Trends for 2010 and Beyond – Financial Predictions
- the Dow Jones Index will go down to 9000 or lower
- gold will go to USD$1500 or more per ounce
- silver will go to USD$22 or more per ounce
- the US dollar will fall to an all-time low
- unemployment in the US will rise to at least 15%
- more bailouts, more debt, more printing of money by governments around the world
- people power e.g. X Factor winner did not get the Xmas number one in the UK - Rage Against the Machine won because of people power on the internet. We will see much more of this.
- radical changes in the law
- taxes and more taxes and people’s revolts
- business and banking leaders will be disgraced publicly
- a major surprise e.g. terrorist attack, bird flu or some epidemic, a war, a revolution - but it will be unexpected
- a major medical breakthrough that will be beneficial for the masses
- more space exploration of galaxies, aliens and discoveries that are exciting and lead us onto a new level of consciousness and awareness
- most people ignoring the concerns about the economy and not being prepared for the changes
- we will have one world currency within the next decade
- we will have another major political party in the US within the next 4-5 years
Over the next decade we will see major changes. The huge schism between the haves and have-nots will increase and there will be much civil unrest. Some of my predictions will happen in 2010, while others such as the world currency will take longer to come about. However, the above information gives you some idea of the changes ahead.
Wishing you all the very best for the New Year!
Friday, January 1, 2010
Thursday, December 10, 2009
Dealing with Builders and Tradesmen
Builders, renovations for your own home and for investment properties
With the house you are living in, if maintenance has not been kept up, you may run into expensive repairs. Your renovations are more personal and you are there while the renovations are going on. So although you are inconvenienced by the noise and the mess, at least you are there to see how the work is progressing.
With an investment property, it’s a bit trickier because you have to meet the contractors at the property and you are not there to supervise the work. No matter how well you know your contractors, it is always advisable to show up on a regular basis and check out their progress.
Let me give you an example to illustrate this. I was having a builder put up a partition wall to make the through lounge into two rooms in one of my investment properties. The room was large enough to divide without sacrificing living space and I was going to make one of the rooms into another bedroom because I knew it would bring in more rental income. A job that should have taken a few days had already taken three months and, if it weren’t for a neighbour telling me that the builder and his men were sitting around on boxes every day drinking tea and smoking for hours on end, they might still be there three years later. After the neighbour reported this to me, I came to the house every day until the job was finished, pretending to work on different things. Amazingly, they finished the job a few days after I got there.
There are different ways of looking at property renovations:
For the most part, investors look at it as “let’s get it fixed up and rented out as quickly as possible. For the last several years, it was very common for people to buy a fixer-upper house – maybe they went in with two or three others and did their own repairs for a quick turnaround. Or they got others to do the renovations for them – either way, many people were making money hand over fist. When property prices are rising quickly, it’s easy to make money even if you are a novice. However, in this economic climate, you cannot turn around properties so easily any more. If you are investing right now, you will probably have to rent out the property for a few years before you are able to turn in around for a profit. Therefore, you need to consider the issue of renovations, upgrades and repairs very seriously.
With an investment property, you may want to use low-grade to medium-grade items and materials just so you can get tenants in.
For your own home, you may want to upgrade. It’s a different kind of call when you are doing your own house as opposed to an investment property.
Ask yourself, how much am I going to invest in my property? Am I going to stay there for a long time in which case I might like to get an upgraded bathroom, an upgraded kitchen and nicer appliances. Also, because it’s your own home and you are living in it, you have more time to save up and do the renovations in your own time.
With an investment property, you don’t have that kind of time. You need that property to start bringing in you an income as soon as possible and you want to do it as cheaply as possible, unless you have a luxury investment property where you can get a very good return on your investment. Then you may want to hire an interior designer to help you make the property as attractive as possible to tenants who will pay a very high rental.
However, if you are going to hire an interior designer, make sure that your builder is willing to work with them. I hired an interior designer to design the kind of kitchen that would be attractive to a prospective tenant who was going to be paying a high rent. She came in, made recommendations on cabinetry, counter tops, hardware and flooring. I was very pleased with the samples she showed me and she gave my builder a list of the things she needed.
Whether the builder was having a bad hair day or he had a hearing loss, or he just didn’t like the interior designer, the end result was that everything that she put down on her list was ignored. She asked for white counter tops of high grade quality and he had substituted a dingy greenish-brown colour of the cheapest grade. Instead of buying new doors for the cabinets, he gave me second hand doors and wanted to charge me for new doors. And the knobs – unbelievable as it may seem, he put on knobs that were different colours and sizes that he must have had lying around from other jobs. They weren’t just different colours and sizes but the wrong colours and the wrong sizes and wherever the doors and cabinets didn’t fit properly, he cut them down to make them almost fit, but not quite fit. The lesson I learned from this was that I needed to buy the materials myself – at least then I could be sure that the interior designer’s instructions had been adhered to.
To summarise:
- know the difference between renovations on your own home and those on an investment property
- with an investment property, try to make a point of supervising builders on a regular basis. If you are not living close by, get someone to check for you and report back to you
- in the current downturn economy, it’s very difficult to buy, fix up and sell a property in a short space of time. This is only for the professionals, not amateurs
With an investment property, what you want to avoid are hassles with your tenants. There are enough things that can go wrong when you are letting a property, so if you can get these things fixed before they move in, chances are you will save yourself a great deal of money and aggravation down the line.
Firstly, the heating. Make sure it works, and if necessary, pay a little extra for a guarantee which gives the tenants an emergency call-out number so that you are not disturbed at a very inconvenient moment.
The damp. The last thing you want is tenants calling you out saying that there are mushrooms growing up on the inside of the walls….In fact, this happened to me with one of my properties. It developed dry rot, a very expensive disaster to remedy, all because the builder did not give me the option of spending an extra $3.00 for three air bricks. Had he done so, my tenants would not have had to contend with huge mushrooms that kept sprouting up all over the bathroom and kitchen walls due to a lack of subfloor ventilation.
It’s amazing that so many damp companies go out of business within a few years of opening their doors. You would think that since most old houses have a bit of damp and people tend to have it treated to prevent major problems from developing, there would be enough work to keep these companies afloat for years to come. The reality is that many companies will give you ten and twenty year guarantees, but a couple of years later, they are out of business. On the odd chance that a company is still in business, their policies are downright ludicrous. Four years ago, I had a whole house treated for damp and they gave me a ten year guarantee. When I called them to come out and look at it, they tried to hit me up for another $110 before they would come out. Their new policy is that if they determine that the damp has come back and it is their fault, then they will fix it – otherwise they want nothing to do with it. So make sure the damp company you are dealing with is reputable.
The roof. Tenants having to use buckets to catch water pouring in, have a tendency to lose patience very quickly and to withhold their rent. A ceiling could fall down and injure your tenants.
I’ve had more problems with roofs than just about anything else in my property investment career.
Flat roofs are often the biggest nightmare. They usually last ten years, sometimes more, sometimes less, but they are always a problem at some stage. My offices had three flat roofs and finding someone who is exceptionally good at doing flat roofs is a real ordeal. I had five different roofers come out to bid for the job and I had five different recommendations.
The first roofer said they were fine and would last me another five years. The second roofer told me to put a coating of tar over them and that would seal them for a good few years. The third one told me to build up the roof with plasterboard and then it would be even and drain away properly. The fourth roofer told me that he could recover the existing roof with more felt and that would do the trick. Finally, the fifth roofer told me that the whole roof had to be stripped away and back to the very bones and then built up from the start. I went along with the fourth roofer who wanted to recover the existing one with the better quality felt. I was assured by my master roofer that this roofer was good but whenever I looked at the roof, there was always a huge pool of water sitting in it and it looked as though it would leak at any time. I keep thinking that a roof should have water draining away from it, not sitting in it. I have since sold that property, but sometimes I wonder how long that flat roof lasted and whether it still has water sitting in it to this day.
The plumbing – have the plumbers check all appliances, drains and gutters before the tenants move in.
