So here I am watching the markets rise last month and all I can think is greed has entered the market again as all the boomers try to make back their lost 30-50%.
There’s no fundamentals causing the market upward swing, thus I have to side with many who believe there is another crash coming. I think we’re going to see a sawtooth pattern for awhile to come.
With the rise in markets also comes the rise in bonds and indirectly the rise in rates… at least the 5 year and longer term rates. Again not driven by anyting as neither the Fed or the Bank of Canada are even hinting at raising rates. Just simply responding to the rise in the markets.
OK, so if we follow this logic, then how do we explain that as the longer term fixed rates are rising, at the very same time we are seeing a thaw in the variable rates. What’s that famous texting expression… WTF?!? The sources of funds are rising long term, just not the source of funds for variable rate funds. Why are these funds exempt? Not a major shift like we saw last summer going from prime minus to prime plus in the space of a couple weeks.
Speaking with a broker in the office this week. I said rates are on their way up. His response? Great! That means we’ve finally hit bottom. Well, maybe for the summer. I still think we’re heading for another major decline in the market. Oil always seems to rise most rapidly just prior to a stock market crash.
I figured for sure when GM officially declared bankruptcy that this would send markets for a spin. Business as usual. Guess the market expected/predicted this well enough that it was a non-event.
Anyone catch those new GM commercials? “We’re not out of business…” I don’t know about the rest of you, but I’m going to find it hard to have any confidence in a company that has just now realized it’s time for a change. What has me spinning is the seemingly precise timing of these new ads. Certainly their PR department is right on the ball.
Locally, we’ve seen the announcement of dealerships closing. I’m still trying to make sense of this one. In a crisis situation, where the only hope you have of surviving is to sell MORE product, they are closing down dealerships. Huh? Again WTF?
Don’t they earn franchise fees from these folks? Aren’t all these places run based on 100% commission sales? Isn’t this like cutting off your nose despite your face?
Really, in recessionary times to sales managers walk in and tell their sales staff, “Well, we’re experiencing difficult times. I expect everyone to sell just a little less so we can make it through this rough spot.” …. Um, I would hope not. I would think it would be, “Things are tough, let’s go break some sales records. What can we do to be meaner, leaner and get more deals done? If we don’t sell, this company is toast.”
I’m obviously missing something in the bigger picture, but reducing the sales staff or outlets to sell just doesn’t seem like the smart move for a company trying to “renew” itself.
Sorry for the lack of posts.
Spend the first week trying to “move” to a new hosting company. I had a deadline and I just kept running into the next problem. No sooner do I get the move complete then does the phone start ringing off the hook.
The last couple weeks has seen some interesting questions coming from investors and a discussion with a real estate broker.
What I’ve been telling any one new to the investment market for years now, you need to make your money on the day of close. Period. Don’t think that in X number of months, things will change (see my last post) as the rents will be suddenly higher or some renovation will be complete and the equity will now be there and a refinance is possible.
For new investors or investors with smaller portfolios, you have to focus on the cashflow. If it ain’t there day 1, you don’t have an asset, you have something you’re putting money into monthly. There’s only so many of these you can buy before… well you either don’t qualify for a mortgage or you and your family are limited to eating only Kraft Dinner until you can refinance one of the properties and pay yourself.
A couple things have happened in the last couple weeks. We had a wonderful presentation by our new OREIO (www.oreio.org) president, telling us that we need at least a 5 year plan AND that we need to review or revise this plan as we go. Near the end, she talked about a property that met her criteria when she first started investing. It was a great deal, however it no longer fit with her current plan.
Next I am in discussions with a real estate broker. She has this great opportunity for someone to act as the purchaser of an upscale home in the very nice part of town. The unique part of this deal is she knows several families that are coming to down as diplomats (or their aids or support staff) and they need a place, but naturally can’t qualify for a mortgage. They have a housing allowance which is fairly substantial and should easily cover the mortgage payment. After doing the math on one of these deals, it turns out, due to the higher fixed expenses (i.e. taxes) that these deals work out fairly close to break even. The real win for these properties is in 3-4 years when you sell them on the market at a 5% compounded increase per year. All call it a quasi-guaranteed rent for the term and an almost certain appreciation (high end market seems less affected by downturns in the economy).
There is an opportunity for people to purchase these deals, but they have to be a fairly special purchaser. They have to have some kind of plan and know that these don’t necessarily cashflow, but the equity build up should more than make up for this.
