Well, so much has happened during 2009. The real estate scene became the entire financial system scene. We are now coming out of a recession, but unemployment is over 10% and that does not count the people who have stopped looking for jobs. Real unemployment is probably 12% or more already. I have been collecting articles from the newspaper and magazines and I will be blogging about them since they are really indicative of what people are doing to re-establish themselves financially. People have lost savings if they were invested in the stock market or recently in real estate. People have or are afraid of losing their jobs. People have b

The first article that caught my eye was the Oct 13, 2009 Wall Street Journal article section D, page 1, “Real -Estate  Pros Go Moonlighting”. The housing market’s long decline has left once thriving real estate professionals scrambling for supplemental income or changing professions. The article describes Jill Galloway, 49, who worked solely as a realtor in Beverly Hills, CA who last winter realized that real estate sales wouldn’t be enough to support herself and her two children, ages 16 and 11. Ms. Galloway didn’t sell a home from January through July. “It became crushingly apparent that I couldn’t pretend anymore that all of my clients were sitting on the fence,” she says. Her only income came from sporadic leasing deals forcing her to dip repeatedly into her retirement savings. She estimates that her earnings  will fall at least 60% from the $200,000 to $250,000 in a typical year. In July she and a friend opened a women’s store in downtown Los Angeles selling samples and overruns given to them by showrooms; when an item sells the women pay the showroom and keep the markup. They don’t pay rent because the landlord  with other vacant shops just wants the store occupied.

“It’s not a major income stream, but I do see some cash flow and  a way to cross promote” her real estate business, she says. She says any face time with new people can turn into a prospective business deal.

I was so impressed with what Ms. Galloway did and even more about what she is further exploring. Read the full article.

It is so important to deal with reality in creative ways without letting denial control your view of the world. So many people are still in denial about the economy and how to recover financially from their losses. We need to be acting more like Ms. Galloway and diversify.

I am amazed at how the financial crisis has evolved from Jan 2008 when I started blogging about the  mortgage scene to April 2008. I answered a number of typical questions about exotic mortgages and interest rate indexes, and addressed ways to think about whether to or when to buy one’s first or next home. Since the market value of houses has been in decline for months and months the decision about when to buy has been a tough one for young home buyers to figure out. The good news is that homes are MUCH MORE AFFPORDABLE now and will get more so for the next couple of years at least. The bad news is that you really have to do you homework on the decision to buy and where and when. You cannot just follow the “conventional wisdom” advice of realtors or mortgage lenders these days. They are parties that have a vested interest in getting you to buy. So you need to dig in and ask questions and assess answers and formulate your own “worldview” on what is going on and how you will best participate in what is going on. 

Just over a couple of years ago my wife was diagnosed with “calcium deposits” in one of her breasts. Seems insignificant– little specks on an xray. But it led to a biopsy to check out the cells and another biopsy to get more of the cells out that could/would cause problems in the future. You can bet that we went into this process with a lot of anxiety and uncertainty. We did a lot of talking with friends and family and we did a lot of research on the Internet– and NOT WIkipedia. We wanted credible sources. But we found differing opinions from different credible  sources!  This led to more research and more dialog with more experts. We were motivated. This research was not the kind you did for a homework assignment in school. This research was not casual searching on the Web for a product or service that might be purchased on EBay or Craigslist or from an online storefront or fron a brick and mortar store. This research was going to determine how we approached a potentially life or death decision for follow on treatment and therapy to make her better. When we went to the oncologist, to get help making the decision about the need for preventative radiation or chemo therapy, his first statement was “What questions do you have for me?” By this he meant to say that he would not be telling us what to do. He would not be “the oracle”. It was up to us to do our homework and use him as a knowledgable resource who would invest the time and effort to get to know my wife’s exact situation so he could offer his best insight on likely causes and effects of various therapies. He would be a good resource for assessing the likely rewards and probable risks of alternative courses of action. We like this since we had done our homework and were willing to do whatever it took to learn more as needed so we could make a good decision. My wife made her decision with her network of  support resources and she is doing great– over a year later! 

