The Financial Mess

Today, the world's banks -- in an unprecedented emergency global move -- lowered interest rates by 1/2 percent.

Markets are still jittery, and only time will tell if this effort helps ease uncertainty and fear.

In the meantime, Opinio Juris has a stellar analysis of the global financial problem. What started as an American problem is now worldwide. It is a no-holes-barred look at how it started, where it is going, and what may be around the corner.

A must read.

DON'T PANIC!

Retirement Stocks Down $2 Trillion

News outlets are reporting that retirement assets -- at least those invested in the stock and commodity markets -- are down some $2 trillion during the past 15 months.

And guess what, some guy will be sitting across the table from people thinking about retirement down the road and telling them . . . "buy stocks, they do great!" He will call himself an investment adviser, but in reality he will be a stockbroker. With only one investment to peddle.

Have you ever heard the term "sheeple?"

I will say it just one more time. Commercial/investment real estate makes money, it makes money reliably. And there has never been a better time to jump in. The people who are getting out are those who are trading up, or who are so over-leveraged in the stock market they need to raise cash fast. And are liquidating their real estate. In hindsight, I would be if you asked every one of them where they would rather be -- real estate or stocks -- they will say real estate every time.

Sigh . . .

Don't Panic...Markets Are Correcting

Don't panic!

The markets are cyclical. The bailout that passed the U.S. Congress, in my opinion, probably wasn't necessary from a fiscal standpoint (it was necessary from a public relations/feel-good standpoint for the world markets). But its done.

There is a lot of wealth being lost in the markets, sadly, but someone is buying stocks up. Warren Buffet bought a ton of General Electric stock. He hasn't been on a buying binge for a few years, but he buys when things are undervalued. Buy more if you can.

But if you want something more steady, something more reliable, seriously consider looking at investment real etate. There are a lot of great office, multifamily that make financial sense. A strong real estate agent who understands commercial/investment properties can show you on paper how they will benefit an investor each year, both in terms of income, as well as tax advantages. Single family homes as an investment can also work if you have an agent who understands "investment" properties -- not just understands "rental houses." There is far more to it than that...

But most of all. With the turmoil in the market, it is a time to be concerned. But don't panic. The credit markets, at least in the United States, were not allowed to police themselves. I wrote about this weeks ago, knowing it was politically incorrect, but lenders were forced to make loans they knew were dangerous. Risky. The PC term is "sub-prime." Then greed took over, and some lenders (some, not all) realized they could get away with fiscal murder and no one cared or would do anything about it. And they cleaned up. And the house of cards is now collapsing, and the problem that some in Congress and in this industry (myself in the latter category) have been warning for years would occur...did.

Markets were not allowed to correct themselves out of political considerations. It is correcting now.

Turmoil

Stock values dropping . . . money markets devalued . . . giant investment houses being gobbled up or declaring bankruptcy . . .

And yet people will persist and turn money over to stock brokers with promises that things are going to turn around soon. To people they don't know, to be managed by people they don't know

But people are "afraid" of investment real estate? Where apartment renters pay the owner a monthly fee to live in a few hundred square feet? Or businesses or retailers pay the building owner for the right to operate out of a few thousand square feet of the owners space?

Where is the risk in THAT? Why the irrational fear of investment real estate (no I don't mean houses, I mean commercial buildings and multifamily) when the real volatility, uncertainty and high risk is in the markets?

U.S. Treasury Dept. Seizes Control of Fannie Mae, Freddie Mac

This week, the U.S. government will take over Fannie Mae and Freddie Mac -- the two organizations that fund the majority of mortgages in the United States.

They are being placed in a government conservatorship for the time being. A tough decision, but one that had to be made in the end. My concern is that people who gambled and used these mortgages to fund questionable investments will be bailed out. CASH ON CASH readers know my distaste for flipping houses and calling the process "an investment." Some estimates are that upwards of 50 percent of foreclosures are on houses in which the owner does not reside, but purchased for investment.

People who used these organizations for their mortgages and are living in homes they may lose due to the credit crunch, however, are people who deserve a helping hand -- in most cases.

In many cases, Fannie Mae and Freddie Mac made loans that . . . for lack of a better phrase, should never have been made. To risky, sub-prime home buyers who in most instances should never have been allowed "the dream" of home ownership. Because anyone could see what was coming. Many of us in the industry have been talking for more than three years about the events unfolding now.

Time will tell how this all sorts out.

Group Investing Helps The Skittish Jump Into Wealth Building

There are many fallacies about getting into commercial/investment real estate as an investor. Sadly, too many people don't use their brain, but worry about tiny little things and that keeps them out of the market. I like professional financial advisers. They usually understand the intricacies of utilizing investment real estate to build wealth, and the myriad of tax benefits that accompany income. But increasingly, I find that people will say they need to consult their financial advisers, and it is their uncle, or a neighbor, or a long-time (and now retired) stockbroker friend.

Listening to the news, one would think that the market is in the toilet and that a one-and-a-half percent passbook savings account is the way to go to keep your money safe. It is anything but that. Remember, it is the residential market that is having difficulties. People buying and selling homes in which to live. If you are a buyer, however, it is your market. Don't like the terms on this house? Pick another one down the street. You might get a better deal.

With investment real estate, it's all about the numbers. If the deal doesn't work financially, you go on to the next opportunity. And there are tons of opportunities today.

One of the possibilities is group investing. This is where a number of people go in together on a property. While there isn't a lot of risk in a good, income-producing property, when people buy something as a group the perception is that whatever risk there was has just diminished exponentially.

From a collague of mine who put this together, here are some of the excuses people will use to block their ability to succeed:

I don't have enough money; I don't have the know how; I don't know where to start; What if I buy the wrong property; What if my timing is wrong; What if prices go down; What if I make a mistake . . . people will think I'm foolish; What if I can't get a loan; What if this is a bad location??? And so on . . .

Here is why people buy interests in real estate:

To gain net spendable cash flow; To take advantage of favorable tax laws to real estate; To acquire equity through leverage; To hedge against inflation; To profit from appreciation; To put existing capital to work; To achieve overall higher investment yield; To avoid the management burden; To avoid signing a large mortgage not;e To purchase without a credit report or bank financing.

Get the picture?

With group investing, everyone puts in some cash at the beginning -- often from existing equity in their homes (dead equity), or self-directed IRAs. But not out of pocket, meaning not from the weekly or monthly checking account. The property can be paid for up front, or over a period of two to three years. Either way, cash flow begins immediately. Add in appreciation, cost recovery (depreciation) and avoidance of capital gains when the property is sold later on (utilizing an IRS 1031 tax deferred exchange) and you have the makings of a solid investment that will build wealth.

This way, the perceived risk is spread around.

Retail Weakening, But Commercial Investment Real Estate Staying Strong Overall

Here is some more news on the continuing strength of income producing properties. The residential mess that everyone is talking about has had little impact on commercial brokerage.

For buyers and sellers alike the market remains strong, though there is some weakness appearing in retail properties. Those banks that are having problems have lumped their residential development lending packages in with their commercial loan programs. Which give a very skewed view of the market.

Lenders agree while there is some slight weakening, there has been no significant or a concerning amount of tangible deterioration on the part of custumers. Cash flows are still there andmost lenders have few concerns. Why? Because income producing properties produce just that -- income.

That is in contract to single family homes used as our primary residences. They aren't the same as income properties, unless someone is being charged rent.

For the full story, click here.