Interest Rates Have Fallen

The Federal Reserve has been in the news lately as they dropped their interest rate to just above zero. (0.25% more precisely). They tell us they want to avoid a credit crunch. What does this mean for us unwashed masses in flyover country? There could be several different outcomes. It's been said that you could take all the economists in the world and lay them end to end and they still would not reach a conclusion. While it has never been done, it would be an interesting thing to try someday when more than ten of us can get together. In spite of this uncertainty it is worth considering how this rate drop may impact the world of real estate.

Businesses

Right now, many businesses are experiencing between fewer and no customers. If they are not flush with their own cash, they need working capital to stay afloat. Shortly before writing this, I saw an article that said Cheesecake Factory does not anticipate being able to pay the rent on their facilities. The CEO of Texas Roadhouse said he will forego his salary for this year so the employees can be paid. This guy is showing leadership and appreciation for the people who make his business work. Money is needed to keep business running. The lower interest rate will help ease the pay back burden but the money supply (the amount the Fed creates out of thin air) is what will keep these people in business.
The same is true for some in the real estate business. If there are mortgages to pay, having tenants out of work does not make for a happy landlord... or happy lender. If this thing is over in a few months it may not hurt the rehabbers and builders too much, yet they still have unbudgeted carrying costs. It is not known at this time how the banks will use this availability from the Fed, lending it out will be giving the borrowers a larger nut to crack, and cuts into their profits but they will stay solvent. King Solomon summed it up well in Proverbs 22:7 “The rich rules over the poor, and the borrower is the slave of the lender.” But... it's better than going out of business. Or perhaps, it just delays it.

Savers

The thrifty, work hard and save your money types, will continue to take a beating at the hands of the banks offering their sub one percent CDs. Better to buy a Willie Nelson CD at least the online store won't insult your intelligence.

It's not that many people these days can count on interest accumulation to fatten their home buying fund, but this certainly will not make it easier to accumulate substantial down payment money. In a way it is good for new buyers that the FHA will finance them with almost no money down, But it does leave them vulnerable to downturns in the housing prices as we saw when the bubble burst years back.

Buyers

When it comes to selling houses, if the money supply holds up, it may make it easier. With cheaper money more people can afford the houses on the market. So until they decide the market is expanding too fast and raise the rates it may be a good time to make hay while the sun shines and sell what is ready, IF the chicken littles in the media have not destroyed the confidence of the buying public.

Investors

I understand that most investors don't trot on down the the local financial institution to be laughed and misunderstood by some banker with the employee mentality when they want to fund their deals. However, some do and they may benefit from this lower rate IF the bank passes on the reduced interest and does not make them grovel too much. For the others, cheaper money may have an impact on hard money lenders as well... but maybe not as they are paying for availability apart from the banking system. However, if more money is available overall, it may just result in more competition (and higher prices) for deals.
These are a few of the factors we may be facing in the coming days. Others, including wild cards of how long people will be cowering in their homes, and the attempted destruction of public confidence as well as any regulations our helpful betters may see fit to impose can move any of these suppositions in either direction. Experts, or those we look to for answers don't agree so we just need to stay calm and flexible since this will help us respond to many of these situations we can neither predict nor control.
Having said all that, we need to go back to the beginning and look at something that is common knowledge among those who have been following the actions of the central bank (the Fed) for some time. We need to get rid of the idea that the Federal Reserve is a government agency acting altruistically for the benefit of the American people. Despite the name, they are no more a government agency than Federal-Mogul Corporation or Federal Express. They allow the President to appoint the chairman, but it is still an organization assembled by the major banks in the US. The whole sordid tale is told in the classic book The Creature From Jekyll Island. It's a good read that will scare the daylights out of you... even Willie Nelson said so after reading the book. There have been several other books written on the topic, but this one appears to be the definitive work that pulls back the curtain and shows what is really going on.


Right now there are just too many variables to be certain of the future... but as always we just need to be paying attention to everything going on around us and make the best decisions based on the best information we can get. There are no guaranteed of anything, except change.

Tough Times Don't Last...

Robert Schuller was fond of saying “Tough times don't last, tough people do.” Thomas Paine told us, “These are the times that try men's souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands by it now, deserves the love and thanks of man and woman.” We aren't fighting an enemy trying to kill us with muskets and swords, but we are fighting an enemy that can destroy lives and our economy – our way of life.

Many have chosen to complain and obstruct honest efforts to get us through this time. They are the nay sayers who would rather point out their perceived problems than do what is necessary to fix the situation. For the forseeable we will be inconvenienced by efforts to stop the spread of this Chinese virus. This is much like we are inconvenienced here in Pinellas County as every where we go as streets are torn up and traffic rerouted in an attempt, they tell us, to provide a higher capacity storm sewer system to handle the massive rainfall we see during the frequent tropic storms and occasional hurricane. I hope the local efforts are worth the annoyance.

