“You don’t want a capital market that functions perfectly if you’re in my business.”

The cover story in this month’s issue of Fortune (April 28, 2008) has a cover picture and quote from Warren Buffett: ” You don’t want a capital market that functions perfectly if you’re in my business.” He is in the business of investing and investors make money when assets appreciate in value. Buy low, sell high. Investors make more money when they make investments that have less competition. Competition for an investment drives the price up. So in the article he said you should “get greedy when others are fearful and fearful when others are greedy”. That means when other investors are hesitating and backing away from an asset, and you decide that the asset has good long term potential you should go for it. When other investors are rushing to invest in an asset, the long term potential will be reduced because the demand for the asset will drive up the price and you won’t be able to buy low. So be fearful of competing with greedy investors. This applies to housing in this buyer’s market. If you find a house in a good location and the price is OK, and you will live in it or the house has good rental prospects, and you have good credit to pass muster with very today’s picky lenders, consider buying it. Even if prices decline a bit further, you’ll be able to benefit from ownership of the asset and housing values will rebound in the future. Compare this strategy to waiting until everyone knows the market has hit bottom. Then the pent up demand will create another competitive demand frenzy and you’ll be hard pressed to get the house you want. What’s worse than buying a house and watching the value decline some more? Not buying a house and not being able to buy at a reasonable price because of more qualified or more active, competitive buyers in the market bidding over the asking price. When people pay over asking price they are counting on market appreciation to rationalize their decision. Expecting, even counting upon market appreciation over the rate of inflation (3-5% per year, hopefully) is the mind set of the greedy investor.

Markets exist because people have different needs and investing philosophies. Markets don’t function perfectly for many reasons. For one thing people make decisions based on imperfect information. And they have different tolerance for risk. In the mortgage market there is considerable regulation and more is being discussed. Imagine what might happen if the consumer became more knowledgable about rates and terms?

Could knowledgable consumers with perfect information become the driving force for the mortgage market to become more accountable and efficient, offering long term credit cheaper, faster, better?

Libor is going up—-slightly

The Libor index is moving up ever so slightly, due to London Bankers’ concerns about inflation and concerns about other banks under reporting their costs to borrow short term funds. There is a guessing game going on with bankers not being sure that other bankers are telling the whole truth about their financial circumstances. The same thing happened in the US when investment banks and mortgage banks were reporting losses due to poor performance in the subprime arena.  Anticipated writedowns in the few billions turned out to be in the many tens of billions prompting fire sale mergers of Bear Stearns with Morgan accompanied by a government “guarantee” of Bear portfolios in the amount of $29 BILLION!? Taxpayers are paying “to keep the system appearing healthy, AGAIN!”.

Read about this further in the Wall Street Journal:

http://online.wsj.com/article/SB120847993927124997.html

http://online.wsj.com/article/SB120856108868827857.html

 

I do believe that the Libor index will stay low compared to past years. Unlike the relationship with Australia or Iceland where interest rates are being raised significantly to address those countries’ financial circumstances, the need to keep global investment dollars in their countries, there is too much interrelationship between the US and European financial sectors for there to be a huge gap between FFR and Libor.

 

Another opportunity to learn about positive cash flow investing in affordable parts of the US

Can you achieve positive cash flow in the first year? Yes, if you put enough down when purchasing the rental property, such as 20%. The lenders like that as well and make it easier for you to qualify as a non-owner occupied investor. But, if you can still get 90% financing (10% down), you can achieve breakeven cashflow in one or two years and that is pretty darned good. These are rental areas with reliable sources of renters (supply and demand is basically balanced, but in favor of demand, so there are more renters looking for housing than available single family houses) and non spectacular market appreciation (3-5% per year just on or slightly ahead of inflation). Both of these conditions are actually good for the long term investor. We’re so over the attempted FAST FLIPPING of real estate properties, aren’t we?

 

I’ll be out of town on May 6, but will have a group of blog readers attending this workshop. Want to join in?

Contact me at 408 802-0658.

 

Best regards,

Chosen

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Current Strategies in Real Estate Free Lecture by Adiel Gorel – NEW FORMAT TO ADIEL’S LECTURES   SAN RAFAEL LECTURE  Wednesday, April 30 2008 7:00PM – 9:00PM  Embassy Suites Hotel 101 McInnis Pkwy, San Rafael, CA 94903  Register Online   SAN JOSE LECTURE Tuesday, May 6 2008 7:00PM – 9:00PM Crowne Plaza 282 Almaden Blvd, San Jose, CA 95113  Register Online Adiel will cover the following topics: PART I: The regular, basic lecture (45 minutes): * What makes some mortgages in the United States so special * Investing well even when you are extremely busy * Setting up your kids’ college education with real estate investments * Setting up your retirement with real estate investments * Financing and cash flow issues for the coming years * The type of properties we should buy * Property management made safe * Safety issues and considerations * Appropriate use of IRA funds for real estate investing * Tax considerations, 1031 exchanges, etc PART II: ADVANCED SUBJECTS – NEW EVERY TIME (1:00 Hr): * Using the current economic situation to your advantage * Is New Orleans viable for you? * How raw land figures in your portfolio * Buying REOs the right way – the Denver example * Builder’s discounts Vs. Foreclosures * GO-ZONE products and strategies for the last full year – 2008 * Current growth markets, current down markets – how to profit from both * Demographic trends projected for the next decade * Exit strategies in real estate investing PART III: EXTENSIVE Q&A (30 Minutes) Limited Seating ================= Admission complimentary: Pre-register NOW to reserve your seat: Register Online Register by phone: 800.324.3983