This is akin to a long term investment, similar to land banking. Buy land, hold for years and wait for the city limits to expand to your location and sell to a developer. Meanwhile you get zero cashflow, negative if you look at paying taxes. My doctor did this, only he managed to get a billboard company to put up a sign (enough to cover taxes) and gave a lease to a chip stand just so he could say he had some cashflow. 12 years later, developer calls and offers him 10x what he bought it for.
A good friend of mine calls these deals “acorn planting”. Plant an acorn. Sit on it. Water it and eventually you get a tree which has way more value than the acorn.
So, what’s your 5 year plan? Are you tracking to it? Are you reviewing it? How often?
I was just listening to Jim Rohn the other day in an interview. He got to talking about having a plan or goal, “but remember there is always a mid-course correction”, he says. Things don’t always work out as planned (almost never), but if you don’t review and see that you’re off course, how can you ever expect to reach your goal/destination?
Have great week folks.
I’ve had a couple of files that I have been working on in the last month or so, that are beginning to concern me.
I even had a couple clients walk away for a difference of 0.2% on their interest rate (4.2 vs 4%, ridiculously low).
I’ve seen it before and I’ve been sucked into it myself. The issue is borrowing money today with the thought that the expense is justifiable as it is so low.
Credit card companies have fed on this for decades now. Not that they have low rates, don’t get me wrong on that idea, but that they have low monthly payments.
People generally seem to be rather myopic when it comes to their personal finances. Some go as far as looking at their income and expenses, firguring out what the difference is to see if they can afford an item. Then justify it by saying, well it’s only for 2, 3 or 5 years. I’ll have more income next year and just pay it off.
The ever ellusive “I’ll have more money when…” or “if only I earned more.” Believe me, I’ve been there. I’ve learned the lesson the hard way. So when someone makes the statement, you already earn “more than enough”. Most people disagree.
After sitting through a presentation of a couple earning a combined income of $60K with a debt load of $80K plus a mortgage and seeing a method that pays not only the debt but the mortgage off in less than 20 years (I think it was 17 total), I was stunned.
There was no magic here, no going out and getting a part time job, no business on the side that suddenly created a huge income. Simple basic steps to first stop digging the hole deeper and slowly start to fill it in.
As I have said many times in previous posts, I refuse to put people into 100% financed home. I’ve done one, on a very exceptional basis, but that’s it. Why? Because it severly limits the persons options. How? Let’s look at a quick example.
You buy, for simplicity $100,000 home.
Finance this for 100%. CMHC Fee of 2.9%. You can’t afford a downpayment and likely you are at your limit or over and have to go for an extended amortization. Thus the fee becomes 3.3%.
Now you’re into a home that financed for 103.3%. CMHC actually only insures up to 95%. The remaining 5% is provide as a “cashback” to the mortgage holder. For this act of kindness on the part of the lender, they charge you full posted rates… not on the 5%, but the entire mortgage.
Let’s not forget land transfer fees. Calculated as 1.5% or $1500 in this case.
You’re into your house. You’re a new home buyer. You need to buy things to maintain your house. Lets assume you have some furniture and you buy with appliances. You’ll still need things like a lawnmower and shovel for the winter time. Hand tools as either there is always something that needs repair (more costs) or simply something you bought needs assembling.
Let’s say you rack up $3000 in household items. Remember, you were already at your limit on debt service when you moved in, but you figure you can afford the $90/mo on credit as a minimum payment.
Looking ahead a few years, the real estate market crashes (it seems to almost once a decade). Let’s say one of you loses your job or takes on a lower paying job.
Let’s say you realize that you can no longer afford to pay the mortgage, at least not eat an pay it.
You decide to sell and go back to renting.
Let’s say th value of your house stays the same and you’ve manged to pay down the 3.3% CMHC fees. So put your house on MLS. Wait you can’t do that as you realize that you have to pay a commission to an agent of 5%.
So you had no money to put down and now you need to sell and have to come up with that 5%.
Now your stuck. You can’t afford to live there and you can’t afford to move. Borrow more to move out? (Rob Peter to pay Paul?) Stick your head in the sand and hope it all goes away?
I love that line from a comedian. “I got a final notice from my utility company. Great! I wont hear from them again!”
Now I’m sure I’ll get a comment from some government worker who says, well my job is secure that will never happen to me. Folks, I don’t care how important you think you are to a company or how secure you think your position is the fact is downsizing is a reality in any position, government or not. Job security is a myth. If customers stop buying or the tax base erodes, that’s it your done.
Just my thoughts for today as I qualify people for mortgages at low rates and wonder what will happen in 5 years when rates are higher… oh, they’ll have more income then.
Let’s hope they do or pay off some debt or reduce expenses. Ah, the Latte Factor…