Fortunately, for the first time in many years, it looks like the direction coming from DC is taking us to the solutions we need. However we still see far too many people hurt by our disinclination to travel, congregate in larger groups and got restaurants. These choices are either our own or by decree. They are the right things to do and sometimes those who can least afford it pay the price. The government is trying to ease the burden with some cash, but by their very nature cannot take care of everybody.

Personal Cost

There are hospitality workers who are simply not needed for sparsely populated hotels. There are waitresses and waiters dependent on tips employed by empty restaurants. Clerks in shuttered stores. The list goes on. There are people hurting financially, emotionally and spiritually now. Like the government, we can't help everyone, but perhaps we can help a few... like those of us who we have the privilege of providing housing.

Among the suggestions is that people should be forgiven rent on their homes. This is a fine suggestion by someone with no skin in the game and nothing to lose or mortgages to pay. Like pretty much all give away schemes, they are proposed by those who think someone else should pay the bill. There may be some large corporate property owners with free and clear properties that could do this but many have mortgages to pay and simply cannot forego the monthly revenue.

Staying Afloat

That said, within the bounds of economic realities, it will not hurt work with tenants who have been with us all along but have run into some tough times. In doing so we have to remember that taking care of tenants includes keeping lenders fed who have financed the rental properties. This is not the kind of thing that Paine's sunshine patriot would do. The summer soldiers would throw up their hands and tell everyone there is nothing they can do. Taking care of people is the right thing to do and, long term, is good business. However, it can not be done to the point where your business can no longer function and you cannot take care of your other tenants.

Many small businesses cannot afford to be shut down or work without sufficient revenue for long periods. The real estate business is no different, some allowances won't be too damaging long term. I am suggesting that rather than cursing the darkness around us in the form of the Chinese virus, we can light a candle and pitch in and help where we can.

Other ways we can help ease the burden of our separated lives is to do such things a buying gift cards from our favorite restaurants to help them with some cash flow while people stay home. This isn't charity as these cards are fine to be cashed in when the virus is defeated and we start going out again.

Overcoming Adversity

One thing I have learned over time is that we aren't bothered nearly as much by all our inconveniences and annoyances when we are helping someone else. Americans came together after the War Between the States to become one country again. Americans defeated the Axis powers in World War II. Americans put a man on the moon. Americans developed much of the technology we use everyday. And we will defeat this virus in spite of the bellyaching and carrying on by the whiners among us. Each of us has a choice we can join the whiners or we can be overcomers.

Condo or Co-op: What's the Difference?

When my most recent excursion into real estate as an investment I came across what I thought were some fairly inexpensive condos that I could rehab and rent or sell. But a before we had a look at some of them, a realtor friend said to me, “You know, those are co-ops, not condominiums.” That started me down the path of learning the differences.

When you drive by, unless it is stated in the signage, you can't really tell one from the other. However purchasing each is where you find that they are two different animals. With a condo, you are actually purchasing real property. You have a recorded deed that specifies exactly what you own... and that you actually own the property. With a co-op, you put your money down and get a stock certificate and the right to lease a particular unit. This, in itself should be an immediate cost savings as real estate closings carry a substantial price tag. 

That is first major difference and all the others flow out of that. For example, as real property that can be foreclosed, banksters believe their money is safer and are more willing to lend on better terms, With the co-op the collateral is not as readily available to the lender should things begin to go badly... and you will probably have to present a much larger down payment. In either case, a property constructed on leased land may be more of a hindrance to desirable financing.

Since co-op shares represent ownership in the entire building, controlling boards, which can be elected or a board of the whole, take a more active and energetic role in the approval of new residents. Of course they do the normal credit check and background report that you would find in either building, but there is an interview process where fairness and legality are not so highly regarded as compatibility with the existing social culture. This can be good if you are a good match, but woe to the poor soul who wears a MAGA hat in the presence of Clinton supporters... or possibly the reverse. While all share holders are equal, often the owners of the larger units are more equal in that they have more voting power.

This leads to a closer, more uniform community if you are a good fit. The fit is less of an issue with condos as if you meet the published criteria you are generally accepted to purchase a unit. From that point on, it is up to the buyer to live peacefully with their neighbors... and they can't throw you out simply because they don't like you.

If you are looking at the property as a part year resident, either is particularly well suited despite the ongoing monthly fee as there are always people around more or less watching your property while you are gone.

