Archive for July, 2006
What’s the Difference between Stock Market and Real Estate Investing?
It may not seem obvious to many people, but the strategies involved in real estate investing and stock market investing are different from each other. Many people, disenchanted with the lackluster performance of their stock portfolio, first become interested in real estate investing after someone they know makes a large sum of money in real estate in a relatively short time.
If that sounds like YOU, be warned: investing in real estate in the hopes that the market will increase rapidly and steadily is, and always has been, a risky strategy, and can cause severe difficulty if you guess wrong about a piece of property–or if the entire real estate market begins to collapse, as has happened many times in the past.
If you can afford to buy real estate and hold on to it for five to fifteen years, you will nearly always realize a substantial profit. If you are savvy enough to buy a significantly discounted piece of property and then sell it within a year, you’ll make money, too. But buying an investment property at its fair market value that only gives you a break-even cash flow (or worse yet, loses money every month) can sink you in a relatively short time if you don’t have the wherewithal to feed it until you CAN make money on it.
It’s like riding a horse. If you don’t know how to ride, you’d better take some lessons before you sign up for a rodeo! The results could be disastrous if you make a mistake. And if you haven’t done your homework, you WILL make a mistake. The wrong real estate investment could cause not just financial hardship, but also financial ruin.
So know your real estate market, inside and out. Know where it is in its overall cycle, because all markets, no matter how hot, have ups and downs within the overall trend. There are always bargains available, regardless of the market. Watch your local housing market so you know how much rental income to expect and if there is a vacancy glut on the market. Two years ago you could buy an apartment building in Las Vegas for zero down because investors couldn’t rent the apartments. Some investors who could afford to make up the negative cash flow each month made a killing in appreciation. Investors with financing or cash who transformed the apartments into condominiums made even more money.
Finding the lowest-priced financing also helps make the most return on your investment. Unlike stock investing, you need strong credit to use other people’s money to finance investment property.
Even if you’re frustrated by a lackluster stock market, don’t expect to make a short-term killing in real estate to make up for it. In both cases, one of the best strategies is to buy excellent examples–and then hang on for awhile. It’s also a good strategy to maintain a cash reserve, especially when it comes to real estate. That way, even if the market heads south, you won’t find yourself being overwhelmed while you wait for the inevitable rebound in prices.
Real estate investing can carry more significant consequences than stock market investing if you guess wrong, since there’s generally a great deal more money involved. So take it easy, do your homework, and don’t rush into anything until you’ve learned as much as you can about how to become a prudent real estate investor.
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This article was posted at iReprint.info on 2003-12-20. Webmasters and publishers are free to reprint this article as long as the resource box and all the links remain intact.
Collapse of bubble inevitable, could cause recession
Various factors are consipring to burst the real estate bubble, most notably, the Fed raising interest rates. This piece from the Center for Economic and Policy Research highlights concerns with the current state of the US economy and the potential for recession caused by a collapse in house prices.
Fed Treading on Thin Ice as U.S. Housing Bubble Weakens
“Since the mid-90s the country has accumulated an enormous housing bubble, as house prices nationally have risen nearly 70 percent after adjusting for inflation. In some bubble areas, mostly the east and west coast, the real increase has been over 100 percent. Since house prices have historically increased at about the same rate as inflation, this means that more than $5 trillion of excess paper wealth – similar to the stock market bubble of the late 1990s – has been created. Just as bursting of the stock market bubble caused a recession in 2001, the collapse of the housing bubble will almost certainly do so.”
“Rising mortgage interest rates will finish off the housing bubble if oversupply and a psychological reversal of the speculative mania don’t do it first. This party is about over, most unfortunately for the majority of Americans who never got to join in the festivities.”
Credit Bureaus Sued for False Credit Scores
In a case with potentially far-reaching significance for mortgage applicants nationwide, a South Carolina consumer has filed class-action lawsuits against the three national credit bureaus, charging that they allow a practice that lowers the credit scores of millions of people.
Depressed scores raise the interest rates and fees that mortgage lenders offer. Sometimes the higher rates lead to monthly payments that are hundreds of dollars higher than they otherwise would be.
The three lawsuits charge that, under the federal Fair Credit Reporting Act, the national bureaus — Equifax, Experian and TransUnion — are required to follow “reasonable procedures to assume maximum possible accuracy of information in consumer [credit] reports.”
Nonetheless, said William A. Harris Sr. in his complaints, each of the bureaus allows credit card giant Capital One to withhold the credit limits on its customers’ card accounts — knowing full well that such omissions frequently lower consumer credit score calculations.
Though not the only company that refuses to report credit limits, Capital One Financial is the biggest and best known. According to Barron’s, the weekly investment publication, Capital One is the fourth-largest issuer of Visa and MasterCards in the United States and has 49 million customers. Capital One did not respond to a request for comment on the Harris suits, but in the past has confirmed that it withholds its customers’ credit limits from the bureaus as a corporate policy.