So, homebuyers need to do the same thing and make a commitment to get smart about homebuying basics in this market that will favor the credit worthy person or couple who has solid income and savings. It also favors those who are smart about creative finance and partnering. This market will last for another year or two. When markets return to normal buyers will be back to clamoring over each other and bidding up properties. The advice I gave to my daughter and her fiance three months ago still holds. Keep an eye out for properties that come on the market in your preferred locations and be prepared with pre-approval letters and tuned up FICO scores to make outrageously low offers to several properties at a time.

I have been watching the drama of the $700 Billion Bailout, the demise of independent investment banks through bankruptcy or acquisition or transformation from investment bank to a bank bank. These changes have unfolded with amazing speed– daily new announcements. What’s interesting is how quickly spokespersons (CEO’s) switch from being confidence propper uppers to being fired. There is a Pollyanna mentality in which the leadership of a company asserts that things are challenging, but all will be fine with the infusion of one or two or three billion dollars of petro dollars from a Middle East investor or trade surplus dollars from a national investment fund like that of China or several billions of dollars of equity investment from Warren Buffett. The Pollyanna mentality (macho confidence) is needed to convince the investor that his new investment dollars will not just get sucked up in the bad debt whirlpool like previous capitalization. The new investor needs to think that he is getting a chance to buy into an important piece of the US financial establishment at distressed bargain basement prices and that this investment will make a killing when the market rebounds. It’s a game of the buyer being simultaneously wary and greedy and the seller being simultaneously weak and strong. The seller is seen as weak to need more capital and strong to be able to leap tall buildings in a single bound with the new capital infusion.

We went from the Pollyanna phase over the past several quarters where progressively greater losses became public, and everybody was sharing in the pain and public and marketplace flogging to the “Potemkin Village” phase where we discovered that there were fake facades to the Pollyanna companies that appeared weak and strong. They were actually weak and weaker. One would think that Sarbanes Oxley would begin to  come into play since mistating financial statements is serious stuff. But, perhaps it is not purposeful mistating. Perhaps it  IS just the effect of Mark to Market  rule where investment banks need to mark down the value of their assets based on the likelihood of selling at market prices. When banks are weakened with battered balance sheets due to lowered values of the assets they hold, they get conservative in their willingness to lend to others. They wonder if they will be paid back. So the price points fall even further and another wave of mark downs is precipitated the next financial quarter. Lack of investor confidence to lend to the bank and lack of bank confidence to lend to each other  causes  there to be no market for financial assets based on cash flows from homeowners that may likely default due inability to pay or unwillingness to pay a loan that is under water, where the homeowner owes more than the house is worth.

This is scary stuff and that’s why the Government Bailout is needed. It’s like a slap in the face to the market. The government is slapping the market by letting some companies go under and letting their assets be sold at fire sale prices to healthier companies. Then the government is grabbing the market by the shoulders and shaking it and saying, “wake up I ’m here and will help you out. Just get moving again. Stop looking like a deer in the headlights.” Will it work? WIll it be sufficient? It will work because it has to work. We won’t let our system collapse. It’s not just the US system. It is the global system.  And it may take more than $700 Billion. Certainly there was more than $700 Billion in valuation that was created in the market over the past 25 years of growth.  The market giveth and it taketh away.

Anyway if you are a first time home buyer, and you have good credit and a good income and some savings your patriotic duty is to buy a home that is the best you can afford, and it is available finally at a reasonable price, the most reasonable in a decade.

So the headlines describe the reaction to yesterday’s FED decision to hold the Federal Funds Rate constant at 2% and not to raise it to fight inflation and today’s ECU decision to hold the short term rate firm so that the Libor stays steady at 2.45%. These decisions have produced a huge rally in the stock market.  London and European banks while concerned about inflation are not using short term interest rates as a club to blunt inflation. It seems they are also concerned about weakness in their respective economies and share some of the FED’s concerns about fighting recession.

So the FED is implying that inflation is going to moderate in the future due to other causes and and raising short term rates to put the brakes on the economy to fight inflation is not the right thing to do to an economy that is producing just 1% growth, staying just ahead of the technical definition of recession (two consecutive quarters of negative growth). The FED is sending a message that supply and demand factors can influence the price of oil, even though worldwide demand for oil is increasing and supplies have not increased significantly yet. The signal is that the economy can absorb the costs of high priced oil if consumers are willing to change their behavior. And we have seen consumers do just that. They have stopped buying large cars and trucks and have started buying smaller cars. The car companies are having to tweak their business models.