At one of my properties, the tenants would regularly phone me saying that there was water leaking down into the lounge ceiling from the upstairs bathroom. The dangerous element here is that it would frequently be coming in through the electric light as well. Several plumbers came out to look at the problem.
One plumber said that problem was the silicone around the bathtub so he whipped it around and for about a week it was fine. Then it started leaking again and I had another plumber come and look at it. This one said it was a leak in the pipes under the bath and he replaced the pipes and said it would be fine. Not so. Another plumber came out and said that the bath was not even and needed to be put on a piece of plasterboard and made even. So they ripped out the bathtub and then put it on a piece of plasterboard. This held for about six months and then it started leaking again. When yet another plumber came out and told me I had to replace the whole bathroom and ceiling, I ushered him out the door. The last plumber I called had a simpler solution. He replaced all the tiling around the bath, regrouted it, and then put in new silicone. That lasted a year until I sold it and I only hope that the new owners have not had further leaks.
The saying, “adversity is the mother of invention” was very true in the case of another of my properties. The toilet had an enormous big copper pipe coming out of the seat at the back. It looked dreadful but each plumber who looked at it said that it was best left alone. They said “if it ain’t broke, don’t fix it.” It was working so I opted for not fixing it. Instead, I painted the pipe a cream colour to match the walls and sold the property as is.
the electrics must be checked by a certified electrician who gives you a document stating that they are safe to use
Basically, anything that involves the structure or safety of your property must be seen to as a matter of priority. The risk you run, otherwise, is that your insurance cover may be invalid.
The areas you can afford to economise on with a rental property are:
- the carpets,
- the appliances
- the paint job
- the curtains/drapes
- the quality of the fittings in the kitchen and bathroom
The areas you must take care of are:
- the plumbing
- the electrics
- the roof
- any damp
- the heating / cooling system
- the washing machine and dryer – make sure they are in working order
With the house you are living in, if maintenance has not been kept up, you may run into expensive repairs. Your renovations are more personal and you are there while the renovations are going on. So although you are inconvenienced by the noise and the mess, at least you are there to see how the work is progressing.
With an investment property, it’s a bit trickier because you have to meet the contractors at the property and you are not there to supervise the work. No matter how well you know your contractors, it is always advisable to show up on a regular basis and check out their progress.
Let me give you an example to illustrate this. I was having a builder put up a partition wall to make the through lounge into two rooms in one of my investment properties. The room was large enough to divide without sacrificing living space and I was going to make one of the rooms into another bedroom because I knew it would bring in more rental income. A job that should have taken a few days had already taken three months and, if it weren’t for a neighbour telling me that the builder and his men were sitting around on boxes every day drinking tea and smoking for hours on end, they might still be there three years later. After the neighbour reported this to me, I came to the house every day until the job was finished, pretending to work on different things. Amazingly, they finished the job a few days after I got there.
There are different ways of looking at property renovations:
For the most part, investors look at it as “let’s get it fixed up and rented out as quickly as possible. For the last several years, it was very common for people to buy a fixer-upper house – maybe they went in with two or three others and did their own repairs for a quick turnaround. Or they got others to do the renovations for them – either way, many people were making money hand over fist. When property prices are rising quickly, it’s easy to make money even if you are a novice. However, in this economic climate, you cannot turn around properties so easily any more. If you are investing right now, you will probably have to rent out the property for a few years before you are able to turn in around for a profit. Therefore, you need to consider the issue of renovations, upgrades and repairs very seriously.
With an investment property, you may want to use low-grade to medium-grade items and materials just so you can get tenants in.
For your own home, you may want to upgrade. It’s a different kind of call when you are doing your own house as opposed to an investment property.
Ask yourself, how much am I going to invest in my property? Am I going to stay there for a long time in which case I might like to get an upgraded bathroom, an upgraded kitchen and nicer appliances. Also, because it’s your own home and you are living in it, you have more time to save up and do the renovations in your own time.
With an investment property, you don’t have that kind of time. You need that property to start bringing in you an income as soon as possible and you want to do it as cheaply as possible, unless you have a luxury investment property where you can get a very good return on your investment. Then you may want to hire an interior designer to help you make the property as attractive as possible to tenants who will pay a very high rental.
However, if you are going to hire an interior designer, make sure that your builder is willing to work with them. I hired an interior designer to design the kind of kitchen that would be attractive to a prospective tenant who was going to be paying a high rent. She came in, made recommendations on cabinetry, counter tops, hardware and flooring. I was very pleased with the samples she showed me and she gave my builder a list of the things she needed.
Whether the builder was having a bad hair day or he had a hearing loss, or he just didn’t like the interior designer, the end result was that everything that she put down on her list was ignored. She asked for white counter tops of high grade quality and he had substituted a dingy greenish-brown colour of the cheapest grade. Instead of buying new doors for the cabinets, he gave me second hand doors and wanted to charge me for new doors. And the knobs – unbelievable as it may seem, he put on knobs that were different colours and sizes that he must have had lying around from other jobs. They weren’t just different colours and sizes but the wrong colours and the wrong sizes and wherever the doors and cabinets didn’t fit properly, he cut them down to make them almost fit, but not quite fit. The lesson I learned from this was that I needed to buy the materials myself – at least then I could be sure that the interior designer’s instructions had been adhered to.
To summarise:
- know the difference between renovations on your own home and those on an investment property
- with an investment property, try to make a point of supervising builders on a regular basis. If you are not living close by, get someone to check for you and report back to you
- in the current downturn economy, it’s very difficult to buy, fix up and sell a property in a short space of time. This is only for the professionals, not amateurs
With an investment property, what you want to avoid are hassles with your tenants. There are enough things that can go wrong when you are letting a property, so if you can get these things fixed before they move in, chances are you will save yourself a great deal of money and aggravation down the line.
Firstly, the heating. Make sure it works, and if necessary, pay a little extra for a guarantee which gives the tenants an emergency call-out number so that you are not disturbed at a very inconvenient moment.
The damp. The last thing you want is tenants calling you out saying that there are mushrooms growing up on the inside of the walls….In fact, this happened to me with one of my properties. It developed dry rot, a very expensive disaster to remedy, all because the builder did not give me the option of spending an extra $3.00 for three air bricks. Had he done so, my tenants would not have had to contend with huge mushrooms that kept sprouting up all over the bathroom and kitchen walls due to a lack of subfloor ventilation.
It’s amazing that so many damp companies go out of business within a few years of opening their doors. You would think that since most old houses have a bit of damp and people tend to have it treated to prevent major problems from developing, there would be enough work to keep these companies afloat for years to come. The reality is that many companies will give you ten and twenty year guarantees, but a couple of years later, they are out of business. On the odd chance that a company is still in business, their policies are downright ludicrous. Four years ago, I had a whole house treated for damp and they gave me a ten year guarantee. When I called them to come out and look at it, they tried to hit me up for another $110 before they would come out. Their new policy is that if they determine that the damp has come back and it is their fault, then they will fix it – otherwise they want nothing to do with it. So make sure the damp company you are dealing with is reputable.
The roof. Tenants having to use buckets to catch water pouring in, have a tendency to lose patience very quickly and to withhold their rent. A ceiling could fall down and injure your tenants.
I’ve had more problems with roofs than just about anything else in my property investment career.
Flat roofs are often the biggest nightmare. They usually last ten years, sometimes more, sometimes less, but they are always a problem at some stage. My offices had three flat roofs and finding someone who is exceptionally good at doing flat roofs is a real ordeal. I had five different roofers come out to bid for the job and I had five different recommendations.
The first roofer said they were fine and would last me another five years. The second roofer told me to put a coating of tar over them and that would seal them for a good few years. The third one told me to build up the roof with plasterboard and then it would be even and drain away properly. The fourth roofer told me that he could recover the existing roof with more felt and that would do the trick. Finally, the fifth roofer told me that the whole roof had to be stripped away and back to the very bones and then built up from the start. I went along with the fourth roofer who wanted to recover the existing one with the better quality felt. I was assured by my master roofer that this roofer was good but whenever I looked at the roof, there was always a huge pool of water sitting in it and it looked as though it would leak at any time. I keep thinking that a roof should have water draining away from it, not sitting in it. I have since sold that property, but sometimes I wonder how long that flat roof lasted and whether it still has water sitting in it to this day.
