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Can smart property investors get bankrupt

safsad

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As safe as houses.
Is there an economic climate when real estate investing is risky?Getting cash flow on your properties is very protective but is there a time when even positive cash flow will not protect u?
If u follow the property goldmine scorecard and select good areas with good cash flow is there any reason to fear a possible economic downturn.
 

Thomas Beyer

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# possible, albeit unlikely scenarios come to mind where real estate will not do well:

a) interest rates @ 18% i.e. high carrying costs !

b) unemployment rates @ 15% i.e. many renters that can`t afford to pay rent !

c) socialistic/left leaning political movement such as huge property taxes to discourage home ownership i.e. falling home values !
 

Nir

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Hi safsad (safe&sad?) just joking
,

Thomas summarized it well.

However, you are confusing important terms. `risky` and `fear` are relative terms. one`s perceived risk is another`s safe place. asking if there is a reason to fear is only relevant when you look at the mirror. ask my mother and she`ll first say "yes it`s risky", then think about the question. Ask my father - a holocaust survivor, if there is a reason to fear and he will say no regardless of the question.

The only correct statement I can think of, related to your question, is:

Smart property investors have lower risk of going bankrupt than less smart investors – now that`s not relative, that`s a fact.

Regards,
Neil
 

wealthyboomer

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QUOTE (ThomasBeyer @ Oct 9 2010, 03:55 PM) # possible, albeit unlikely scenarios come to mind where real estate will not do well:


b) unemployment rates @ 15% i.e. many renters that can`t afford to pay rent !

...the U.S.A. is quickly heading to that rate. The real unemployment rate for September is 12.9% according to Eliot Spitzer.
 

Pheenix

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QUOTE (wealthyboomer @ Oct 10 2010, 02:57 AM) ...the U.S.A. is quickly heading to that rate. The real unemployment rate for September is 12.9% according to Eliot Spitzer.

Hey W.B.

I am always reluctant to discuss the unemplyment figure during times of economic stress without looking at the participation rate.

The US Department of Labor`s, Oct 8 release shows this as 58.5%, which is down from approx 66% in 2005 according to wikipedia. That means (without detailed analysis) 7.5% of the Labor force cohort, has joined the military or are neither `employed` nor `unemployed` (by definition). http://www.bls.gov/news.release/pdf/empsit.pdf

So 7.5% plus the 5.6% who are officially unemployed (9.6% of 58.5%) you get a figure of 13.1 which is close to M.
Spitzer`s 12.9 - who should have a better methodology than this crude calculation.

BTW in this same report; over 41% unemployed for more than 27 weeks, and a huge increase in the number of non-voluntary part-time employed.

As to the original question, Safsad, positive cash flow is not in and of itself sufficient. It is the amount net, how much over all expenses, and also the reserves available. Rents tend to be `sticky`, that is they tend to move slower than sale prices. However, a recent survey (which I can`t put my hands on at the moment) of approximately 20 US cities showed rents, net of incentives, that declined 7 -13% year over year to mid 2010, while vacancy rates had doubled in most of those same cities - harder to rent and at lower amount.

This is why periodic stress testing is important, not just for interest rates (which only have to move significantly relative to your current rate), but as to the `sensitivity` to occupancy and rental rates, over a period of time. What combination of variables will put you off-side, and what does that do to your portfolio value? Do you need to beef up the equity or the reserves? Would you be able to sell into a slow, or lower priced market and stop the bleeding? Is your other income sufficeint and secure enough to weather some negative impact?

I would add that a periodic re-assessment of the local fundamentals would be wise as well - are there bad news events; plant closings, hiring freezes, delays in construction projects (especially infrastructure in today`s world), etc. - or are they still strong.

There is probably a good reason that lenders have a history of looking for 20-35% equity in investment properties, unless they are insured of course.

Prudence and caution, can be driven by wisdom and experience not necessarily fear, and nothing is riskless.
 

gwasser

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QUOTE (Pheenix @ Oct 10 2010, 07:59 AM) Hey W.B.

I am always reluctant to discuss the unemplyment figure during times of economic stress without looking at the participation rate.

The US Department of Labor`s, Oct 8 release shows this as 58.5%, which is down from approx 66% in 2005 according to wikipedia. That means (without detailed analysis) 7.5% of the Labor force cohort, has joined the military or are neither `employed` nor `unemployed` (by definition). http://www.bls.gov/news.release/pdf/empsit.pdf

So 7.5% plus the 5.6% who are officially unemployed (9.6% of 58.5%) you get a figure of 13.1 which is close to M. Spitzer`s 12.9 - who should have a better methodology than this crude calculation.
...

Prudence and caution, can be driven by wisdom and experience not necessarily fear, and nothing is riskless.

When we talk about postive cash flow, it means that your current operating income is sufficient to pay the bills and have a bit of a safety cushion in case income falls or costs increase.

But it does not tell you whether you make money or better how fast your net worth goes up. That you measure as a rate - Rate of return on your invested money or ROI. The strange thing is, whether you invest in gold, bonds, the stock market, the ROI always seems to swing back to a current average. Depending on the time and sweat you put in your investment you may get better returns.

The current `average return on investment` is a the middle ground of a range of ROIs. The ROI on low risk investments like a GIC is low and that of high risk Junk Bonds high. In other words, high risk often spells high ROIs. Investing in the U.S. is high risk and if your investment survives it may give you a very high return or in otherwords, you would make oodles of money. If it does NOT survive you may loose all and in some cases evenmore.

