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Posted by Mike Hoeft on January 11, 2003 at 14:43:12:

Thank you Joe C. for your response to my last question.

To start off, I just finished reading Ray Alcorn's article in the advice articles section of this site.

Although I agree with many of his central tenets, I must say I disagree with Mr. Alcorn's belief that interest rates are rising. I think our economy is still sluggish at best (with our economy still being the strongest around the world) and with our dollar getting hammered because of war tensions and the such, I do believe Mr. Greenspan will be on hold for a very long time.

But that is only my opinion. Mr. Alcorn may very well be correct himself. Guess we will just have to wait and see.

Still, how would one take advantage of buying homes in a low-interest rate environment? I mean, I know it is financially smart for a current home-owner because money will be cheaper to borrow.

However, is it easier for an investor either to flip properties or invest in long-term properties now because of our low-interest rate environment?

If so, how would one make it mutually beneficial to both parties in the transaction (say, on a lease-purchase deal)?

Thanks!

-mike h.

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Posted by Tony-VA on January 11, 2003 at 22:15:24:

Mike,

I do not intend to argue either way about the future of interest rates but I do have a few thoughts on the market of current low rates.

Low rates and a flood of money out of the stock market into the real estate market has spawned higher price in many areas, higher competition from less experienced (Real Estate) investors who are willing to accept lower returns (often manipulated by numerical formula computations they are unfamiliar with).

Where do Real Esate investors stand? A many sided question.

Certainly those who have properties (particularly commercial properties) stand in a land of great opportunity for the reasons mentioned above. Selling some of these ventures could produce cash at the height of a market, thus providing cash for the low end buys to come. Eventually Wall Street will return to favor and those who bought Real Esate at the height of the market will struggle to sell at, or more than they purchased the properties for.

Taking advantage of the current low interest rates and refinancing properties you intend to hold for the long term could also provide some cash for future purchases while perhaps even lowering payments on current debt service, thus increasing that "monthly paycheck".

There will still remain motivated buyers in every market. Mobile home parks for instance are not necessarily mainstream investments that Wall Street will bail out and scarf up (depending on the size of the park perhaps). But other income real estate might prove quite competetive. Wall Street investor turning to real estate at a time when interest rates are low (thus providing for greater leverage) may buy larger properties at lower returns (than traditional RE investors would require).

This theory of mine differs when it comes to mobile homes (personal property). Selling older homes for cash will still remain a challenge, though not impossible but perhaps not as practical due to the glut of newer, repo homes on the market from the Conseco fall out. Decent, newer homes are becoming affordable and might be a higher return for your money than competing in a Seller's market. Making money on the "Buy" when selling with owner financing (thus avoiding the market finance hurdle) would seem to continue to be a strong investment.

But again, I do believe it is our duty to locate motivated sellers under all market conditions, even the Seller's market we may face.

War, Oil, Interest rates etc. will affect the above scenarios. What is the answer? Motivated Sellers.

Thus my reluctance to speculate on the future of interest rates. I rather prefer to be seeking motivation in the market.

Best Wishes,

Tony-VA

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Posted by ray@lcorn on January 12, 2003 at 09:54:18:

Mike,

I think you must have read an old article? If it was "Real Estate Investing in a Rising Rate Environment", the article was written three years ago, and rates were rising at the time.

I agree with you about present conditions. The economy is very sluggish, and may well slow further before hitting bottom. The latest employment numbers are not encouraging. From what I have read and surmise, most expect the Fed to lower the discount rate another quarter point early this year. That will put the discount rate at 1%, and that's going to about do it for the leverage the Fed can use to spur growth.

But it?s not all about rates. Real estate values are dependent upon both positive demographics and access to capital.

What I am watching closely is the progress of the proposed tax cuts. The proposal to make stock dividends tax-free concerns me more than the interest rates. That could have an indirect negative effect on asset values through reversing the flow of capital into real estate..

