy.
You've got to find your obstacles and call them out! Unsheath the sword, and do battle with whatever it is that holds you back!
Happy New Year!!!
Question about the 5 YR ARM...why not a 5 YEAR BALLOON W/ 15/30 year? I am now facing the fact the Fannie/Freddie have implemented a 6 mo. seasoning period which a commercial loan doesn't have...so if I want to do commercial why the 5 yr ARM instead of the fixed Balloon? Or were you just making a suggestion...Could you please clarify? Thanks CBR!!! Ciao...
Challenges are only challenges if you view them that way. Try looking at them as OPPORTUNITIES instead and success will follow!!! "ME"
Great post!!!
It lays out a plan for us beginners
Thanks....
Don
Thanks CBR! You're always ahead of the game. This is really good stuff!
Not to hijack the thread - just need to know how to contact you - can't seem to send you a PM. Issue with order processing. THANKS!!!
Tracey (Hamilton) Roberts
aka MouseBandit
CBR's plan is very solid. I dont have a crystal ball but my guess on interest rates is that they will stay low for all of 09.
The economy is REALLY weak right now. And still getting worse. The layoffs are just starting to happen which means they havent begun to do damage yet. But they will. That is clearly the next shoe to drop, and the laces are already untied.
I dont see anyway the Fed can do anything but ease for the foreseeable future. And the govrnment will be pumping $$$ into the economy to try to electro-shock a patient that is on life support.
Definitely a great time to pick up deals. I am looking to buy and flip. The low end, VERY low priced (FHA) market seems ok. It does seem like there are currently problems with the rental market.
I will indeed be looking to LO out of my properties. It might 2011 instead of 2010. But it is coming.
GL to all,
Mark
There is a real and growing opportunity to take advantage of the banks' stupidity.
First is buying properties that they made stupid loans on and are now having to dump.
But more to CBR's points, they banks are ALSO now over-reacting on the other side, not lending to people who probably should get loans. There will be a real opportuniy to sell to people who don't fit the banks' current (VERY TIGHT) borrower mold. Selling means land contract, owner financing or LO.
Hello everyone, I am a newbie to REI ,but I read Dean's book some months ago. Just like CBR said it about 09, it's a great year to be in RE. Here is my situation, I have a bad credit, self-employed in slooow business and only 5,000 dollars in hand. I don't own a home yet, so I am thinking maybe get a house to live in first,or use the money to invest, but how in my case ? I am really confused. Any ideas? Thanks everybody.
I would definitely take care of your PR first. Here is a great strategy if you are willing to nomad/rough it a little.
Buy a fixer at WAY below market. Live it in for 2-3 years while rehabbing it. When it is rehabbed, sell it. The first 250K (500K for a married couple) of gain is tax free.
Plow that money back into your next fixer.
Rinse and repeat every couple of years.
thanks for your reply wmark, is there any faster way to do this and also to buy a fixer upper suitable for a family of 5 ,wouldn't it cost a bit and what about my bad credit?
Daba.......in your case you need to find HARD MONEY to back a GREAT DEAL. Find a Great 40% below value home that a Hard Money loan will cover.....conventional may not work for you otherwise.
BUILD your knowledge base....it is your ARSENAL to wage war against disbelief and the negativity of the status quo. You need your weapons......It's your choice whether you carry them or not.
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Build Relationships and open the door to opportunities that could once only be dreamed of......never take those relationships for granted.
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Don't let EXCUSES be the nails that keep you INSIDE the box.