How To Get Real Estate Flyin’ Off The Shelves Again — This Would Help Big Time
Posted @ 11:33 pm - Filed under 1031 Exchanges, 401(k)'s & IRA's, BawldGuy Axiom, Buying Income Property, Capital Growth, Cash Flow, Depreciation, Financing, Market Correction, Real Estate Markets, Retirement, Tax Shelter
The last couple months or so I’ve been having some interesting, sometimes funny, sometimes very lively conversations with some pretty knowledgeable people. They come from all over the country. Both genders. Over 70, under 30, and everything in between. Two had experience with Fannie/Freddie — one with each, and both impressively high on the regional pecking order in their area.
I asked all of the The Question: If you were King how would you go about healing our real estate problem?
Caveat — Told ‘em not to take the concept of ‘King’ literally. Within the fabric of what’s possible in our political/economic system. In other words, the had to be realistic — more or less.
I won’t go through the whole laundry list of their suggestions, or as one lady put it, her fixes. Some ideas were beginning to sound pretty solid ’till they kept talking. Wow, what some folks think is possible boggles the mind.
One guy though was like listening to my own thoughts on the subject, which of course led me to conclude he was no doubt on to somethin’. 
If he wants to ID himself he welcome to, but I didn’t feel comfortable doing it myself.
I’ll keep him anonymous as I don’t wish either to embarrass him or violate his professional privacy.
I’ve been thinkin’ this for awhile now. Here’s what we both thought would work. And no fair being disappointed when you see how simple it’d be to execute. This problem’s genesis isn’t akin to figuring out the final answer to whether or not we’ve ever been visited by aliens.
Here’s what I’ve been thinkin’ for quite awhile now. It’s so simple, so doable, and so easy to execute as to be maddening. In fact, I’ll go a giant step down the road. There are vast amounts of what I now refer to as ‘Hostage Equity’. That equity investors would love to exchange, tax deferred into much more property, but due to the above mentioned limitations, they simply don’t have the option. No loans — no tax deferred exchanges.
First we expand FHA loans to investors. 10% down payments minimum — and absolutely no negative cash flow allowed. The down payment would rise ’till the underwriter agrees the property would be paying for itself with market rents, reasonable operating expenses, and vacancy rates. But there are plenty of small income properties around the country that would easily cash flow with only 10% down. The underwriting itself would be stringent but not blood sucking in nature. In other words, the property and the investor/borrower qualify using reasonable standards — or no loan. The interest rate would be 4.5% fixed for 30 years, plus mortgage insurance if the down payment is less than 20%.
Second, and maybe even more critical, is the lifting of Fannie/Freddie’s silly, arbitrary limit on the number of loans an investor can have. Four? Are they seriously thinking they’re helping with that policy? It’s like the well meaning folks in charge of the then infant Federal Reserve, in response to the crash of 1929, who decided higher interest rates and a depressed money supply was the cure. What? No leaches? That worked out well, didn’t it now?
There should be no artificial limit to investor loans period. Some of these policies are just plain stoopid.
Let’s use an example of how this policy is impacting the nation’s lending problem not to mention the unsold supply of very salable property.
How ’bout a couple with half a million in cash, massive liquid reserves, mid-700’s for credit scores, and a hankerin’ to buy a bunch of income property? Problem is they already own their own home. Strike one. They still own their first ever home too, having kept it as a rental. Strike two. Finally, eight years ago they bought a couple duplexes as part of the Plan to grow their capital. Strike three — and they’ve not even grabbed a bat and left the dugout yet. They lose — the sellers of several income properties lose — the lender hasn’t made several solid loans (and received the fees) — and the taxpayer will surely end up holding the bag for much of the unsold property.
Sound ridiculous? Of course it does. I deal with this Keystone Kop Krappola daily.
Now let’s explore what they’d be able to do if my plan was in play.
They’d be buyin’ $2-3 Million in investment property in all the right places. They’d have $30-50,000 in completely tax sheltered before tax cash flow. $60-100,000+ in yearly depreciation. Not to mention the capital growth as real estate markets emerge from this correction as they always have and always will.
‘Course it’d be sooner if they’d adopt this plan.
If we go all Solomon on ourselves and slice it down the middle, they’d acquire $2.5 Million in property. This would mean, using a few of the growth regions I currently favor, that 10-12 pieces of real estate that have been sitting around bolluxing up the economic scenery, would now be in solid productive use. They wouldn’t be vacant, ‘cuz there’d now be a family living in them. The lender(s) would have, give or take, a couple million bucks out makin’ them a profit instead of gathering mold on their books. Their bottom lines would look a whole lot sexier too. Duh.
Others would see what’s possible and do the same. There are literally thousands of real estate investors, big, small, and tweeners, who’d love to be able to acquire more real estate while the gettin’s hot. But they’re stopped before they get outa the starting blocks because either they can’t find a lender in the area, (Hellllllo FHA) OR they’re too successful as real estate investors and, golly Aunt Bea, we don’t want that, right? After all, who do those thousands of investors think they are anyway — Americans investing for their retirement? Guess they should be waiting on all that money they’ve been makin’ with their 401(k)’s, right? (Ouch!)
FHA is beggin’ folks to borrow money with only 3.5% down payments, and credit scores of under 680, but our example investors can’t buy more units ‘cuz they’ve already proven themselves to be solid citizens and great risks? Do the math. My plan would have investors with about 3-6 times the ’skin’ in the game as the folks FHA is wooing. Am I the only one waiting for Rod Serling to begin his narration?
What’s the government gonna think of next, indoor plumbing?
The Einsteins who’ve saddled us with this ridiculous and artificial loan limitation, just won’t learn what Grandma taught me so many moons ago. I liked it so much it’s become my favorite axiom.
BawldGuy Axiom: About the time the farmer got the old mare to work without eatin’, she died.
It’s funny, but it’s not, is it? How long before those in charge show up for work one day and find the old mare layin’ in the field — cold, stiff, and very dead.
OK, enough. I’m confident this approach would begin working almost overnight. Will it happen? Not if somebody tells the government yahoos in charge how much sense it makes. So, everybody, ‘mum’s’ the work, OK? Cool.
Think your ready to make a move? Been wondering if you and I should talk? Stop wonderin’ and start clickin’. The Contact BawldGuy button’s there so we can get together easy as pie. Have a good one.
This entry was posted on Monday, January 19th, 2009 at 11:33 pm and is filed under 1031 Exchanges, 401(k)'s & IRA's, BawldGuy Axiom, Buying Income Property, Capital Growth, Cash Flow, Depreciation, Financing, Market Correction, Real Estate Markets, Retirement, Tax Shelter. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