The plumbing – have the plumbers check all appliances, drains and gutters before the tenants move in.
At one of my properties, the tenants would regularly phone me saying that there was water leaking down into the lounge ceiling from the upstairs bathroom. The dangerous element here is that it would frequently be coming in through the electric light as well. Several plumbers came out to look at the problem.
One plumber said that problem was the silicone around the bathtub so he whipped it around and for about a week it was fine. Then it started leaking again and I had another plumber come and look at it. This one said it was a leak in the pipes under the bath and he replaced the pipes and said it would be fine. Not so. Another plumber came out and said that the bath was not even and needed to be put on a piece of plasterboard and made even. So they ripped out the bathtub and then put it on a piece of plasterboard. This held for about six months and then it started leaking again. When yet another plumber came out and told me I had to replace the whole bathroom and ceiling, I ushered him out the door. The last plumber I called had a simpler solution. He replaced all the tiling around the bath, regrouted it, and then put in new silicone. That lasted a year until I sold it and I only hope that the new owners have not had further leaks.
The saying, “adversity is the mother of invention” was very true in the case of another of my properties. The toilet had an enormous big copper pipe coming out of the seat at the back. It looked dreadful but each plumber who looked at it said that it was best left alone. They said “if it ain’t broke, don’t fix it.” It was working so I opted for not fixing it. Instead, I painted the pipe a cream colour to match the walls and sold the property as is.
the electrics must be checked by a certified electrician who gives you a document stating that they are safe to use
Basically, anything that involves the structure or safety of your property must be seen to as a matter of priority. The risk you run, otherwise, is that your insurance cover may be invalid.
The areas you can afford to economise on with a rental property are:
- the carpets,
- the appliances
- the paint job
- the curtains/drapes
- the quality of the fittings in the kitchen and bathroom
The areas you must take care of are:
- the plumbing
- the electrics
- the roof
- any damp
- the heating / cooling system
- the washing machine and dryer – make sure they are in working order
Saturday, December 5, 2009
Another 6 US banks fail
This week I am going to discuss the failure of yet another batch of US banks.
Jim Sinclair is a precious metals expert who has authored numerous magazine articles and three books dealing with a variety of investment subjects, including precious metals, trading strategies and geopolitical events, and their relationship to world economics and the markets. He is a frequent and enormously popular speaker at gold investment conferences and his commentary on gold and other financial issues garners extensive media coverage at home and abroad.and a very generous, knowledgeable and person, has a wonderful website www.jsmineset.com that is literally a mine of accurate and essential information about gold. Having followed it for over two years now, I would like to quote from CIGA (Comrade in Golden Arms) Richard in today's posting about six US banks that have just failed:
Earlier this year, the Financial Accounting Standards Board (FASB) capitulated to pressure from banks and financial institutions and allowed financial institutions to value worthless assets at values that the financial institution had concluded were correct, not values that were market-related.
Six more banks were closed this week. Collectively, they had assets of $13.425 billion and deposits of $9.368 billion. The total estimated cost to the FDIC’s Deposit Insurance Fund (“DIF”) is $2.384 billion.
Consistent with recent trends, by the time these banks were finally closed their condition had deteriorated to a point far worse than banks were allowed to in the years before this crisis. As a result, the FDIC continues to incur much higher rescue costs than it would if it were able to close them at a stage more like they have been historically. The total cost to the DIF of closing this week’s failed banks exceeds 25% of their total deposits. By contrast, the FDIC was only required to make up about 5.7% of insured deposits in connection with the three banks it closed in 2007, at the beginning of this crisis.
The details of this week’s closings also point out some troublesome discrepancies between the value of assets stated on the banks’ balance sheets and their perceived market value. Five of the six acquiring banks this week required the FDIC to enter loss-share agreements as a condition of their purchasing the assets of the failed institutions.
Insisting upon a loss-share agreement indicates the prospective buyer is so worried about the value of the assets it is purchasing, it is unwilling to alone bear the risk that their value will turn out to be lower than anticipated. In the case of the three banks closed in 2007, none of the acquiring banks required that the FDIC enter into a loss-share agreement.
The largest of this week’s bank failures was AmTrust Bank of Cleveland, Ohio. On paper, AmTrust appeared to be very well capitalised. It claimed to have assets of $12 billion against deposits of $8 billion, a ratio of 1.5:1.
However, closing AmTrust cost the FDIC an estimated $2.0 billion, 25% of the value of its deposits. Furthermore, the purchasing bank, New York Community Bank (“NYCB”), was only willing to purchase about $9.0 billion (75%) of AmTrust’s assets, and did so only on the condition that the FDIC agree to share the risk of loss with respect to $6.0 billion of that amount. In the final analysis, it appears that NYCB had confidence in the value of only $3 billion of the $12 billion in assets on AmTrust’s balance sheet.
Furthermore, the parties appear to have concluded that the $12 billion in assets listed on AmTrust’s balance sheet were only worth about $6 billion. Otherwise, the FDIC would not have allowed for a $2 billion charge to the DIR to make good on AmTrust’s $8 billion in deposits.
There is not enough information available at this point to determine the causes of this huge discrepancy between the claimed and actual values of AmTrust’s assets. However, in the absence of an allegation of criminal fraud it stands to reason that the failure to require fair value accounting contributed substantially to this discrepancy.
The facts surrounding the closings of the remaining five banks this week raise similar concerns.
This week’s bank closings continue to warn of U.S. banks’ deteriorating balance sheets and of the FDIC’s inability to resolve troubled banks before they cause extraordinary losses. Nationwide, banks are going broke much faster than the FDIC can close them. This creates a domino effect whereby the FDIC loses the ability to mitigate losses at the same time it exhausts its capacity to pay claims.
As of November 12, 2009, the DIF had fallen into deficit and in order to replenish it, the FDIC ordered banks to pre-pay three years’ worth of deposit insurance premiums, amounting to about $45 billion. In the three weeks since then, the FDIC has been forced to acknowledge another $3.394 billion in liabilities – more than 7.5% of the new revenue it is attempting to raise by way of the pre-payments. Very soon the entire $45 billion will be wiped out and the U.S. Treasury will become the FDIC’s sole source of funding for years to come.
Given this dire situation with the banks in the US, the case for holding physical gold strengthens. If you have not yet added gold into your portfolio, I strongly suggest that you investigate your options and consider putting at least 10% of your assets into the yellow metal.
Jim Sinclair is a precious metals expert who has authored numerous magazine articles and three books dealing with a variety of investment subjects, including precious metals, trading strategies and geopolitical events, and their relationship to world economics and the markets. He is a frequent and enormously popular speaker at gold investment conferences and his commentary on gold and other financial issues garners extensive media coverage at home and abroad.and a very generous, knowledgeable and person, has a wonderful website www.jsmineset.com that is literally a mine of accurate and essential information about gold. Having followed it for over two years now, I would like to quote from CIGA (Comrade in Golden Arms) Richard in today's posting about six US banks that have just failed:
Earlier this year, the Financial Accounting Standards Board (FASB) capitulated to pressure from banks and financial institutions and allowed financial institutions to value worthless assets at values that the financial institution had concluded were correct, not values that were market-related.
Six more banks were closed this week. Collectively, they had assets of $13.425 billion and deposits of $9.368 billion. The total estimated cost to the FDIC’s Deposit Insurance Fund (“DIF”) is $2.384 billion.
Consistent with recent trends, by the time these banks were finally closed their condition had deteriorated to a point far worse than banks were allowed to in the years before this crisis. As a result, the FDIC continues to incur much higher rescue costs than it would if it were able to close them at a stage more like they have been historically. The total cost to the DIF of closing this week’s failed banks exceeds 25% of their total deposits. By contrast, the FDIC was only required to make up about 5.7% of insured deposits in connection with the three banks it closed in 2007, at the beginning of this crisis.