So, while the effect of high prices is causing headaches for consumers, consumers can control their driving habits and are doing so. Consumers can control their spending and saving habits and are starting to do so, they will no longer depend on freewheeling lender deals to qualify for buying a house.  Firs time homebuyers are taking advantage of FHA 95% money and qualifying the old fashioned way– with high credit scores and good jobs and pooling family or other friendly money to make downpayments. This should be good news . It’s good news that what our parents taught us or should have taught us in Kindergarten still applies and that there are not new rules. It still makes sense to live within your means and save money and when you have to borrow money be a good borrower and pay on time to have a good credit rating. The rules have not changed.You cannot borrow forever, repeatedly refinance your home to pull out money like an ATM and cunt on appreciation bailing you out. You cannot live a loose financial lifestyle and perpetually avoid the consequences.

Now if only the federal and state governments will come to their senses as well.

I love graphs that show GAPS in what is currently happening and what “should be” happening or “what actually happened in the past. From these kinds of comparisons one can draw inferences. One cannot be definitive in predicting the future, but one can apply some common sense to get a sense of what will happen in the future. I saw a great graph in today’s Wall Street Journal, Section C1. It’s in an article by Mark Gongloff in his column Ahead of the Tape. The article is titled “History Aside, Housing Woes Not at Bottom.” “Housing starts, a government measure of new home building breaking ground, in March 2008 were down about 58% from their January 2006 peak.”  

http://online.wsj.com/article/SB121366308001479273.html

The article states that “there have been four major home building downturns since the 1960s and each of them recorded peak to trough declines of roughly 60%.” It took the 1972 decline 28 months to start going up again and we are at 30 months into the 2006 decline. But it took the 1986 decline 6 months to hit bottom. Which path will housing starts take?

The article states that there are related metrics that should be considered that will affect housing starts. One is the inventory of houses (new and pre-owned) currently for sale. In April 2008 there were enough houses for sale that it would take 11 months of average sales to sell them all. And there are increasing numbers of foreclosures, adding to the number of homes for sale, and at sales prices that are below what next door neighboring houses are trying to sell for. I know of a home in Antioch, CA that is bank owned and selling for $290,000 next door to a home purchased 2 years ago for $650,000. I know of a home in Brentwood, CA that was purchased for $750,000 that the owner would love to sell, but it is surrounded by six or more foreclosures in the development, selling for far, far less. Comparables are in the $500,000 range. His loan is $550,000.

So, it is the best of times and it is the worst of times.  In this buyer’s market it is the best of times for new homeowners who have good credit and have saved for a downpayment, since they can get into homeownership in a far better location than they would have been able to do in a normal seller’s market. Even if prices drop further the buyers in good locations will come out ahead since the market will rebound and the prices in the good locations will go up faster than the average market.  Current homeowners with good credit and some good equity can now upgrade to a far larger home in a better location than they would otherwise been able to consider. They have to sell their current home or rent it out but there are plenty of folks in a position to transition manage two mortgages and also plenty of renters out there. 

It is the worst of times for homeowners who are investors and who stretched their finances to buy and then flip a house and make a quick killing in a rising market. There’s a GAP between what investors thought would happen and what actually happened since 2006.  Luckily the loan indexes have remained fairly low and so resets of many 5/1 ARM loans have not hurt mortgage payors too much. If the mortgage payor was paying interest only payments and the loan reset, the new payments have gone up, but not excessively. A 1% cap in mortgage payment increases per year can be absorbed by most homeowners unless they experience a job loss. So several of my clients have been reassured that they are not headed for a cliff financially and they have a year or more to monitor the mortgage market and to improve their credit scores and to be in a position to refinance when the market rebounds. It’s possible that it may be 2-3 years before the market rebounds. They’re still OK as long as they maintain their jobs and don’t overspend to diminish their credit rating. Banks are getting much more conservative and the old fashioned values of thrift and savings (banks call it reserves) are back in style. 

It’s back to the basics and good credit and personal economy and savings are once again in style. 

