Cashin' out ... NO MORE BANKS ??? - Posted by LightWalker

Real Estate Investing Retail
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Re: Cashin’ out … NO MORE BANKS ??? - Posted by Vic

Posted by Vic on August 04, 2009 at 19:01:31:

I understand what you’re saying that house values will rise with inflation, but my question is are you coming out ahead?

Here’s what I mean. Let’s say inflation is running at 10% & let’s say that everything goes up 10% - wages, ins., taxes, etc.

My question is how will housing prices increase in real dollars by that same 10 per cent?

Under Fannie Mae guidelines, a person can only borrow up to 33% of their monthly income. So if their income increases by 10% then they can only borrow up to 1/3 of that for a house, which means they can only afford 1/3 more of that 10% in the form of a monthly payment. The extra costs for ins. & taxes is also going to eat away at some of that 1/3. So something has to give some where.

Do you see what I’m getting at? The value of the house may not be able to keep up with inflation because people won’t be able to qualify for as much of a monthly pmt., thereby reducing the price of the house that they can afford to buy. Houses will gradually lose value in real dollars even though they are increasing in price, because people won’t qualify for the higher monthly pmt. that would be needed in order for the value of your house to keep up with inflation.

I understand the mortgage losing the 10% in real dollars, but I’m having a tough time wrapping my mind around the gain in real estate value to offset the inflation.

I know this is all very complicated & to be fair I suppose you also have to factor in that the mortgage isn’t worth the same amt. either as when you first took it out. Maybe when you combine everything, it works out, but it surely is difficult trying to piece it all together.

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Re: Cashin’ out … NO MORE BANKS ??? - Posted by LightWalker

Posted by LightWalker on August 03, 2009 at 21:10:37:

Hey Gene… My goal is basically to take some of my money and buy and sell. I’m just done with borrowing money… just don’t want to do it any more. My goal is to NEVER do it again.(period) I just don’t want to owe ANYBODY anything any more.

When I look at the most successful companies in the world, they all share one very fascinating quality… They are debt free and expand their businesses out of their profits. When I found this out, it hit me like a ton of bricks.

Microsoft
Walgreen
Cisco Systems
William Wrigley
Gateway
CDW Computer Centers
Family Dollar Stores
Ross Stores
Gevity HR
C.H. Robinson Worldwide
Bed Bath & Beyond

I think Celeste-fl has it right. Less is more. I’m going to FIRE every last one of my bankers and I’m going to expand out of my profits.

I’m CASHIN’ OUT … AND CASHIN’ IN FROM HERE ON OUT!!!

NO MORE BANKS… NO MORE HML’S… EVER!!! THIS IS NOW MY FOCUS!!! … It’s the Microsoft mentality… =^)

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Timing The Market - Posted by Vic

Posted by Vic on August 03, 2009 at 16:41:40:

Gene,

It sounds like you are talking about timing the market & that is very difficult to do. If you’re leveraged & you get caught up in a bad market, like most of us are in now, you end up with a situation like we have now with all the foreclosures.

I think it was Warren Buffet or somebody that said leverage is great on the way up, but it’s a real you know what on the way down.

I’ve used leverage before & would probably do so again, if I have to, but you’ve got to be very very careful. It is soooo easy to get stuck holding the bag. Again, there’s pros & cons on both sides of it. If you can avoid it, that’s probably the smarter thing to do.

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Re: Why limit your options? - Posted by celeste-fl

Posted by celeste-fl on August 04, 2009 at 15:37:01:

I would of never been able to quit my job and invest in RE full time if I used leverage…

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Re: Why limit your options? - Posted by LightWalker

Posted by LightWalker on August 04, 2009 at 10:11:43:

(LOL) Of course I knew it was unfair… (LOL) In all seriousness, I do see your point. I can forsee deals in which I’m short. In those cases, I would rather partner with another CASH player and split the profits. Remember, my goal is NO BANKS…

I am having some trouble with this statement:

“And as I said in previous posts…if we experience inflation you would be much better being leveraged out with fixed rate financing.”

Is it better to be leveraged with debt during inflationary periods or having no debt with free and clear Real Estate?

What are your thoughts?

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Re: Why limit your options? - Posted by John Vosilla

Posted by John Vosilla on August 04, 2009 at 01:23:43:

So you buy five in FL in the next 12-18 months for $40k each leveraged with 6% 15 yr fixed rate and $750 rent and sell them for $150k each around 2019-2020? The appreciation on the sale is nice but you also build up tremendous equity year after year from the cash flow, principal paydown and tax shelter while you wait with you annual ROE around 50-70% before any appreciation gains. That bubble of 2003-06 was a house of cards destined to collapse but those days are long gone. Coming out of this has to be some version of the stagflationary 1970’s IMHO.