The details of this week’s closings also point out some troublesome discrepancies between the value of assets stated on the banks’ balance sheets and their perceived market value. Five of the six acquiring banks this week required the FDIC to enter loss-share agreements as a condition of their purchasing the assets of the failed institutions.
Insisting upon a loss-share agreement indicates the prospective buyer is so worried about the value of the assets it is purchasing, it is unwilling to alone bear the risk that their value will turn out to be lower than anticipated. In the case of the three banks closed in 2007, none of the acquiring banks required that the FDIC enter into a loss-share agreement.
The largest of this week’s bank failures was AmTrust Bank of Cleveland, Ohio. On paper, AmTrust appeared to be very well capitalised. It claimed to have assets of $12 billion against deposits of $8 billion, a ratio of 1.5:1.
However, closing AmTrust cost the FDIC an estimated $2.0 billion, 25% of the value of its deposits. Furthermore, the purchasing bank, New York Community Bank (“NYCB”), was only willing to purchase about $9.0 billion (75%) of AmTrust’s assets, and did so only on the condition that the FDIC agree to share the risk of loss with respect to $6.0 billion of that amount. In the final analysis, it appears that NYCB had confidence in the value of only $3 billion of the $12 billion in assets on AmTrust’s balance sheet.
Furthermore, the parties appear to have concluded that the $12 billion in assets listed on AmTrust’s balance sheet were only worth about $6 billion. Otherwise, the FDIC would not have allowed for a $2 billion charge to the DIR to make good on AmTrust’s $8 billion in deposits.
There is not enough information available at this point to determine the causes of this huge discrepancy between the claimed and actual values of AmTrust’s assets. However, in the absence of an allegation of criminal fraud it stands to reason that the failure to require fair value accounting contributed substantially to this discrepancy.
The facts surrounding the closings of the remaining five banks this week raise similar concerns.
This week’s bank closings continue to warn of U.S. banks’ deteriorating balance sheets and of the FDIC’s inability to resolve troubled banks before they cause extraordinary losses. Nationwide, banks are going broke much faster than the FDIC can close them. This creates a domino effect whereby the FDIC loses the ability to mitigate losses at the same time it exhausts its capacity to pay claims.
As of November 12, 2009, the DIF had fallen into deficit and in order to replenish it, the FDIC ordered banks to pre-pay three years’ worth of deposit insurance premiums, amounting to about $45 billion. In the three weeks since then, the FDIC has been forced to acknowledge another $3.394 billion in liabilities – more than 7.5% of the new revenue it is attempting to raise by way of the pre-payments. Very soon the entire $45 billion will be wiped out and the U.S. Treasury will become the FDIC’s sole source of funding for years to come.
Given this dire situation with the banks in the US, the case for holding physical gold strengthens. If you have not yet added gold into your portfolio, I strongly suggest that you investigate your options and consider putting at least 10% of your assets into the yellow metal.
Friday, November 27, 2009
Commercial vs Residential Property Investment
What are the essential differences between residential and commercial property and which makes the best investment?
When you invest in residential property you are essentially dealing with people.
When the rent is late, you have to deal with a person – the tenant. If you feel the property is not being looked after properly, you will have to deal with people who may have a different opinion from you.
With commercial property, you are essentially dealing with contracts. If the rent is not paid on time, then the contract (lease agreement) stipulates a series of remedies that the landlord can take. If the property is not kept up to a certain standard, then the contract may stipulate that you can send in a commercial cleaner and send the bill to the tenant.
Generally, governments around the world have countless rules governing the renting of property to residential tenants, which override anything that you may put in your rental agreement. For example, in the UK, if a tenant is behind in their rent, you cannot just evict them. There are all sort of protections in place so that the tenants will not be exploited. You have to allow them to fall behind in rent for at least 30 days before you can start eviction proceedings.
With commercial property, what is in the lease contract is generally what goes. Many commercial leases have a clause in them that stipulates that if the rent if late by more than a week, then penalty interest will be applied to the amount of rent outstanding. If the tenant still has not paid the rent a certain period of time thereafter, then you have the right not only to change the locks and take your premises back, but also to seize all the tenant’s fittings, furniture and equipment on the premises, and to sell them to recover the rent owing. Your rights as a commercial landlord are far stronger than those as a residential landlord.
With commercial property, the tenants usually derive their income at your premises. Therefore they have a vested interest in keeping your property in good condition. With residential tenants, there is not the same drive to maintain your property, let alone improve it. With my commercial property, I spent thousands of pounds changing the business from a men’s hairdressers (which it had been for the previous 30 years) – into a real estate business. In fact, for the first couple of years, we often had men coming to the property and looking inside expecting to have their haircut.
With a commercial lease, the tenants often paint their premises every couple of years so that it will be attractive to customers. In fact, in a commercial property, the tenant is responsible for whatever maintenance repairs occur. So if there is a plumbing problem in a commercial property, it is up to the tenant to bring in his own plumber and to be responsible for whatever bills are presented to him. In a residential property, the tenant is entitled to call the landlord or the management company – they are compelled by law to fix whatever repairs are necessary.
Another fundamental difference between residential and commercial property concerns the typical length of the lease. With residential properties it can be on a month-to-month basis, but is rarely longer than one year. Commercial properties, on the other hand, are generally leased for many years at a time. From the tenant’s perspective, it gives their company or business the security of the same premises to work out of. Banks like long-term leases as well: the longer and stronger the lease, the more willing they are to lend money on the property.
In some countries a tenant cannot rent the premises with a lease that is under 5 years. There is an upside to this and a downside to this. The upside is that his business is secure in that location for at least 5 years. He cannot be asked to move. The downside is that if times are bad, he might be able to pay his rent and he has no wiggle room to get out of that lease. So in the end he possibly could lose everything. He could lose whatever deposits he has put down, he could lose his furnishings, his equipment. He could theoretically lose the essence of his business.
So far, you can see there are a lot of advantages of commercial properties over residential ones.
Let’s summarise the main categories of commercial property:
1. Retail: shops or any building where passing trade or the general public are invited
2. Office: commonly found with retail or alone, and often above the retail areas on the ground floor
3. Industrial: places where things are manufactured or services provided – but not necessarily where the general public are walking past.
Commercial property is much more specialised than residential and it may be more difficult to find a tenant in the area of specialisation catered to by your building.
Typically banks will lend you up to 80% of the value of the property on a residential investment. However, with commercial property usually the maximum is about 60%.
The biggest advantage of residential property over commercial comes when your property is empty. If you have a house where the tenants have just left, if you have bought it in a good location and the market is reasonably active, then you should be able to find tenants quite quickly. Generally even in a slow market, the only reason why a residential property sits empty for a long time is because of the rental price. If you drop your rent by 10% or more, you will usually get a tenant. However, this downturn economy has vastly affected both residential and commercial properties. Workers who have been made redundant find that they cannot pay the rent. Many commercial properties are suffering because their tenants have been forced out of business.
With residential property, if your tenant has been laid off or fired, it may take you months to be able to evict him let alone find another tenant. In a commercial property, you are entitled to keep his deposits, fittings, equipment and furnishings, but that still doesn’t give you an income for that property. And right now there are many commercial properties that are going bankrupt. So my best advice is that in this downturn economy, that while there may be numerous opportunities for investment, be aware that there are just as many situations where you could lose a great deal of money.
Let’s look at commercial property that has been empty for 3 months or 3 years, then the problem may not be because the rent is too high. Even if you were to slash it in half you still may not find a tenant.
The reason for this is simple. Just about any residential property on the market has all that is required for someone to live in it. However, when it comes to commercial property, the requirements vary hugely from tenant to tenant. For example, when a dog food cannery becomes vacant, it may not be simply a matter of reducing the rent to find a tenant. No matter how much you drop the rent, no photographer looking for a studio is likely to settle for the dog food cannery. No shoe shop that relies on passing foot trade will want the top floor in an office tower, no matter how good the view or how reasonable the rental.
