Housing Problem Putting Pressure On Rents In Big Run-Up Markets

More fallout from the debt crisis. BTW, its NOT a credit crisis, though people are having trouble getting mortgages because they have too much debt. We're actually back to the way things used to be before all the subprime loan vehicles were created to give credit to people with existing debt problems.

Anyway, this isn't a surprise but analysts are now saying that the housing problem has created -- are you ready -- a rent problem! I have already written on this extensively, but now its official, according to CNN Money.

What happens is that as people, often who either bought a house to flip (don't get me started) in hopes of a short-term big gain, or bought a new home and have their old for sale, cannot get that house they desperately need sold. So they rent it.

Which is exponentially increasing the inventory of available homes for rent.

Which puts pressure on rents.

See the vicious cycle? Read the CNN story here. Fortunately, this is only being felt worst in those market that have been hit hardest by the debt/credit/housing problem. That is, those markets that saw huge, fast run-ups in home prices as speculators took over the market. Atlanta and Houston rents are dropping the most, the report says. But resort areas like Lee County (Ft Myers) in Florida have a similar problem. In fact, according to a mind-boggling New York Times story, one out of every four homes in Lee County is vacant. That is an incredible number. And if you are a house renter there, you can pretty much name your own price, for some owners are in such rough shape that they will gladly negotiate on rent.

Much of Ohio is far stronger economically in that regard and has not seen the steep declines in values, nor the intense pressure on rents. In fact through much of Central Ohio, rents seem to have stabilized. But other parts of the nation are not faring so well.

For investors who understand the value of holding real estate for 5-10-years, the next two years are going to represent a boom time to pick up nice single family homes in strong neighborhoods at a discount. The market will come back, they will appreciate in value, and all the while the rents will pay the note.

Inflation Up In 2007; Commercial/Investment Owners Performance Still Strong

I have said in previous posts that holding investment real estate is a hedge against inflation. Well, the Department of Labor is reporting today that wholesale inflation last year shot up by the largest amount in 26 years.

The story notes that the 6.3 percent increase in the Producer Price Index, which measures cost pressures before they reach the consumer, followed a much more moderate 1.1 percent increase in 2006. Read the entire story here.

To review a bit, investing in and holding commercial real estate is a hedge against inflation. While the media is obssessed with the decline in residential property values, commercial property is holding its own, and in many cases, still appreciating. Holding investment property gives you income to cover the mortgage used, if necessary, to purchase the property. But more so, an investment property's appreciation is truly "wealth forced upon the property owner." As it becomes more valuable, the property owner can make tax-free loans to him or herself for pretty much any use, including acquisition of additional property.

Keep in mind that the lending problems you are hearing about on the television news each night have to do with residential paper. What is of concern is traditional lenders, so heavily invested in the housing market, may struggle a bit. And we will have to watch and wonder whether we want to run our commercial loans through these same investment houses as we monitor their turmoil.

Definition For The Day

Family Limited Partnership -- A Family Limited Partnership is a limited partnership whose interests are owned by members of the same family. By this arrangement, gift and estate taxes may be reduced , though owners will not enjoy the freedom of ownership or transferability of other ownership vehicles.

So here is an example. A family owns an office building worth $10 million if sold as one unit. A family limited partnership is formed to own the building. Each of 10 family members own a 10 percent interest. Because of restrictions imposed by the partnership, the sale of a single unit to an outsider would bring no more than $500,000. When a family member died, the unit was valued at $500,000. This amount is less than the federal estate tax exemption, so there is no estate tax. Had there not been a family limited partnership, the share would have been valued at $1 million, and the estate tax would have been about $150,000.

Last To Be Paid or First To Be Paid? You Choose

Let's repeat the lesson:

If you are a shareholder in a company, if there is a profit, you are the LAST person to be paid, assuming there is money left over after all bills and other debts have been covered.

When you own investment real estate, you are the FIRST person to be paid.

Why repeat the lesson? This week several analysts reported that banks will be forced to slash dividends in 2008. Many bank shareholders use these dividends as income. In fact, numerous companies are feeling a pinch on the revenue front these day.

So which makes more sense? Be last in line to be paid, or first in line? Which would you choose?

Thus endeth the lesson.

Federal Reserve Hints At 'Substantial' Rate Cuts

The Fed hinted at further rate cuts, which will be a further boost to investors. A rate cut is certain at the Federal Reserve's meeting, scheduled for the end of January. The question is how much? The story is at CNN money.

Why the Name "Cash on Cash?"

I had a couple of people email me privately the past few days and ask why I call this blog, "Cash on Cash." The simple answer is that this is a common term used in investment real estate. As an investor, your "Cash on Cash Return" equals your net operating income, minus debt service, divided by equity invested. It is, in other words, the annual cash flow that an equity investor receives. Questions? Drop me a line and I'll explain in more detail!