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Re: You Must Be Reading My Mind - Posted by LightWalker

Posted by LightWalker on August 03, 2009 at 06:54:21:

Thanks Dave T. Good info… Time to make the doughnuts…

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Re: You Must Be Reading My Mind - Posted by LightWalker

Posted by LightWalker on August 03, 2009 at 07:43:08:

Hey Vic… I see where you’re coming from. I guess at this point it would be a personal preference. Paper or Physical property. I think I’m more of a physical property guy. The only time that property has been stressful for me is when I GAVE A MORTGAGE TO SOME BANK!!! … (LOL) … and some tenant wasn’t paying… (LOL)

Here’s how I operate:

  1. Buy in lower to mid neighborhoods, and then I have always made sure that my property was the best property on the block.(period) I’m real anal about that. I don’t play. I fix EVERTHING!!!

  2. I TRAIN MY TENANTS. My tenants know that it is their responsibility to do x. I ALMOST NEVER GET A CALL. If I do, something serious has happened. I do inspections throughout the year, or have my contractor walk through. If anything is out of wack, they fix or they won’t be my tenant. It’s just that simple.

  3. My rents are always just a little lower than my competition. My tenants know they are getting a deal. I can raise rents later. If my competition is $1,200, I’m $1,150. I HAVE NEVER HAD A VACANCY!!! In other words, if someone moves out on the 30th, I’ve got a new tenant within 30 days.

My process is very honest and very direct. My tenants know 3 things after sitting down with me. (1.) Pay me on time. (2.) Take care of the property. (3.) Don’t disturb the neighbors. Doing this has eliminated the headaches for me. Even if they’re late, or something happens, they are very apologetic and humble. Again, the only problems/stress that I have is owing some bank, HML, etc… some money. I just simply don’t want to deal with them anymore. I just think that I’ve sort of graduated from having to do that. The goal is to never, ever use their money ever again. I looked at some of the most successful businesses and guess what I found. THEY OPERATE OFF OF THEIR PROFITS!!! Microsoft, Walgreen, Cisco Systems and William Wrigley HAVE NO DEBT!!! This is why they are successful.

So we are brothers in R.E., Vic. Our minds are knitted together… (LOL) … You like paper and I like bricks and mortar… either way we can both switch over if we choose… =^) See you at the top my friend…

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Re: You Must Be Reading My Mind - Posted by Celeste-fl

Posted by Celeste-fl on August 03, 2009 at 07:20:21:

Hi vic,

I have been a landlord for 13 years and love it. I have so much free time and don,t have to work a 40 hr week job. I get bored because other people my age can,t come out and play because they are working a 9-5. I don,t have the mental pressure you talk about and repairs are few. I don,t think everybody is cut out to be a landlord. I own all my places free and clear and love the cashflow and lifestyle. Landlording is a business not a hobby. Do you know of any business or job where you don,t have stress or problems. I know lots of people who work 60+ hrs a week at a job or there own business and have tons more stress then me and also make less cash. I work about 5 hrs a week on my rentals on average. Like flipping is not stressful. First you have to fight to find a good deal. Then you have to turn on the power in your name,get ins and hire someone that does not rip you off to fix it up. Then you have to find a buyer in this market and it has to appraise out. Then you have to keep on doing that over and over and over again. Sounds like stress to me.

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Re: Cashin’ out … NO MORE BANKS ??? - Posted by Gene

Posted by Gene on August 06, 2009 at 11:22:03:

-------My question is how will housing prices increase in real dollars by that same 10 per cent?--------

House prices usually follow inflation relatively closely. There are times where it deviates dramatically but usually returns pretty quickly. Take CA the during the run up…it tripled in value while inflation was much less…and wage inflation was flat.

------Under Fannie Mae guidelines, a person can only borrow up to 33% of their monthly income. So if their income increases by 10% then they can only borrow up to 1/3 of that for a house, which means they can only afford 1/3 more of that 10% in the form of a monthly payment. The extra costs for ins. & taxes is also going to eat away at some of that 1/3. So something has to give some where.-----

No…it wouldn’t be 1/3 more of the 10% it would be 100% of the 1/3. I am not following your logic. Their would qualify for 10% more.

-----Do you see what I’m getting at? The value of the house may not be able to keep up with inflation because people won’t be able to qualify for as much of a monthly pmt., thereby reducing the price of the house that they can afford to buy. Houses will gradually lose value in real dollars even though they are increasing in price, because people won’t qualify for the higher monthly pmt. that would be needed in order for the value of your house to keep up with inflation.-------

History shows that people buy real things during inflation. Cash is losing value so you want to hold something real…RE, gold, ownership in companies…

--------I understand the mortgage losing the 10% in real dollars, but I’m having a tough time wrapping my mind around the gain in real estate value to offset the inflation.---------

The gain is that RE is real and will have value while money is becoming worthless. So as money becomes worthless…real things cost more.