To summarise the differences between residential and commercial property:
Residential
Tenants have little interest in maintaining or improving your property
Leases tend to be short
Tenants contact the landlord for minor problems
Governments tend to legislate to protect tenants rights
Banks lend up to 80% of the value
If the property is empty, it is usually easy to find a new tenant
You deal with people
Commercial
Tenants have a strong vested interest in the upkeep of your property
Leases tend to be long
Tenants tend to fix minor problems
Governments tend to leave you alone
Banks will lend only 50-60%
The appraised value when tenanted may be 2 or 3 times the value when empty
If the property is empty, it may be difficult to find a new tenant
You deal with contracts, not people
If you were coming to me for property investment advice and you didn’t know which would be better for you: to buy a house or to buy a piece of commercial property. The first thing I would say to you is: research, research, research commercial property. Find out everything you possibly can about being a landlord, about tenancy agreements, about your areas of responsibility, the tenant’s areas of responsibility, and when you have spoken to a number of commercial property landlords, and gotten to understand the business really really well, then I would look for a group of investors who would go in on a building with you.
I would also look for a syndicate – you would be just a small part of that syndicate. Your financial obligation would be very small in comparison if you had just gone into it yourself or with one or two other people. A syndicate usually implies a large group of investors. The upside is that you don’t have to have much of a cash outlay if you invest with a syndicate. The downside is that you don’t make as much money if you invest with a syndicate. But your risks are greatly reduced, which is why people have a tendency to look for syndicates. When you have a syndicate investing in residential property, a lot has been written about landlords – that the landlord or landlords plural, are just soulless people out to gouge as much money out of their tenants as possible, making the fewest number of repairs they can get away with. The laws governing commercial property makes that condition less likely – mainly because most of what we are talking about is the tenant’s responsibility.
When you invest in residential property you are essentially dealing with people.
When the rent is late, you have to deal with a person – the tenant. If you feel the property is not being looked after properly, you will have to deal with people who may have a different opinion from you.
With commercial property, you are essentially dealing with contracts. If the rent is not paid on time, then the contract (lease agreement) stipulates a series of remedies that the landlord can take. If the property is not kept up to a certain standard, then the contract may stipulate that you can send in a commercial cleaner and send the bill to the tenant.
Generally, governments around the world have countless rules governing the renting of property to residential tenants, which override anything that you may put in your rental agreement. For example, in the UK, if a tenant is behind in their rent, you cannot just evict them. There are all sort of protections in place so that the tenants will not be exploited. You have to allow them to fall behind in rent for at least 30 days before you can start eviction proceedings.
With commercial property, what is in the lease contract is generally what goes. Many commercial leases have a clause in them that stipulates that if the rent if late by more than a week, then penalty interest will be applied to the amount of rent outstanding. If the tenant still has not paid the rent a certain period of time thereafter, then you have the right not only to change the locks and take your premises back, but also to seize all the tenant’s fittings, furniture and equipment on the premises, and to sell them to recover the rent owing. Your rights as a commercial landlord are far stronger than those as a residential landlord.
With commercial property, the tenants usually derive their income at your premises. Therefore they have a vested interest in keeping your property in good condition. With residential tenants, there is not the same drive to maintain your property, let alone improve it. With my commercial property, I spent thousands of pounds changing the business from a men’s hairdressers (which it had been for the previous 30 years) – into a real estate business. In fact, for the first couple of years, we often had men coming to the property and looking inside expecting to have their haircut.
With a commercial lease, the tenants often paint their premises every couple of years so that it will be attractive to customers. In fact, in a commercial property, the tenant is responsible for whatever maintenance repairs occur. So if there is a plumbing problem in a commercial property, it is up to the tenant to bring in his own plumber and to be responsible for whatever bills are presented to him. In a residential property, the tenant is entitled to call the landlord or the management company – they are compelled by law to fix whatever repairs are necessary.
Another fundamental difference between residential and commercial property concerns the typical length of the lease. With residential properties it can be on a month-to-month basis, but is rarely longer than one year. Commercial properties, on the other hand, are generally leased for many years at a time. From the tenant’s perspective, it gives their company or business the security of the same premises to work out of. Banks like long-term leases as well: the longer and stronger the lease, the more willing they are to lend money on the property.
In some countries a tenant cannot rent the premises with a lease that is under 5 years. There is an upside to this and a downside to this. The upside is that his business is secure in that location for at least 5 years. He cannot be asked to move. The downside is that if times are bad, he might be able to pay his rent and he has no wiggle room to get out of that lease. So in the end he possibly could lose everything. He could lose whatever deposits he has put down, he could lose his furnishings, his equipment. He could theoretically lose the essence of his business.
So far, you can see there are a lot of advantages of commercial properties over residential ones.
Let’s summarise the main categories of commercial property:
1. Retail: shops or any building where passing trade or the general public are invited
2. Office: commonly found with retail or alone, and often above the retail areas on the ground floor
3. Industrial: places where things are manufactured or services provided – but not necessarily where the general public are walking past.
Commercial property is much more specialised than residential and it may be more difficult to find a tenant in the area of specialisation catered to by your building.
Typically banks will lend you up to 80% of the value of the property on a residential investment. However, with commercial property usually the maximum is about 60%.
The biggest advantage of residential property over commercial comes when your property is empty. If you have a house where the tenants have just left, if you have bought it in a good location and the market is reasonably active, then you should be able to find tenants quite quickly. Generally even in a slow market, the only reason why a residential property sits empty for a long time is because of the rental price. If you drop your rent by 10% or more, you will usually get a tenant. However, this downturn economy has vastly affected both residential and commercial properties. Workers who have been made redundant find that they cannot pay the rent. Many commercial properties are suffering because their tenants have been forced out of business.
With residential property, if your tenant has been laid off or fired, it may take you months to be able to evict him let alone find another tenant. In a commercial property, you are entitled to keep his deposits, fittings, equipment and furnishings, but that still doesn’t give you an income for that property. And right now there are many commercial properties that are going bankrupt. So my best advice is that in this downturn economy, that while there may be numerous opportunities for investment, be aware that there are just as many situations where you could lose a great deal of money.
Let’s look at commercial property that has been empty for 3 months or 3 years, then the problem may not be because the rent is too high. Even if you were to slash it in half you still may not find a tenant.
The reason for this is simple. Just about any residential property on the market has all that is required for someone to live in it. However, when it comes to commercial property, the requirements vary hugely from tenant to tenant. For example, when a dog food cannery becomes vacant, it may not be simply a matter of reducing the rent to find a tenant. No matter how much you drop the rent, no photographer looking for a studio is likely to settle for the dog food cannery. No shoe shop that relies on passing foot trade will want the top floor in an office tower, no matter how good the view or how reasonable the rental.
To summarise the differences between residential and commercial property:
Residential
Tenants have little interest in maintaining or improving your property
Leases tend to be short
Tenants contact the landlord for minor problems
Governments tend to legislate to protect tenants rights
Banks lend up to 80% of the value
If the property is empty, it is usually easy to find a new tenant
You deal with people
Commercial
Tenants have a strong vested interest in the upkeep of your property
Leases tend to be long
Tenants tend to fix minor problems
Governments tend to leave you alone
Banks will lend only 50-60%
The appraised value when tenanted may be 2 or 3 times the value when empty
If the property is empty, it may be difficult to find a new tenant
You deal with contracts, not people
If you were coming to me for property investment advice and you didn’t know which would be better for you: to buy a house or to buy a piece of commercial property. The first thing I would say to you is: research, research, research commercial property. Find out everything you possibly can about being a landlord, about tenancy agreements, about your areas of responsibility, the tenant’s areas of responsibility, and when you have spoken to a number of commercial property landlords, and gotten to understand the business really really well, then I would look for a group of investors who would go in on a building with you.
I would also look for a syndicate – you would be just a small part of that syndicate. Your financial obligation would be very small in comparison if you had just gone into it yourself or with one or two other people. A syndicate usually implies a large group of investors. The upside is that you don’t have to have much of a cash outlay if you invest with a syndicate. The downside is that you don’t make as much money if you invest with a syndicate. But your risks are greatly reduced, which is why people have a tendency to look for syndicates. When you have a syndicate investing in residential property, a lot has been written about landlords – that the landlord or landlords plural, are just soulless people out to gouge as much money out of their tenants as possible, making the fewest number of repairs they can get away with. The laws governing commercial property makes that condition less likely – mainly because most of what we are talking about is the tenant’s responsibility.