This is a welcome sentiment and even if the prediction is premature it will happen and probably sooner than later. We all are creatures of habit and the habit now is to think that housing values are going to continue to slide. But, there is an equilibrium point were the excess buying patterns and financing patterns of the real estate boom will be balanced by basic supply and demand no matter how stingy the banks have become in raising lending standards. The pendulum will swing back, but hopefully with less swoop than before. And maybe we will all be more cautious about making assumptions about real estate “always” going up.

Check out his hedge fund manager’s insights in the WSJ. Very interesting reading and if you’ve been reading this BLOG, it reinforces the notion that if you find a home in a neighborhood that you desire to live in, you should consider making an offer while the majority of buyers are scared of the market.

http://online.wsj.com/article/SB121003604494869449.html 

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?

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.

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

Check our website for more events and updates

Do a search on the Wall Street Journal website, www.wsj.com for ‘fed funds rate’ and you’ll get articles about the hoped for effect of lowering the short term cost of borrowing by US banks, AND you’ll get articles about what is happening in Europe and the response of the European Cental Bank equivalent of the FED. My reading of the daily business news has been that the ECB claims to be more concerned about inflation than recession and so claims that it will be holding the overnight interest rate for European Banks at a high level in order to combat inflation, but inevitably 30-60 days later an article comes out suggesting that the European economy is influenced by the US economy and so as the FED has been lowering the Fed Funds rate, the ECB will lower the Euro interbank offered rate and the BOE, Bank of England will further lower the Libor.

Here is what Joellen Perry wrote in her article,  http://online.wsj.com/article/SB120601229992551599.html

“The ECB has been holding rates steady at 4% while the U.S. Federal Reserve has been reducing them. Many analysts argue that factors including a U.S. recession and the surging euro mean growth this year will slow more sharply than the central bank’s projection. They anticipate the ECB will start cutting its key rate in June.”

Here is what Carrick Mollencamp and Mark Gongloff wrote in their 2/7/2008 article about the Bank of England making decisions about the Libor. http://online.wsj.com/article/SB120234389156849037.html

“Some investors are already starting to look beyond the rising odds of a recession. In the fed-funds futures market, where investors make bets on the outlook for Fed policy, investors are betting the Fed will be done cutting interest rates this summer.

The euro, meanwhile, has been under pressure because investors increasingly think the European Central Bank is behind the curve in addressing economic weakness in the euro zone. The ECB will likely keep rates on hold at its policy meeting today, but policy makers could hint that they’re turning their attention from fighting inflation to fighting recession, which would hit the euro. The Bank of England is expected to cut its key interest rate, which could also support the dollar against the pound.”

So that is why you will see the ECB’s 30 day Euro interbank offered rate at 4.35% and the Bank of England’s Libor at 2.606% as of March  21, 2008. With the Fed Funds rate currently at 2.25%  and a lot of discussion about inflation vs recession, there is going to be a lot of attention paid to taking supplemental steps to support the economy, not just lowering short term interest rates. The respective governments are going to be taking other steps to bolster confidence in their economies, such as engineering “supports” (aka “bailout”) for failing banks (nationalizing Northern Rock in England, lending money to German lender IKB  to cover writeoffs) or investment banking houses (helping Bear Sterns in the US).

There has been discussion that in the early 2000’s the FED took the Fed Funds rate too far down to 1% and left it down for too long. So if you are waiting for the magical 1% Fed Funds rate mark to somehow revitalize confidence in the economy and cause long term mortgage rates to drop, you’ll probably be waiting a long time. The 1 month Libor may get down to 2.25%, and it’ll probably stay there for awhile, but don’t hold your breath for it to go down further. So if you are looking to refinance a variable rate loan during 2008 or 2009 the next three to six months would be a good time to do it.