------I know this is all very complicated & to be fair I suppose you also have to factor in that the mortgage isn’t worth the same amt. either as when you first took it out. Maybe when you combine everything, it works out, but it surely is difficult trying to piece it all together. ------

Exactly. Your mortgage payment would drop in real terms during an inflationary period.

Its a pretty broad topic. There are some great articles online and on Wikipedia on inflation, deflation, and inflationary cycles what have occurred in history which will help you with a more broad understanding of that could and likely will happen.

Inflation is a very important factor to RE price, I think a basic understanding is good thing for any RE investor.

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2nd on list not better - Posted by Gene

Posted by Gene on August 03, 2009 at 21:54:50:

Walgreen Begins $1.3 Billion Debt Offering
July 16, 2008, 7:07 am

Walgreen started its first public debt offering in over two decades on Tuesday, The Chicago Tribune reported. The move was intended to establish long-term funding for some recent acquisitions.

The drugstore chain said it priced a $1.3 billion offering of 4.875 percent senior unsecured notes due 2013.

The pricing action came one day after Walgreens filed ?shelf offering? documents with the Securities and Exchange Commission, covering plans to sell an undisclosed amount of debt securities from time to time.

In a statement, Walgreen said Banc of America Securities and J.P. Morgan Securities are acting as active book-running managers of the offering, Goldman Sachs and Morgan Stanley are acting as passive book-running managers and Wells Fargo Securities and Loop Capital Markets are acting as co-managers of the offering.

A Walgreens spokesman said the company last made a public debt offering in January 1988, when it offered $15 million in senior notes.

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Re: Cashin’ out … NO MORE BANKS ??? - Posted by Gene

Posted by Gene on August 03, 2009 at 21:45:44:

Sounds like your very emotionally fired up on this. Good. Its a great way to go in our consumer society…where most cannot see the difference between good debt and bad debt.

Your argument is interesting. I wondered if Microsoft (the first on your list) was built only using cash and not borrowing…or if it borrowed at first but then had so much cash it didn’t need to barrow. It took me less than 1 minute to find that Microsoft sells bonds. That is holding debt!

Also the list of the companies are not the “most successful companies”…here is the list:
http://money.cnn.com/magazines/fortune/global500/2009/performers/companies/profits/

Only two on your list were in the top 50.

How many of the top 50 do you think use or have used leverage as a tool?

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Re: Timing The Market - Posted by Gene

Posted by Gene on August 03, 2009 at 17:49:00:

I think the RE market is pretty reasonable to follow the trend and seeing changes in the trend. Real Estate is very illiquid which makes trend changes slow and obvious.

If you read the archives…there were a lot of investors saying the market was totally over heated in 2005 and prime to crash.

I highly recommend Robert Campbell book called “timing the real estate cycle”. If you use his technique you’ll be ahead of the trend.

Keep in mind…I am in California…a boom and bust state. In slow and steady states…timing is not as important.

The hard thing to predict is inflation/deflation right now. We are in history charting territory and with a govt that makes new rules by the week…its very difficult to predict the short term.

I am waiting, holding cash, and buying a few very good deals (with massive cashflow), but when things hit bottom or look inflationary…I am going to leverage out as much as I can.

The last cycle served me well and this next one could be just as great!

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Re: Why limit your options? - Posted by Gene

Posted by Gene on August 04, 2009 at 16:34:23:

You NEVER used leverage?

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Re: Why limit your options? - Posted by Gene

Posted by Gene on August 04, 2009 at 13:11:15:

In my experience I wish to avoid partnerships when ever possible. And partnerships are usually much more expensive than even HMLs with the deals I have been doing.

As far as you question:

"Is it better to be leveraged with debt during inflationary periods or having no debt with free and clear Real Estate? "

Again…if I would rather have a free and clear 1 million dollar house rather than one with a 800k loan…but we are not talking about a comparable situation. The equity difference is 800k. I would obviously rather have 800k than not.

A more reasonable question is if I would rather have a million dollar apartment building or a 5 million dollar apartment building with 1 million in equity and a 4 million dollar loan. All other things the same…if we were in a inflationary cycle…I would prefer the 5 million dollar building.

So my answer is…it absolutely better to be leveraged during inflationary periods.

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Re: Why limit your options? - Posted by Gene

Posted by Gene on August 04, 2009 at 01:27:33:

Stagflation would be a very bad thing for most people.