Friday, November 20, 2009
Is it too late to buy Gold?
Is Gold Due for a Correction and is it a good time to buy now?
I have been recommending physical gold for the last three years to all my clients. Those who invested and took my advice are of course very pleased with their purchase. However, there are new clients coming to me know who are very anxious about the state of the world economy and the continuing uncertainty and wish to know whether it’s too late to invest in gold.
It’s a good question. Let’s take a brief look at the major moves in gold over the last 18 months or so. One of the key high points was in March 2008 when gold went over USD$1000 for the first time ever. At that point it looked as though it would continue to rise and go through the roof. However, much to the chagrin of many gold bugs, only two months later, gold was at just USD$870. And for the next five months, gold continued to drop and by October 2008 it was below USD$715.
It wasn’t until February 2009 – just under a year later, that gold managed to go above USD$1000 once again. So those who bought gold at its high in March 2008 had been kicking themselves for nearly a year. Many were very concerned that perhaps gold would never go above $1000 an ounce ever again. However, I did try to allay their fears by showing them that the world economy was far from certain and that for sure, it would come back again and show its true colours.
However, gold is not for the faint-hearted. It is not something that you can watch every day and worry about. This is not the idea of owning gold. It is largely for insurance purposes and could just make the difference between being able to pay your bills and buy food for the month if the world economy got into severe difficulties. It is always best to be prepared for the worst and then hope for the best. Because only two months after gold hit $1000 in February, it went below $880 in April. In September 2009 gold has started to rise parabolically – going over $1000 and in November to $1150 and rising…..
So should you buy now?
I advise all my clients to buy incrementally so that if you do happen to buy at the high point, you won’t feel too bad if it drops subsequently as you will still have funds to buy in the dips. However, with governments around the world buying gold, banks buying gold and more and more private individuals investing in gold, you can be sure that the price eventually will soar. It’s just a question of when. The UK has never sold so many gold coins to private individuals ever before. In the East, the public are more accustomed to buying gold. However, with Harrods offering gold to the public in the UK, the West is catching up.
If you do not have any physical gold in your portfolio I would strongly suggest that you seriously consider buying some. This is a very difficult time to decide whether to buy or wait. The price may just to up and up, or it may drop back before rising again. In my opinion, probability is on the side of it going up overall with a few small dips in between.
If you have already bought your gold, then just sit and wait!
I have been recommending physical gold for the last three years to all my clients. Those who invested and took my advice are of course very pleased with their purchase. However, there are new clients coming to me know who are very anxious about the state of the world economy and the continuing uncertainty and wish to know whether it’s too late to invest in gold.
It’s a good question. Let’s take a brief look at the major moves in gold over the last 18 months or so. One of the key high points was in March 2008 when gold went over USD$1000 for the first time ever. At that point it looked as though it would continue to rise and go through the roof. However, much to the chagrin of many gold bugs, only two months later, gold was at just USD$870. And for the next five months, gold continued to drop and by October 2008 it was below USD$715.
It wasn’t until February 2009 – just under a year later, that gold managed to go above USD$1000 once again. So those who bought gold at its high in March 2008 had been kicking themselves for nearly a year. Many were very concerned that perhaps gold would never go above $1000 an ounce ever again. However, I did try to allay their fears by showing them that the world economy was far from certain and that for sure, it would come back again and show its true colours.
However, gold is not for the faint-hearted. It is not something that you can watch every day and worry about. This is not the idea of owning gold. It is largely for insurance purposes and could just make the difference between being able to pay your bills and buy food for the month if the world economy got into severe difficulties. It is always best to be prepared for the worst and then hope for the best. Because only two months after gold hit $1000 in February, it went below $880 in April. In September 2009 gold has started to rise parabolically – going over $1000 and in November to $1150 and rising…..
So should you buy now?
I advise all my clients to buy incrementally so that if you do happen to buy at the high point, you won’t feel too bad if it drops subsequently as you will still have funds to buy in the dips. However, with governments around the world buying gold, banks buying gold and more and more private individuals investing in gold, you can be sure that the price eventually will soar. It’s just a question of when. The UK has never sold so many gold coins to private individuals ever before. In the East, the public are more accustomed to buying gold. However, with Harrods offering gold to the public in the UK, the West is catching up.
If you do not have any physical gold in your portfolio I would strongly suggest that you seriously consider buying some. This is a very difficult time to decide whether to buy or wait. The price may just to up and up, or it may drop back before rising again. In my opinion, probability is on the side of it going up overall with a few small dips in between.
If you have already bought your gold, then just sit and wait!
Friday, November 13, 2009
Gold Hits New Highs
So just what is happening around the world? Gold hit new highs of $1123 per ounce this week, the US dollar came under severe pressure and yet stocks continue to rise. Some call this the “jobless recovery” and cannot understand what the media mean by “green shoots of recovery.” Others are convinced that we will soon be out of global recession. So whom can you believe and what is the truth behind all the stories that we hear?
In my view, I tend to agree with those pundits (who are in the minority) who say that this recession/depression has a long way to go. The fact that millions of dollars have been thrown at our banking institutions around the world and now that some are showing positive balance sheets and are paying themselves record-breaking bonuses once again beggars belief. Do we have to go through the same scenario once again – and maybe the second time it will be even more painful? Or are there some serious politicians and leaders out there who can see alternative solutions that might actually turn this impending depression around?
This week I was heartened to see that the Wall Street Journal reported that “Merkel (German Chancellor) Vows to Cut Taxes Despite Rising Job Losses.” This has made her very unpopular with some and she has received much criticism for her approach. In fact, this could be the best strategy out there right now. Cutting taxes is a very intelligent thing to do in order to deal with the current economic uncertainty. By cutting taxes more monies will be in the hands of the consumers who may just spend more and thus boost the economy. Cutting taxes is also a great way to encourage small businesses to hire people which could also be the answer to long-term job creation. Yet Merkel is being criticised for this longer-term stimulus proposal. She seems to be the first world leader who is willing to go against the tide and propose a new strategy that is constructive and promises to bring Germany out of recession sooner than many other countries. If she actually implements this policy, then Germany may be a country to keep an eye on for investing your money for the future.
I predicted that gold would soar in value as it is doing, (against the opinions of many stalwart investment analysts) and I think it still has a long way to go. So don’t be kicking yourself thinking that you should have bought earlier – try to buy when it goes down a little and buy incrementally so that you can take advantage of the dips when they occur.
We live in interesting times – the main thing is to try to protect yourself and your family first, then adjust your mindset so that you are aware of the possible outcomes around you and if necessary change your strategy to suit the prevailing conditions.
In my view, I tend to agree with those pundits (who are in the minority) who say that this recession/depression has a long way to go. The fact that millions of dollars have been thrown at our banking institutions around the world and now that some are showing positive balance sheets and are paying themselves record-breaking bonuses once again beggars belief. Do we have to go through the same scenario once again – and maybe the second time it will be even more painful? Or are there some serious politicians and leaders out there who can see alternative solutions that might actually turn this impending depression around?
This week I was heartened to see that the Wall Street Journal reported that “Merkel (German Chancellor) Vows to Cut Taxes Despite Rising Job Losses.” This has made her very unpopular with some and she has received much criticism for her approach. In fact, this could be the best strategy out there right now. Cutting taxes is a very intelligent thing to do in order to deal with the current economic uncertainty. By cutting taxes more monies will be in the hands of the consumers who may just spend more and thus boost the economy. Cutting taxes is also a great way to encourage small businesses to hire people which could also be the answer to long-term job creation. Yet Merkel is being criticised for this longer-term stimulus proposal. She seems to be the first world leader who is willing to go against the tide and propose a new strategy that is constructive and promises to bring Germany out of recession sooner than many other countries. If she actually implements this policy, then Germany may be a country to keep an eye on for investing your money for the future.
