The Art of Investing (Part 2)

Art Espinoza recently asked me to return to his radio show entitled “The Art of Investing”.  Art is a respected financial advisor and wealth manager with offices in Vero Beach, Florida and Brookfield, Wisconsin, and his show airs every Saturday at 9:30 am on WAXE 107.9FM and 1370AM, or on iHeart Radio.

Recently Overheard at Dinner Parties…

“I got caught in the housing crisis, so I’m not going to buy now unless it is a steal”
[Reality: They can’t afford to buy anything, and most of the low hanging fruit is gone anyway]

“I’m downsizing because I don’t need the space”
[Reality: Their income is not close to what it was, and their association fees are killing them]

“I’m nervous because interest rates have been so volatile”
[Reality: They lost most of their equity in 2008-09 and are scared to death of borrowing – even though rates remain at historical lows]

“As soon as we sell our home, we will finance the purchase of a retirement home in Florida”
[Reality: They will use their net proceeds to pay cash for the Florida condo]

Lately, when attending seminars, dinner functions, charity fundraisers, and other networking events, I hear a lot of people in real estate finance say: “It’s crazy busy right now”.  But those are the people I don’t know that well.  They stumble a little when I ask about the number of real estate loans they have closed and funded.  Unless they are focused on helping people who require portfolio loans due to prior events that have detrimentally affected their credit (and there is a lot of this business right now), volumes on conventional financings are way down and banks are shedding staff as a result.

Don’t Put All Your Eggs in the Stock Market Basket

(Thanks for putting up with my Easter pun.)  As a real estate investor, it’s time for a “feel good” reminder:

Commercial Real Estate (CRE) represents an attractive asset class.

Here are a few of the obvious reasons for some reinforcement:

– Inflation Protection (with contractual rent increases, CRE can offer the perfect inflationary hedge

– Long-Term Capital Appreciation (according to the National Council of Real Estate Investment Fiduciaries or NCREIF, CRE returns have outperformed the S&P 500 since the late 1970’s – ignoring the correction of property values in 2008-09)

– Low Return Volatility (CRE can lead to more predictable, recurring cash flows – especially well-located properties having a stable roll-over schedule of creditworthy tenants on longer-term leases)

– Diversification (CRE returns generally have a low correlation to stock and bond returns)

And for those of you who just can’t stay out of the stock market… Although 2013 was an exceptional year for the S&P 500 (32.7% return), equity REIT’s in 2014 are likely to outperform last year’s abysmal 2.7% return.  The threat of interest rate increases weighed heavily on the REIT sector in 2013, but these returns should improve with the focus now leaning on company earnings – which should lead to additional demand for space in markets with limited supply.

Lending Integrity Seal of Approval

I was recently awarded the Lending Integrity Seal of Approval from the National Association of Mortgage Brokers. This means that I have met the Association’s high standards for ethics, integrity, professionalism and knowledge in the mortgage industry. I couldn’t buy it or receive it just by joining the Association; I had to earn it, and my pledge to you is that I will keep earning it every day.

As a mortgage broker, my job is to present you with a range of loan products so that you can select the one that’s right for you. The success of my business rests upon a foundation of professionalism and service.

To earn the right to display the seal, I had to pass a national criminal background check; to keep it I must attend professional education classes, including ethics training, and adhere to NAMB’s strict Code of Ethics, and best business practices. This sets the highest national standard in the country, and I am proud to have earned it.

I’m very pleased to share this important news with you. I look forward to working with you again when you need to finance or refinance your real estate.

Short Sale? No Problem – Here is Your New Loan!

Wrong! It’s not that easy, especially if you held back funds while the bank permitted the sale of your property for less than the mortgage.  You can’t stiff the lender and then think the next creditor will just turn a blind eye (Obvious Red Flag Alert: Experiencing a short sale, foreclosure or bankruptcy but miraculously still having a 25% down payment right afterwards).

Not only do you need to evidence your “Ability to Repay”, but you also must demonstrate fiscal responsibility.  In order for a lender to sell your mortgage to an investor – usually FNMA (Federal National Mortgage Association), your short sale/bankruptcy must have been concluded at least two (2) years prior to obtaining a new loan.

There are plenty of “portfolio lenders” who can help bridge you through the seasoning period (i.e., lenders electing to hold your loan on their books – rather than selling to FNMA).  However, in exchange for taking the risk that you just might revert to how you treated your former creditor, the new lender will assess an interest rate that will most certainly NOT be at the current attractive conventional or FHA levels.

These “Non-Agency” lenders have different programs:

• some charge upfront fees of 1, 2 or 3% of your loan,
• others have no fees but have a declining scale prepayment penalty schedule,
• pricing may be more focused on your credit score and/or loan-to-value ratio, and
• obtaining a portfolio loan on your permanent residence is tougher than encumbering a rental property!

The Art of Investing

I recently had the pleasure of appearing on a radio show entitled “The Art of Investing”, hosted by Art Espinoza. Having known Art for quite some time in the Vero Beach community along the Treasure Coast of Florida, he asked me to discuss what’s happening in the real estate market, who the primary borrowers of real estate capital are, where I see interest rates going, and a variety of other related topics.