But like your example shows…with the right move…you can come out on top.

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Re: You Must Be Reading My Mind - Posted by Vic

Posted by Vic on August 03, 2009 at 17:00:11:

You plan seems very sound. I pretty much do the same thing. Tenants are just one of the problems though that can cause you stress. I’ve had pretty good luck with tenants because I am sooo picky. It’s all the other stuff though, in addition to any tenant problems, that turns me away from rentals.

I’m not totally on the paper side. although I’ve been leaning that way for a while now. I think you need to buy & sell to get the cash, then decide if you want to do some lending with the extra cash or buy rentals or whatever.

Much of it comes down to personal preference.

When I first started with rentals, I though well this ain’t so bad. But as I’ve gotten older & had rentals for longer & longer periods of time, I just got tired of dealing with it all. Rentals just wear you out after a while.

I think you go through stages in real estate investing & you sometimes you can’t get to the next stage until you’ve experienced the current one you’re on. The problem is there’s just too many stages in real estate & those succors are constantly changing too. LOL

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Re: You Must Be Reading My Mind - Posted by Vic

Posted by Vic on August 03, 2009 at 16:31:39:

I agree that some people, like me, don’t like the everyday constant never-ending aggravation of being a landlord. It doesn’t matter how you run them, there is always something to deal with with rental property. Always!

Still, with all factors considered, I believe you can make more money buying & selling than renting, & with much less aggravation & stress. Yes, there is aggravation & stress also with buying & selling, but the big difference is you are in & out the property. You don’t have to relive the stress over & over every day. There is always one issue or another to deal with with rentals. The issues are unavoidable.

Let’s look at the numbers for a second. Let’s say I buy a house, fix it & sell it & make 20K in profit. How long would it take you to make that same 20K by renting that same house. I’d say just about forever. LOL

Also, I can buy & fix up & have all my money back in a few mos. In order to get really decent cash flow with a rental, it’s almost always going to require you to put up some cash, maybe even a good bit, & you won’t get that back until you get rid of the rental.

I can borrow 100% of the money I need to buy & sell & my return will be infinity. On a rental you’re doing good to get a 10-15% return on your cash.

I understand there’s pros & cons to each approach & some people may prefer rentals. That’s OK & I have no problem with that. It’s just that im my experience (& I’ve done both for a while now), you can make alot more money by just buying & selling, & have less stress doing it.

This is just my opinion.

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Re: Cashin’ out … NO MORE BANKS ??? - Posted by Vic

Posted by Vic on August 07, 2009 at 04:13:51:

Hey Gene,

This is a good conversation & has me doing some research & study on this topic. So let me approach this from a little different perspective.

I think if you automatically assume that values will go up during inflationary periods you may be taking a risk that things may not work out the way you want. Now it may very well be that values will rise, but it’s not a given & there are a lot of if’s that have to happen in order for there to be a real gain in real current dollars.

Here’s an example: Let’s say inflation hits & interest rates are raised, those higher interest rates alone will cause a borrower to qualify for less, which means they cannot buy as much of a house, which means the values will drop. Insurance will also be higher & so will taxes, etc. When you add all that together, the amount that a borrower can qualify for will decrease, meaning that sellers will have no choice but to lower their price if they want to sell.

But wait, you may be saying, an increase in wages will offset all this. Well I’m not so certain of that either, at least not for a while, maybe many years. What I’ve read about wages during an inflationary period says that wages may lag years behind inflation. So now what you have is a situation where people are trying to qualify for a loan, but they have less income (in real dollars), but have higher int. rates, higher ins. higher taxes, plus they’re paying more for their everyday goods, such as food, gas, utilities, etc. This puts a real strain on how much of a loan they can qualify for. This forces house prices down.

For investors, hoping that rental prices will match inflation. That may or may not be the case also. If you’re in an area where there are lots of vacancies, then inflation may not help you at all. In fact, if you have a lot of vacancies the competition could cause your rates to fall causing a double whammy - shrinking dollar & lower rents.

On the other hand, I do understand what you’re saying that something solid like a house or gold can provide a hedge against inflation. Certainly people with cash will put money into real estate as a hedge, which will help drive prices up. You’ve got a lot of people looking to do something with cash to hedge inflation, so they buy houses, which is good for values.

So what I’m saying is that there are a lot of factors that go into this & to find that perfect balance where things are just the way you want them to be is not a given.

There are many more facets to this. Hopefully some others will also chime in & maybe we can all learn something.

Your turn.

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Re: 2nd on list not better - Posted by LightWalker

Posted by LightWalker on August 04, 2009 at 04:55:34:

Ok… I’ll remove them from the list. =^)