I predicted that gold would soar in value as it is doing, (against the opinions of many stalwart investment analysts) and I think it still has a long way to go. So don’t be kicking yourself thinking that you should have bought earlier – try to buy when it goes down a little and buy incrementally so that you can take advantage of the dips when they occur.
We live in interesting times – the main thing is to try to protect yourself and your family first, then adjust your mindset so that you are aware of the possible outcomes around you and if necessary change your strategy to suit the prevailing conditions.
Sunday, October 25, 2009
Housing Market and Mortgages Top Tips
I am frequently asked by clients and colleagues: Should I buy a house to live in or should I just rent? Should I get rid of or reduce my mortgage by moving into a smaller property?
Is it a good time to invest in a property or a piece of land? There are so many foreclosures out there – maybe there are some bargains to be had?
With the volatility in housing markets around the world, it’s very hard to know what action to take. Economists talk one day of a possible fall of 30% in the housing market and the next day they’ve changed their minds and they predict just a 15% drop. Whom can you trust and how reliable is the information we receive in the media and in our papers?
I have many clients around the world who are just dying to get back into property investing – why? Because they see that they are getting a very low return on their money in the bank – very often only 1,2 or 3% if they are lucky. They want to have something that brings them an income for their retirement and also hope that the value of the property will go up over time.
Today, I’m going to look at the various options available to you and their respective advantages and pitfalls.
The first thing to say is please do not be fooled by the media’s constant reporting of “green shoots” of recovery. There is very little evidence showing any recovery. There are three main reasons why it is likely that house prices will continue to fall for the foreseeable future:
- rising unemployment. The more people that are out of work – they cannot afford their mortgages and thus have to relinquish their homes. This means that more properties for sale come onto the market and thus drive the prices down. For example, if there is too much availability of rice and no one wants to buy it, then in order to attract buyers, the price has to be reduced. The housing market is no different. If you really want to sell a house in a falling market, you need to price it at least 20% below the average price in that area in order to generate some interest
- banks are now wanting at least 20% deposit. During the housing boom, banks were lending money to people often without asking them for a deposit at all. I saw this happening when I had my property investment company in the UK – they were lending to people who were on unemployment benefit! How irresponsible can you get? So because the banks have got into trouble, they have now tightened up their rules and are asking people for at least a 20% deposit. So this means that fewer people can get mortgages and thus afford to buy a house.
- interest rates will go up in the medium term. The reason why prices have gone up for such an extended period is because interest rates have steadily come down, which has meant that your mortgage payments have steadily gone down. In fact, in the US, they are now at 0%. However, there are already signs that the banks are going to increase interest rates and it is more than likely that they will start to go up in the next year or two. What this means for the housing market, is that fewer people will be able to afford to take out a mortgage and so more houses will be on the market and thus prices will fall further.
So those are the reasons why property prices are likely to either fall or at least remain static for the foreseeable future.
With this in mind, should you rent or should you buy?
It depends largely on your financial situation.
There are six conditions upon which I would consider buying a property to live in right now:
- You find an absolute bargain. This would be based on you having done extensive research on all the other properties in the area. For example, if the average price right now is $200,000 and you find something for $100,000 that is a foreclosure, then that might be a good buy. However, it is only a good buy if you can afford it.
- You have at least a 20% deposit and you have at least 12 months emergency funds in savings to cover unexpected situations
- If you are buying the property with a spouse or partner, you calculate your outgoings for just one income or even no income for a period of time – what happens if one or both of you gets laid off for an extended period of time and you cannot find other employment?
- You calculate your costs based upon interest rates going up which means that your mortgage will go up - so you need to have plenty of buffer monies
- You include in your calculations, the possibility of other costs rising such as property taxes, utilities, telephone, food etc. Many Councils are saying that your property is worth $1M and they are charging you taxes on that amount when in fact you could only get $200K for your property if you sold it.
- You are willing to hold onto the property for at least ten years before you may see an increase in its value.
Remember to keep in mind that if you buy now, you may be sorry as the property you buy for $300000 may only be worth $250000 within a few months. However, I have a client in Michigan and her property a year ago was worth $1M – now she has it on the market for $250K and she still cannot find a buyer. If you do buy a property, don’t have expectations that that property is going to go up in value anytime soon.
If you can satisfy all these conditions and you are not going in by the skin of your teeth – then off you go – happy house hunting!
If you cannot satisfy all those conditions, then I suggest you stick to renting for now. In fact, rents should also start to come down too and you may be able to negotiate a better deal with your landlord. The advantage of renting is that you are not tied into any mortgage agreement and you can be more flexible. If prices continue to fall, you may find that you are in a better position to pick up a bargain when the time comes.
For those of you who are struggling with your mortgage payments at the moment, try to negotiate a better deal with your bank. They would still prefer to have you in the property paying part of the mortgage rather than going through the procedure of foreclosure which usually costs them a whole lot more money. I knew someone who was having trouble paying her mortgage and she managed to negotiate a year’s holiday from paying the mortgage while she got herself back on her feet. It’s a bit like the negotiation we talked about last week – you have to be willing to ask. Also, if one bank does not want to negotiate, try to find one that will.
Depending on the size of your mortgage, you may consider moving to a smaller property so that you can either free yourself of debt altogether or at least reduce your monthly payments.
If you owe a lot of money on your property and you can still get some equity out and get rid of your mortgage altogether, I would suggest that you seriously consider taking that option. Then you are free to buy later when the prices have come down further.
If you have a property in a block of flats, or a condominium, where you are sharing the service charges – if many people in that block of flats have their apartments foreclosed, then the people who are still living there have to take on the added burden of those maintenance costs and if there are a lot of people out of work and not buying merchandise, then cities have to make up the money that they are nto collecting for taxes in some other way. Chances are that one of the first things they will be do will be to increase your property taxes substantially.
People really don’t know what to do with their money and because property investment has been such a good bet in recent years, there are many people itching to get back into the market. But is this the right time? It’s very difficult to pick the top and the bottom of any market – even the experts will tell you that that is almost impossible, but what you can do is to see the trend. With the degree of change that is happening right now, trends are much more difficult to predict, and for the average person, who is not well-informed on the housing market, it is best to wait until things have settled down somewhat before making a major purchase.
For those of you who are looking to invest, here are a few conditions I would suggest that you consider before putting your hard-earned money into property at this time:
- during a recession or depression, people have less available funds and may not be able to afford to rent. So you may need to drop your rental price. This is all right is you have no debt on the property and you have paid in cash – then you will not be too affected if you cannot find a tenant or if rental values go down for a few years. So if you are paying cash and you don’t need a mortgage, then buying a “real bargain” in a good location is a possibility. However, once again, don’t expect the value of the property to go up in value anytime soon.
- If you are taking out a mortgage, I would suggest that you do not take out more than 50-60% of the property price. Then if interest rates go up, your property taxes go up, your property sits vacant for a year or more, you will stillbe able to afford the outgoings. But you must be prepared to sit on the property for a few years and have your money tied up. Remember that selling a property is not a quick exercise and you may have to wait several months or even years to access your cash.
Buying land is even more risky as you do not have a property on it to bring you a regular income. You would either have to hang onto the land until such time as prices go up – which could be many years away – or you could build on the land and hopefully find tenants to bring you an income. However, I know people who own sections around the world and they are having great difficulty selling them right now. Indeed, in Fiji, a couple have had to reduce their section by 50% and they still have not found anyone to buy it. I see this happening around the world. Land, unless you are using it for yourself, is largely unproductive and does not bring you an income. So unless you are using it yourself e.g. to grow vegetables, for farming, livestock and you have a business that brings you an income from your land, then it is not the best investment during a downturn economy.
Summary
Do not leverage yourself too highly – i.e. don’t take out too much debt and make sure you have plenty of buffer funds
In volatile times, best to play it safe and not to borrow too much. Remember if you buy with a 20% deposit and the house price drops 20% you have lost all your equity.
If you rent – you are flexible, you can move quickly and you will be able to pick up the bargains at a later date
Investors: - not the best time to be buying – not only are rental yields low, but leverage is not wise now as there is no promise of capital gain in the near future. If you are paying cash, the risk is much lower and you can afford to wait and sit it out
If you are buying without too much debt – i.e. preferably only 50-60% and you know you can afford the mortgage and rising property taxes and other costs, then ok, but if not, then wait.