Credit industry experts say lenders withhold limits as a way to discourage raids on their customer lists by competitors. Cardholders with lower apparent scores may be less desirable to other creditors sifting through national bureau data in search of prospects.
The suits, filed in U.S. District Court in Greenville, S.C., shed fresh light on a behind-the-scenes practice that may be more common than many consumers know. When Federal Reserve Board researchers examined 310,000 individual credit files two years ago, they found that fully 46 percent of consumers were missing at least one credit limit.
Consumers who are new to the credit marketplace or have relatively few cards or other credit accounts typically are hurt the most. That’s because the most widely used credit scoring system in the mortgage field — Fair Isaac Corp.’s FICO score — gives heavy weight to a consumer’s “utilization” of his available credit. The higher the use of credit relative to the limit, the lower the score.
To illustrate, say you have a credit card with a $5,000 limit. The highest monthly balance you have ever had on the card was $2,500 — a moderate 50 percent utilization ratio. If your card company withholds reporting your limit, however, the scoring software may substitute your highest balance in place of your actual limit to compute your ratio.
Say your most recent balance on the card was $2,000. That appears to be a very high usage of credit when your substitute limit is just $2,500, not the actual $5,000. Now you appear to have a utilization ratio of 80 percent and your credit score could be depressed significantly — 20 to 50 points or more — according to Terry Clemans, executive director of the National Credit Reporting Association.
A 50-point decrease could mean a 1 percentage point difference in your mortgage rate quote, according to Fair Isaac’s MyFico.com Web site. On a $216,000 fixed-rate, 30-year mortgage last week, an applicant with a 660 FICO would typically be quoted 7.07 percent, or $1,447 a month in principal and interest. An applicant with a 610 FICO would be quoted 8.05 percent, with a payment of $1,592, or $145 more.
In his lawsuits, Harris charges that Capital One’s “standard policy of not reporting has a substantial adverse impact on consumers. It makes it appear that many, if not most, Capital One credit card customers have used up more of their available credit than is actually the case, thereby lowering their credit scores.”
Because Equifax, Experian and TransUnion know the potentially negative effects whenever a creditor withholds credit limits, the bureaus “have systematically violated the [law] by failing” to require Capital One to report all card holders’ limits.
Capital One is not named as a defendant in the suits. Under the prevailing, voluntary credit system in this country, no federal law requires it, or any other lender, to report any client’s data to any bureau. However, federal law does require the credit bureaus to strive to be accurate, and Harris’s suits argue that Equifax, Experian and TransUnion are not in compliance.
Asked for comment, a spokesman for Experian said the company had not yet seen the complaint, but that “in any event, we do not comment on ongoing litigation.” Equifax and TransUnion did not respond to requests for comment.
Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
Mortgage Rate History
Properly Shopping for a Mortgage
I have composed articles about this in the past, but the more I am in the mortgage industry, the more I see people making crucial mistakes when they shop for a mortgage. With that in mind, I decided to just make a simple list of what you shoud and should not do when finding a lender to finance your home purchase or refinance:
What you should do:
1) Shop with at least four different mortgage companies or local banks in a time frame of two days
2) Do a full application with every one of these lenders, and let them pull your credit and give you an interest rate quote based on the information you have provided in your application. Tell them to print you a good-faith estimate.
3) Take each good faith estimate you have to each different loan officer and let them analyze it to see if you are being ripped off, charged junk fees, or otherwise misled.
4) As soon as you’ve got a lender you like and a sales contract (if you’re purchasing) or property address (for a refinance), lock the loan with the lender you like.
What you should not do:
1) You should not ask your Real Estate agent about a good mortgage lender and then simply plan on doing your loan with that person. How do you know your agent and that person have not been friends for 20 years? While your agent might think the lender is a nice person, that in no way guarantees you’re getting a reasonable deal on your mortgage.
2) You should not show your Realtor a good-faith estimate because you think they can tell you whether or not you’re being ripped off. Unless they happen to have been working in mortgages within the last two weeks of you applying for your loan, and unless they happen to know your complete financial situation, anything they tell you is nothing more than a poorly-informed guess.
3) You should not go talk to one loan officer, decide you like them, and plan on having them complete your loan.
4) You should not spend more than 3 days trying to negotiate terms of your mortgage among various lenders. Even spending more than 24 hours can result in a daily interest rate increase that costs you money right out of your pocket.
I’ve dealt with a lot of people lately who seem like they want to get 4 or 5 banks competing for their business and then spend the next two weeks trying to nickle-and-dime fees or interest rates. In the meantime, the federal reserve raises key rates .25%, and the time they were wasting trying to get $50 pulled off of closing costs has now cost them thousands of dollars in increased interest rates.
Find 4 mortgage lenders, get applications filled out with all of them in the span of 2 days, and by the end of the second day, lock your rate with the lender that gives you the best offer. If, for any reason, they tell you that they need to wait to do that (and you have a purchase contract or property address in hand), go to the next-best offer and lock with them (there is never a reason you can’t lock your rate, provided you have given a full application and have a purchase contract or property address).