Can anyone see the forest through the trees? Does anyone in Washington really understand what drives the housing industry? Try credit availability. When credit is available in the way of mortgages, the housing market improves. It’s that simple. Contrarily, when it’s not available, the market contracts and prices remain stagnant, and at worse decline. For many people, they will read headlines like this one in the Wall Street Journal on June 25, 2011 and think that the U.S. economy is terrible.
The headline read, “Tighter Lending Crimps Housing.” (Click here for full article.) And you know what? They are right. The U.S. economy is terrible as well as the economy in Europe and other parts of the world.
But the idea that tighter lending policies will continue to negatively impact the housing market is absolutely accurate – for marginal buyers that require institutional financing.
Let me tell you right now that this is a good thing and it’s especially a good thing for house buyers like me.
First of all, where is it written that everyone is entitled to own a house? Certainly, most Americans would like to own a home but it is not their God given right to ownership. Part of my philosophy can be summed up with these words, “Entitlement equals socialism.” Let’s face it folks, the social policies that steal a productive member of society’s earnings and gives them to the non-productive is hogwash. There is no FREE LUNCH. We live in the greatest country in the world with opportunities, freedom of speech and the pursuit of happiness. America is the safest country to achieve your dreams otherwise we wouldn’t have so many immigrants trying to get in. When was the last time you read about people flocking to Venezuela?
Certainly all of us have talent or skill in some area. And if you want more, you have to use what you got. This garbage that we are all created equal is simply that: garbage. We are all born with equal rights and that’s as far as it goes. If you want more in life, do more. But forcing socialism down our throats doesn’t work. Nor does making mortgage loans available to marginal buyers that have a great likelihood of not performing. If I was a bank, I wouldn’t lend to marginal buyers – not if I want my stock holders to be happy with the decisions I make. Just as the government shouldn’t be telling banks what their lending policies should or should not be. That’s exactly how we created the real estate bubble in 2006.
See article: “Fannie Mae Eases Credit to Aid Mortgage Lending.”
The fact that it is harder to get financing on a house should not be the scariest thing for Americans. Their biggest fear should be that the federal government nationalizes our banking system. Now, that’s a concern but I wouldn’t dwell on it because most things we worry about never happen. Heck, the feds can’t even run a post office and don’t know the first thing about balanced budget. But you know what? This article’s main point is about to be delivered and I want you to absorb the profoundness of what I am about to write.
It’s not about the Federal Government interfering with capitalism.
It’s not about stagnant housing prices.
It’s not about poor Johnny not being able to get a mortgage because he doesn’t make enough money or he has seventeen collection accounts.
It’s about the commonsense approach to buying cash flow houses!
Think about this:
If the Federal Housing Authority (FHA) continues to create more stringent borrowing guidelines by increasing down payments, cutting seller’s concessions and requiring higher credit scores – there will be fewer buyers! Pure and simple, that’s an easy deduction to make. So if there’s less buyers for houses, what else can we deduct? Well, the demand for homeownership would be there, but if people don’t qualify for loans, what will it do to the housing market overall?
Here’s what I think:
1. House prices will not spike up anytime soon and will remain low until the REOs are absorbed. There is still a back log of bank foreclosures that have yet to hit the market.
2. More and more people will remain as tenants for a long time, for the reasons stated above. You will also see households being combined including three-generational households, especially up north. Why up north? It is too expensive to live with property and income taxes, the cost for heating and the loss of income. Many folks don’t have enough money saved in their retirement accounts therefore can’t afford to escape to a warmer climate and better quality of life. Heck, they can’t sell their houses so they are really stuck.
3. Rents will stabilize and rise in some areas. The only thing that will reduce rents or prevent them from going through the ceiling is the general loss of income that most people have or may experience. Jobs being cut, salaries reduced, and corporations trimming expenses all have an impact on the rental market. Some rental markets will be much more impacted than others. For example, in the high property tax and high income tax states of the Northeast and Midwest. In no way, shape or form are these areas a safe bet for long term rental houses. The fixed expenses of taxes and insurance, continuous repairs on older houses along with liberal court systems that protect the tenant will destroy the cash flow of well-intended investors. If you are considering buying cash flow houses, and if you have cash, you should do your due diligence. Use a common sense approach to the migration trend in this country. Start by following the jobs and corporations as they flee high income tax states.
4. Ultimately, the only way that some people will ever get financed is by the owner of a house offering seller financing. Hey, this could be the exit plan for most owners of real state at some point in the future. This will drive up property values that provide for financing and I believe that this is a logical conclusion to draw when considering your long term goals and exit plan on cash flow houses.
But if that’s true, what about this?
It becomes even more important for you to analyze your buying criteria and develop a strategy.
If this is your exit plan, you better make sure the houses you buy are in areas that have jobs, increasing populations, and that there is quality of life for retirees. And you better be able to project 20-30 years down the road. Why? Because well located single family houses will always rent. That’s why the age of a house is important. And that’s why location, location, location are still the three most important words when buying bank owned REO houses, bank foreclosures or anything else.
Some investors get caught up using leverage. Some investors get caught up with the promise of guaranteed rents for one or two years. And you know what? They end up buying houses for the above two reasons because their primary consideration to buy the property was impacted by a speculated return on investment (ROI) using leverage, getting short term guarantees or money back at closing.
If you are buying houses this way, you are probably from California and you are buying for the wrong reasons and maybe, just maybe in the wrong part of the country.
Now, Californians please don’t take offense. We are not trying to belittle you, only trying to point out that my experience with California investors is that they would buy a pup tent in New Mexico if they could get financing. Investors that are driven by leverage also can die an untimely financial death by leverage. Hey, did this just happen? You bet it did, and it’s time to learn from history.
Folks, you don’t need leverage in this market. You need cash. Keep it simple and remove the risk as we move into a cash economy.
If turnkey sellers of cash flow houses have to use gimmicks like guaranteed rent or money back at closing, you need to think logically of why they would do that? Common sense should tell you that they made that money up in the price when they sold you the house. It should also tell you that you’re paying absolute retail.
Common sense should tell you that if the housing stock you’re buying is old, you cannot ignore the fact that HVAC systems, plumbing, electrical, roofing, and exterior work like painting every 3-5 years (especially in places with harsh winters) will eventually destroy all your hopes of cash flow. And if you bought in the wrong part of the country, forget appreciation!
Let mortgages be tougher to get, you can’t help that.
Let the countries of Europe figure out how to solve Greece, Italy, Portugal and Spain.
Let the Federal Reserve keep printing money.
Let the United States’ political parties continue to throw stones at one another.
None of this should stop you from protecting you and your family’s wealth as the world economy is shaken up. Forget the news! Do something to protect yourself!
Now is the absolute time to buy well located cash flow houses in emerging markets. The cash flow you create today could replace your income when you retire. There has never been a better time to buy single family houses for cash flow. But do one thing, just one; have a clear set of long term goals of what you want to accomplish and do your due diligence.
Don’t get caught up on comparable sales, they are all REOs. Get hung up on how many you can buy to provide the cash flow for your lifestyle, for your retirement, and for your family.
One last point; tighter lending policies mean more opportunities for you and I to buy cash flow houses for less than it costs to build therefore achieving higher yields on our investments.
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