If you are looking at the purchase as a rental property you are more likely to be able to do so with a condominium. However read the bylaws carefully, don't just take the smiling salesman's word. Some associations do not permit rentals. Some permit them after you have owned the unit for a year or more. Others have no restrictions. While not quite as possessive as co-ops, there are often attempts to retain a desired culture.

Either type of building has some sort of governing board and either type can be led by an a chairman, president, Fuhrer or whatever title they have chosen. Some look out for the good of the residents and others look at the position as being in charge of their own private domain. This is just one more thing to check out as you talk to your prospective neighbors.

There are conflicting reports about which one has higher monthly fees. However there are general guide lines for a well run association. No matter which one you decide on you should be given an information packet including the bylaws and detailing the financial status, including reserves for such things as roof replacement, elevator maintenance, etc. Keep in mind that you are looking into them as much as they are looking into you.

Like the man says: you pay your money and make your choice. Either one can be good. While finishing work on a condo we had one of those things that comes around Florida occasionally called a hurricane. I went over to check out the situation the next day and found the residents pitching in, working together, gathering the downed branches and other debris, getting the place back to normal. Either choice will most likely give you more a sense of community than a single family house. But then, that is one of the choices you get to make.

Are You Depending On Banksters?

Investing in real estate involves a lot of money. Most people, at least when they get started, don't have a lot of money. Many times the first thought is to go to the local financial institution and fill out reams of paperwork after gathering tax papers for the last fifty years and any other documents the whimsy of the underwriter may require.

This may work for one to several deals if your credit and income give the broke guy sitting on the other side of the desk looking good and smelling good likes you. However eventually you will run out of favor as there are only so many mortgage notes they will let you have open at one time. So is going through a financial colonoscopy with your hat in your hands the best way to acquire real estate?

It depends on your financial situation, your ambition and your tolerance for pain. There are better ways to get the job done. They revolve around your ability, which can be acquired, to deal with people. It will help if your life reflects honesty and integrity. If you have acquired a reputation as a shyster you will probably have a harder time. Although there are sharks in this business that will be only too happy to loan you funds in the expectation that you will default and they will take over your project.

So where do you find financing outside the amazing edifices of the stead banking community? It may surprise you to know that there are people, probably in your own neighborhood, with hundreds of thousands of dollars sitting in underperforming IRAs, 401Ks and other retirement plans. Every time you go into your local bank you see their promotions for their CDs. But you look into them, you come away with the conclusion that a Willie Nelson CD is a better investment.

As I write this Bank of America is offering a “Featured account” yielding up to .95% with a minimum deposit of $10,000. For the poor shlub who can't put out that much into their vault, they offer a “Standard account” with a yield up to .5%. Terms and conditions such as early withdrawal penalties not only may, but do apply. Neither one is even 1 per cent – and they have the gall to call some of them high yield.

Some people will say they do it because their money is secure as they watch it lose value year after year because the growth is nowhere near the rate of inflation. You can do something better for them... if they trust you AND you can provide security.

The security you provide is the property itself. Other than a reputation as a square shooter, there is usually no personal financial evaluation, the security is the equity in the property. The idea that if things go badly the loan is secured. If you are unknown to the lender or have had issues in the past, they may require additional security like a lien (if you are in a lien state) on another piece of property. The flip side of this is that if things go badly which rarely happens if you do your homework, it's bad form to make them foreclose on the property, just sign the place over to them. This will help your reputation as one who has the integrity to admit a mistake and not pass the cost on to someone else unnecessarily. But try not to let this happen.

Where do you find these angel investors? These are people who have at least a mild understanding of the potential of real estate and would rather have their money do the work instead of them donning a pair of coveralls and swinging the hammer themselves. Some may be people you already know, friends, neighbors, club members, church members. Some you connect with at investor meetings. A Google search should let you know what, if anything, is going on in your area. Some investors I know have a line on the back of their business cards that says: Ask me how to get higher than bank rate return on your savings.

When you find people that want to invest with you, having the proper paperwork is important to protect both you and your investor. Since having an attorney on your team – in general this is good because you don't know what you don't know – it will cost a few hundred dollars for them to prepare the mortgage and note... if you are in a mortgage state. I am not a lawyer and I have never played one on TV which is why I strongly suggest getting the things done cleanly as they are required in your area. It is cheaper in the long run and shows you are a professional to your lender. Your attorney will also fill you in on the filling requirements and anything else you may need to know.

For more information than we can put in this brief post, I highly recommend checking out Jay Conner, the Private Money Authority. He has refined this process to a science and will give you information your friendly neighborhood bankster would rather not have you know.