Art has been a respected financial advisor and wealth manager for 28 years, and has offices in Vero Beach, Florida and Brookfield, Wisconsin. His show, “The Art of Investing”, is broadcast every Saturday morning at 9:30 am on WAXE 107.9FM and 1370AM, or on iHeart Radio: http://www.iheart.com/live/WAXE-1079-FM-1370-AM-4788/

Art kindly asked me to make regular appearances on his program, and I look forward to sharing real estate industry dialogue and exchanging topical ideas with listeners in the future.

You Didn’t Get The Credit For Your Idea … Again

Some idiot came up with the phrase:

“What goes around, comes around”

Sorry if that’s an expression you use and like, but I find that people use it far too often – and it is too negative.  It suggests that you hope someone gets what you think they deserve – i.e., retribution for taking credit for the hard work you put in.  Is that really what you wish for your colleague, your boss, your client in 2014?  I’m not the expert in advising people on having a successful career, but why not follow these steps instead:

1. Learn everything you can about your business
2. Set realistic broad-based and measurable goals, and refer to them constantly (see below for my broad-based goals as an example)
3. Follow a simple marketing plan having at least 3 key initiatives
4. Strive to create win-win solutions for your colleagues and clients

THEN:

1. Don’t believe that only you know the answer
2. Never compromise your integrity
3. Focus on your actions and not the results

AND FINALLY – Stay Focused on Your Goals:

• To create a legacy for your family, whether they elect to go into your business or not
• To remain interactive with people at all levels and active in the community
• To maintain peace of mind, independence and market intelligence
• And, of course: To afford an Aston Martin DBS Volante (okay fine, unrealistic)

P.S. – Be sure to check out our revised Website at https://oceanmortgage.com

What’s Happening to Interest Rates?

It may not be an original question, but a relatively important one if you are deciding whether or not to lock the interest rate on your loan.  Remember that long-term rates (more relevant to those focused on fixed rate financing) typically lag short-term rates (more relevant for floating/variable rate loans).

Rising Interest Rates are Mainly a Function of Three Things:

1. Demand for Credit – If people and/or companies are borrowing more in the market, lenders will charge higher interest rates (to attract deposits and entice bond investors)
2. Inflation – If there is too much money chasing too few goods and services in the economy, prices start to increase too rapidly (interest rates will increase in order to curtail demand, and to compensate for the decrease in purchasing power from artificial price increases)
3. Monetary Policy – If the Federal Reserve sells U.S. securities, money is drained from the economy as lenders invest rather than lend to the public (a low supply of funds to lend increases the fed funds rate – the interest rate banks charge each other to borrow funds)

The recent good news on the unemployment rate (which could increase public demand for credit) was mainly due to the furloughed government employees returning to work.  And, inflation is in check at 1%.

Bring a Shotgun to the Wedding

A bit extreme to settle differences with your real estate partner through the use of a “shotgun buy/sell” provision? You‘ll be relieved you negotiated this in your joint venture agreement: It gives you the option to either purchase your partner’s interest for a set price, or sell your interest to your partner at that same price. So, if you decide to exercise this right, you better be prudent in coming up with a neutral price – because you will either be buying or selling at a price that you’ll need to live with.

Advantages
(i) Price control (you’ll know what the proceeds will be or how much capital you’ll need to raise)
(ii) Timing certainty (you’ll know upfront in the agreement how long this process will take – generally 30 to 90 days)
(iii) Closing efficiency (there is little to negotiate, and less chance the market will move against you to introduce significant market or competitive pricing risk)
(iv) Ability to exit the relationship (or introduce a new like-minded partner)

Disadvantages
(i) Outcome uncertainty (you have no control over whether you will be the buyer or seller)
(ii) Reputation risk (some partners don’t appreciate surprises – you may be viewed as unnecessarily forcing your partner’s hand)
(iii) Lack of Cooperation (from the “shot-gunned” partner)

But I Want To Stay Debt Free!

Fine – but the big picture is important, so here are a few thoughts to consider:

1. Long-term fixed interest rates are not likely to be as attractive into your retirement (and if you are nearing retirement, your employment income goes away – potentially causing difficulties for you to obtain financing if needed in the future);
2. Mortgaging your to-be-acquired property allows you to maintain additional “just-in-case” liquidity (and can improve your credit score);
3. Over time your investment advisor should be able to comfortably achieve annual returns on your invested capital/retirement funds in excess of the annual interest charges on your mortgage (not to mention the tax benefit of the mortgage interest deduction);
4. With enhanced dividend/interest earnings from investing your liquidity now (as opposed to using it for purchasing a property), your debt-to-income ratios would better support borrowings in the future; and
5. Through a mortgage, you will continue to build real estate equity through principal amortization, and you can always select a lower LTV or faster amortization period (i.e., fixed monthly payments over 10 years instead of 30 years, at an even more attractive interest rate).