If you want to extend or renovate your house – this is going to be a good time:
-builders are looking for work and are willing to negotiate on their labour costs.
Is it a good time to invest in a property or a piece of land? There are so many foreclosures out there – maybe there are some bargains to be had?
With the volatility in housing markets around the world, it’s very hard to know what action to take. Economists talk one day of a possible fall of 30% in the housing market and the next day they’ve changed their minds and they predict just a 15% drop. Whom can you trust and how reliable is the information we receive in the media and in our papers?
I have many clients around the world who are just dying to get back into property investing – why? Because they see that they are getting a very low return on their money in the bank – very often only 1,2 or 3% if they are lucky. They want to have something that brings them an income for their retirement and also hope that the value of the property will go up over time.
Today, I’m going to look at the various options available to you and their respective advantages and pitfalls.
The first thing to say is please do not be fooled by the media’s constant reporting of “green shoots” of recovery. There is very little evidence showing any recovery. There are three main reasons why it is likely that house prices will continue to fall for the foreseeable future:
- rising unemployment. The more people that are out of work – they cannot afford their mortgages and thus have to relinquish their homes. This means that more properties for sale come onto the market and thus drive the prices down. For example, if there is too much availability of rice and no one wants to buy it, then in order to attract buyers, the price has to be reduced. The housing market is no different. If you really want to sell a house in a falling market, you need to price it at least 20% below the average price in that area in order to generate some interest
- banks are now wanting at least 20% deposit. During the housing boom, banks were lending money to people often without asking them for a deposit at all. I saw this happening when I had my property investment company in the UK – they were lending to people who were on unemployment benefit! How irresponsible can you get? So because the banks have got into trouble, they have now tightened up their rules and are asking people for at least a 20% deposit. So this means that fewer people can get mortgages and thus afford to buy a house.
- interest rates will go up in the medium term. The reason why prices have gone up for such an extended period is because interest rates have steadily come down, which has meant that your mortgage payments have steadily gone down. In fact, in the US, they are now at 0%. However, there are already signs that the banks are going to increase interest rates and it is more than likely that they will start to go up in the next year or two. What this means for the housing market, is that fewer people will be able to afford to take out a mortgage and so more houses will be on the market and thus prices will fall further.
So those are the reasons why property prices are likely to either fall or at least remain static for the foreseeable future.
With this in mind, should you rent or should you buy?
It depends largely on your financial situation.
There are six conditions upon which I would consider buying a property to live in right now:
- You find an absolute bargain. This would be based on you having done extensive research on all the other properties in the area. For example, if the average price right now is $200,000 and you find something for $100,000 that is a foreclosure, then that might be a good buy. However, it is only a good buy if you can afford it.
- You have at least a 20% deposit and you have at least 12 months emergency funds in savings to cover unexpected situations
- If you are buying the property with a spouse or partner, you calculate your outgoings for just one income or even no income for a period of time – what happens if one or both of you gets laid off for an extended period of time and you cannot find other employment?
- You calculate your costs based upon interest rates going up which means that your mortgage will go up - so you need to have plenty of buffer monies
- You include in your calculations, the possibility of other costs rising such as property taxes, utilities, telephone, food etc. Many Councils are saying that your property is worth $1M and they are charging you taxes on that amount when in fact you could only get $200K for your property if you sold it.
- You are willing to hold onto the property for at least ten years before you may see an increase in its value.
Remember to keep in mind that if you buy now, you may be sorry as the property you buy for $300000 may only be worth $250000 within a few months. However, I have a client in Michigan and her property a year ago was worth $1M – now she has it on the market for $250K and she still cannot find a buyer. If you do buy a property, don’t have expectations that that property is going to go up in value anytime soon.
If you can satisfy all these conditions and you are not going in by the skin of your teeth – then off you go – happy house hunting!
If you cannot satisfy all those conditions, then I suggest you stick to renting for now. In fact, rents should also start to come down too and you may be able to negotiate a better deal with your landlord. The advantage of renting is that you are not tied into any mortgage agreement and you can be more flexible. If prices continue to fall, you may find that you are in a better position to pick up a bargain when the time comes.
For those of you who are struggling with your mortgage payments at the moment, try to negotiate a better deal with your bank. They would still prefer to have you in the property paying part of the mortgage rather than going through the procedure of foreclosure which usually costs them a whole lot more money. I knew someone who was having trouble paying her mortgage and she managed to negotiate a year’s holiday from paying the mortgage while she got herself back on her feet. It’s a bit like the negotiation we talked about last week – you have to be willing to ask. Also, if one bank does not want to negotiate, try to find one that will.
Depending on the size of your mortgage, you may consider moving to a smaller property so that you can either free yourself of debt altogether or at least reduce your monthly payments.
If you owe a lot of money on your property and you can still get some equity out and get rid of your mortgage altogether, I would suggest that you seriously consider taking that option. Then you are free to buy later when the prices have come down further.
If you have a property in a block of flats, or a condominium, where you are sharing the service charges – if many people in that block of flats have their apartments foreclosed, then the people who are still living there have to take on the added burden of those maintenance costs and if there are a lot of people out of work and not buying merchandise, then cities have to make up the money that they are nto collecting for taxes in some other way. Chances are that one of the first things they will be do will be to increase your property taxes substantially.
People really don’t know what to do with their money and because property investment has been such a good bet in recent years, there are many people itching to get back into the market. But is this the right time? It’s very difficult to pick the top and the bottom of any market – even the experts will tell you that that is almost impossible, but what you can do is to see the trend. With the degree of change that is happening right now, trends are much more difficult to predict, and for the average person, who is not well-informed on the housing market, it is best to wait until things have settled down somewhat before making a major purchase.
For those of you who are looking to invest, here are a few conditions I would suggest that you consider before putting your hard-earned money into property at this time:
- during a recession or depression, people have less available funds and may not be able to afford to rent. So you may need to drop your rental price. This is all right is you have no debt on the property and you have paid in cash – then you will not be too affected if you cannot find a tenant or if rental values go down for a few years. So if you are paying cash and you don’t need a mortgage, then buying a “real bargain” in a good location is a possibility. However, once again, don’t expect the value of the property to go up in value anytime soon.
- If you are taking out a mortgage, I would suggest that you do not take out more than 50-60% of the property price. Then if interest rates go up, your property taxes go up, your property sits vacant for a year or more, you will stillbe able to afford the outgoings. But you must be prepared to sit on the property for a few years and have your money tied up. Remember that selling a property is not a quick exercise and you may have to wait several months or even years to access your cash.
Buying land is even more risky as you do not have a property on it to bring you a regular income. You would either have to hang onto the land until such time as prices go up – which could be many years away – or you could build on the land and hopefully find tenants to bring you an income. However, I know people who own sections around the world and they are having great difficulty selling them right now. Indeed, in Fiji, a couple have had to reduce their section by 50% and they still have not found anyone to buy it. I see this happening around the world. Land, unless you are using it for yourself, is largely unproductive and does not bring you an income. So unless you are using it yourself e.g. to grow vegetables, for farming, livestock and you have a business that brings you an income from your land, then it is not the best investment during a downturn economy.
Summary
Do not leverage yourself too highly – i.e. don’t take out too much debt and make sure you have plenty of buffer funds
In volatile times, best to play it safe and not to borrow too much. Remember if you buy with a 20% deposit and the house price drops 20% you have lost all your equity.
If you rent – you are flexible, you can move quickly and you will be able to pick up the bargains at a later date
Investors: - not the best time to be buying – not only are rental yields low, but leverage is not wise now as there is no promise of capital gain in the near future. If you are paying cash, the risk is much lower and you can afford to wait and sit it out
If you are buying without too much debt – i.e. preferably only 50-60% and you know you can afford the mortgage and rising property taxes and other costs, then ok, but if not, then wait.
If you want to extend or renovate your house – this is going to be a good time:
-builders are looking for work and are willing to negotiate on their labour costs.
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