One last thought – You may already be sitting on sufficient cash to get you rolling in real estate. You can't do much with regular IRAs and 401Ks you left at past jobs, but by putting them into a self directed IRA you can use it to begin building your real estate portfolio and have the profits accumulate tax free or tax deferred. Just something to think about. The good folks at Advanta IRA can fill you in on the details.

Coming to Florida

For good or otherwise, we have seen a greater than usual influx of people coming from the frozen north. Not only are they lured here by the year round summer, but they have been driven out of many northern and western states by the propensity of the governing bodies to take more and more than their fair share of their citizens hard earned dollars to expand services to citizens and non-citizens alike. While this could turn into a rant about the right and wrong of these decisions, the real purpose is to look at the choices people have when the come to the Sunshine State and the possible implications for investors.

For many, selling a home in the God forsaken lands of New York and New Jersey, maybe even Pennsylvania lets the newcomers can plunk down cash for their purchase and still bank a nice chuck of money. I have known some who put a major addition onto their new home to keep from giving an undeserved windfall to the tax man. Now the price differential may not be quite so great if there is a hankering to live by the beach. Before the reader believes I unfairly look down on the northern states I must add that I grew up in Pennsylvania, lived in New Jersey eight years before I escaped and spent part of my summers on a family farm in New York. I come by my opinions honestly.

So for those flush with cash, the choice of where is live is pretty much open. Although there may be some wisdom in not putting all the cash into bricks and mortar. Those with the resources can purchase a wide range of properties and join the many home owners using the copius supply of lawn service providers, along with pool and cleaning services. It can be kind of like living in a condo, but you have control of the whole property. And there are many service providers making a pretty good living doing this kind of work for those capable of writing the checks.

For those with not quite so much cash or those who don't feel the desire to invest it all into bricks and mortar, condos are a good choice. The come in all age and 55 plus flavors and in apartment, townhouse and villa configurations as well as single family home configurations.

They each have their own definite characteristics, just like larger towns and cities. This is probably more important to the buyers comfort level than the facility itself. You can change the carpet easier than you can change your neighbors. Talk to some of the residents and not just the property manager, although sometimes they represent several communities and can direct you to just the place you are looking for.

There are several things to be aware of if you are looking to finance a condominium. Lower price units may be best handled as cash purchases unless you look for a personal loan. Often times mortgage companies are not interested in small loans as there is just as much work to create a $40,000 loan as a $400,000 loan, Another consideration is that many condos are built on leased land. Most are hundred year leases issued several decades ago. The bankstes definitely won't go for a unit where than land lease expires before the term of the loan. I have had one with 52 years remaining on a 30 year loan give the underwriter too much ajita to issue the loan.

HOA fees are another factor to keep in mind when looking at the overall costs. You will often pay less for older units, but because these usually require more maintenance, HOA fees are higher and in an emergency are more likely to require special assessments from the property owners. You will pay more for newer units, but they generally require less and less costly repairs. The point here is that no class of condos is generally bad or good, but some are more suited to the budget and needs of various people, Due diligence is critical as I came across a lady who thought she bought an ideal unit. She had a number of friends that rode motor cycles, It was only after she moved in that she found that these bikes were not permitted in the complex.

If you don't necessarily care to live above or below someone, a nice mobile home may be just the thing. Of course you can find the type of trailer park James Carville visits, but most are pretty nice places to live... and since 1978 they are actually manufactured homes. Many are framed in 2x6s rather than the 2x4s in most single family homes. Like condos they come in all age and over 55 flavors,

They can be had for a few thousand dollars up to $100K or more for the nicer, newer units. As with condos, talking to the residents as well as park managers is a good way to be sure the community is the type of place you want to live in. Lot rent is another consideration and can run over $700 a month. This is not necessarily bad if you check out what is included for the money. Another way of manufactured home living is selecting a resident owned park where you buy a share along with your home. The monthly fees are considerably less but the price of admission is higher. The added benefit is that you have input into park management.

In either case, it's good if you like pan cakes since many have Saturday morning pan cake breakfasts in the clubhouse for the residents. Many have pools and club houses, bingo and shuffle board,

So what does this mean for the investor? Among other things, there is a steady flow buyers for all sorts of housing, not mention long term and seasonal rentals. Then there is the an increasing supply of potential financial partners as the folks coming into the Sunshine State after selling their home up north may well be looking for a better return than their banksters are willing to give. Whatever the guy or girl behind the fancy desk will tell them, or you, .9 % is NOT a high interest account. It may be the best they can do but it still is NOT high interest. We may cover this in another article, but you can pay them a whole lot more so everybody wins... except the bankster.

Treat people fairly and honestly and you may well find yourself a new funding source as well as a friend.