There is room for high risk investments in every investor`s portfolio as long as you have enough to cover the losses of such an investment and to `to fight another day`.
Young people have many days left `to fight another day`; old geezers like myself have less and tend to be more conservative in their overall investment behaviour.

I think previous posters and many others on this website including Don Campbell have extensively pointed out the risks of investing in U.S. Real Estate right now. The choice and the responsibility for the result are yours.
 

housingrental

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Great post Brad!

To add to above - ie include Brad`s point with mine for a more complete list:

Being forced to sell at the worst possible time (severe market downturn, few able purchasers, property sells for 50% discount of what it did the year before but if you could hold out extra year would be able to find purchaser for 30% more.. etc..) so think of:

Divorce

Investment partners force sale

First mortgage lender doesn`t renew policy (unable to find alternate lender, able to find one at lower amount or higher interest rate that property operations + your income can`t support to subsidize)

Second mortgage lender doesn`t renew policy and same issues as above

Unplanned maintenance issue - Significant leak, insurance doesn`t provide coverage, big unexpected $$ for repair (roof? foundation? etc.) and interior finishing`s + no rent + tenant issues

Re above - how about structural issue from ground sinking in unexpectedly... Everything that can happen does happen ... rare events can still be painful if it`s happening to you!

Liability issue - lawsuit and insurance doesn`t provide coverage



From Brad`s post above "nothing is riskless. "
 

Rickson9

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QUOTE (safsad @ Oct 9 2010, 02:22 PM) As safe as houses.
Is there an economic climate when real estate investing is risky?Getting cash flow on your properties is very protective but is there a time when even positive cash flow will not protect u?
If u follow the property goldmine scorecard and select good areas with good cash flow is there any reason to fear a possible economic downturn.

In my opinion, an individual is most as risk for failure when they begin to believe themselves to be smart.
 

Nir

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QUOTE (Rickson9 @ Oct 10 2010, 02:49 PM) In my opinion, an individual is most as risk for failure when they begin to believe themselves to be smart.

The opposite is true. the world`s top billionaires obviously believe they are smart. most just behave modestly which is good for business.
 

JDaley

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QUOTE (safsad @ Oct 9 2010, 12:22 PM) As safe as houses.
Is there an economic climate when real estate investing is risky?Getting cash flow on your properties is very protective but is there a time when even positive cash flow will not protect u?
If u follow the property goldmine scorecard and select good areas with good cash flow is there any reason to fear a possible economic downturn.

Stress test your (cash flow) model to find where interest rates (on a VRM) force cash flows to go to zero at a fixed LTV - it could be much less than 18% as Thomas says. Then work out what other income streams (namely your salary) can reasonably cover before you can`t (likely) make a payment. On large balances you`ll soon find out that it doesn`t take much to overwhelm your salary for instance (this is where people get caught). As Wealthyboomer pointed out, it won`t be long (in the US) before interest rates pop (due to stimulus/QE1 + TARP + QE2 etc) - at least that`s what the gold market is telling us. In Canada interest rates won`t pop because of the same reasons in the US, but should settle to historical levels - but we don`t know for certainity (as both Mark Carney and Jim Flaherty have pointed out). High unemployment could be a problem in Canada. As a sanity check for your calculations, throw in a 20 plex (or some large investment) with a high LTV and analyze the carrying costs on your personal finances - that should give you a good idea of the effect of interest rates on carrying costs. There are ways to get out of (some) trouble but should not be part of your planning if you operate with a low LTV - see Rickson9 success story (a good example of how to do it safely). btw we are in an uncertain economic climate as the IMF has recently pointed-out.
 

ChrisDavies

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Even smart people make mistakes or have bad things happen. Never think you`re exempt from having a run of bad luck. I`ve seen many people, REIN members included end up in bankruptcy from mistakes, bad luck or growing too fast.

That said, outside of Gold, long term real estate makes a great, relatively safe place to invest.
 

Pheenix

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QUOTE (ChrisDavies @ Oct 10 2010, 10:54 PM) Even smart people make mistakes or have bad things happen. Never think you`re exempt from having a run of bad luck. I`ve seen many people, REIN members included end up in bankruptcy from mistakes, bad luck or growing too fast.
Touche, or a perfect storm of some of each.

QUOTE That said, outside of Gold, long term real estate makes a great, relatively safe place to invest.

Although it is hard to cultivate carrots on gold and impossible to wear a house around your neck, no matter how tough the economic, environmental, or political situation!


Real estate is a unique vehicle by which it is possible for us `commoners` to operate with high leverage without risk of a margin call on day to day or week to week basis - like the `flash crash` or any of those other high-volatility periods.

The `score card` covers the basics, but the world is not static and it pays to review things periodically to ensure that the original conditions are still at work and expectations still hold.
 

Thomas Beyer

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QUOTE (ChrisDavies @ Oct 10 2010, 07:54 PM) ..

That said, outside of Gold, long term real estate makes a great, relatively safe place to invest.
if appropriately levered ..
 

Rickson9

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QUOTE (investmart @ Oct 10 2010, 09:23 PM) The opposite is true. the world`s top billionaires obviously believe they are smart. most just behave modestly which is good for business.

Thanks! I appreciate you sharing your opinion!
 
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