As for flips vs. holds, in my opinion it's a function of opportunity rather than environment. I tailor the deal structure to the situation, rather than searching for the situation to fit one structure.

ray

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Posted by Mike Hoeft on January 12, 2003 at 14:18:36:

Ray,

I concur wholeheartedly with the upcoming 25 bp cut (despite the already low Fed Funds Rate). I am a Commodity Broker as my day job and we are speculating on Interest Rates staying low throughout the year (Course we could be wrong!...:)....)

Re: the tax cuts on dividends, would that not be a good thing that money is flowing away from real estate so that people utilizing alternative methods of obtaining properties like lease/purchases would have more opportunities?

And your last point is well taken as well....For the r.e. investor, it does not matter what the int. rate environment is. There will always be opportunities on which to capitalize. And I suspect the same is true for the dividend tax cuts.

My question was that since I am utilizing lease/options to invest in real estate, is there a bargaining chip that I could throw into the fray that would take advantage of our low interest rate environment? Is there something I could put into a contract like, for instance, add'l terms other than: down payment, rent credits, price, option duration, etc. that would be a win-win for myself as investor and the seller?

I guess the question is if I am utilizing l/o's, would the low-interest rate environment inherently make l/o's look more attractive to a seller? I am working with a seller who wants to do an l/o, yet she will not negotiate on price. Maybe she is not really that motivated; still she will negotiate on the other terms like option duration.

Just wondering if I can dangle a carrot that would push her over to take advantage of what my partner and I are offering as investors.

Thanks!

-mike h.

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Posted by Mike Hoeft on January 12, 2003 at 14:37:35:

Tony,

I hear you: It's all about finding motivated sellers.

I did not wish to start up a discussion re: the future of interest rates. I was leading my point into my question which was: Can we utilize this low interest rate environment to perhaps push someone to accept our offers as investors?

My partner and I are working on a few l/o's and one woman will not negotiate on price, yet she will negotiate on option duration. I am wondering if I can wield a phrase or something in the contract perhaps that highlights the fact that int. rates are low, and that maybe it will truly be a win-win for ourselves as investors and her as seller.

Or maybe she is just not motivated enough...I am obviously pushing forward to do more deals with other motivated sellers, yet I wish to see if I can perhaps make a deal with this woman that would truly be win-win.

Thanks!

Best,
Mike h.

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Posted by Dave Swett-CA on January 14, 2003 at 16:55:48:

I assume your L/O is with a seller and you are trying to buy. As others have said, it looks as if the seller is poorly motivated to do a deal and possibly may even be sophisticated enuf to understand the importance of having a high end sales price to give them the yield that they want.

You mention your skills as a commodities/stock broker; may I suggest that you do a NPV calculation at whatever comfortable interest rate and period of time that you would want to use in your investment portfolio and discount the asking price in her L/O to a present value that you like.

I.E., say get a 5+ year L/O with very low payments to her so that you can work a margin or mark up on what you could sell (or sub lease) the MH for. Say you pay her $100 per month and can get a buyer to pay you $225 per month. Your margin profit would be $125 per month for no money down payment.

Also, negotiate that all of your option pmts be applied to a principal reduction during this 5+ years. That will whittle down the net effective sales price to you.

Also, negotiate the option so that you would pay zero interest rate payment on her asking price--that would give you a margin mark up for your profit. A basic rule of thumb for Lonnie deals is to double the sales price. Buy for a dollar and sell for two dollars.

Since we don't have any specific numbers, you might have a good deal at her asking price and then simply double the price to current asking market and still make a good yield.

Considering the somewhat reserved MH financing market right now, perhaps her unit is old enuf so that it can not be refinanced by ANYONE and will require an all cash buyer, which is very improbable. If so, you can continue to keep in touch with the lady so that she knows that you are an eager buyer so that she will call you when she reaches a degree of motivation so that she will wheel and deal.
DJ

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Posted by mike hoeft on January 14, 2003 at 18:17:59:

Much obliged, Dave....

Best,
Mike H.