My wife and I recently had a chance to spend some time with our daughter and her fiancee. We had excellent time together talking about their careers and their desire to get into home ownership. Ok, Ok, don’t bring up the subject of them buying a home without being married. It’s scheduled for sometime next year. And they’re really debating how big of a wedding to have considering the alternative of investing tens of thousands of dollars into buying a property versus spending it instead on a bigger cake or a glitzier location. We discussed the alternative of buying a first home or buying a rental property in a more affordable part of the US and arranging with a good local property manager to keep it rented out. The challenge with trying to purchase a first home in California is affordability. They have the cash flow to make payments but not enough for downpayment on a $500,000-$800,000 “starter” home, but they do have enough saved for a downpayment on a $150,000-$200,000 property, maybe two within another year. If they purchased a rental property in parts of the US that have not experienced a real estate boom, but rather have good steady 3-5% per year appreciation and strong rental housing demand, they would be able to have a renter help them pay the mortgage. In a year or so the rental would be cash flow positive. The rental would enable them to deduct depreciation and property ownership expenses. If they purchased a rental home in the Gulf Opportunity Zone, the GO Zone of Louisiana or Mississippi during 2008 they would be able to deduct 50% of the depreciable basis of the rental property from 2008 taxes owed. We talked about the pros and cons of owning rental property out of state. We discussed the benefits of taking advantage of the investment networks that help to research good rental areas and link investors in with good local realtors and property managers.

The key deciding factor was the benefit of owning rental property on helping them legally reduce taxes in 2008 and 2009. By owning a rental property in the GO Zone they would be able to reduce their tax burden significantly and in fact be able to save more money for downpayment on their own home in California. They would be able to save enough in two years that they could purchase a California home for 10% down using a FHA loan.  Hopefully the real estate market would have stabilized but not totally rebounded by then and the risk of purchasing California property still in decline would be minimized.

I think it’s important to look at the big picture when considering purchasing real estate. Is the goal simply to own you own home? Or is the goal to increase your assets and make the best use of your household cash flow? If the goal is the latter, you can do better by being an investor and deferring purchase of your first residence. That’s what smart business minded people would do, but most young people are simply following the conventional wisdom that owning your own home is a good thing and they are stressed and stretched to accomplish that goal in California.

Here are the links to the investment groups that I recommend www.icgre.com and www.conferwithus.com

Also here is a spreadsheet from the www.Conferwithus.com group that really helps people think about what kind of cash flow they should be planning to be able to generate in the future in order to have a worry free retirement.  Much of the cash flow will come from 401K retirement accounts, but there is usually a gap between what is needed and what is being accumulated. That gap can be filled by enhancing your investment strategy with smart cash leverage and making investment decisions that produce beneficial tax treatment. Smart real estate investing is one part of a complete solution.

I suggest downloading this spreadsheet and the documentation and playing around with the financial gap in your plan. You may be motivated to attend an investment workshop in the future. 

retirement-account-planning-model-description.pdf

Link to download spreadsheet

Having adequate surplus income to make strategic long term investments may require more than one or two sources of household income. Perhaps owning a profit making business in addition to having paying jobs can be a source of such investment cash flow. With the low cost of technology these days and with much of the population in the US using technology like TV, cell phones, and the Internet it shold be possible to  be entrepreneeurial and be employed.   

I attended a small business tax workshop this weekend sponsored by San Jose’s www.businessownerspace.com. It was aimed at small business persons and people planning to start a small business. There were two workshops: business structure (sole proprietor, partnership, C corporation, S corporation, Limited Liability Corporation (LLC)) and record keeping for sole prioprietors. I attended the business structure workshop given by Linda G. Coleman, EA (enrolled agent) (http://biztaxtallk.com) and she was excellent. Her handouts are the clearest set of PowerPoint resources I have seen on the subject of business structure. She certainly came across as knowledgable and approachable. There were many organizations that were available to offer aassistance to small business owners and those making plans to start a small business.

I highly recommend taking the time, 10AM-2PM to attend next weekend’s repeat session, March 15, 1290 Parkmoor Ave, San Jose. It’s just off the 280  Meridian Ave exit at Parkmoor.

While the attendance was good, there was plenty of room for more people. I thought about why more people were not taking advantage of such abundant free resouces. Can it be that everybody who is a small business owner is already totally knowledgable and has no need for free consulting? Could it be that the masses of people employed in Silicon Valley companies are totally comfortable and financially secure and have no need to think about doing something entrepreneurial on the side?  Could it be that those couples in the valley who met while both were working and who decided to live on one income when children appeared on the scene, have no need for some supplemental  income? Could it be that a household with one spouse working in a company has not thought about the at-home spouse doing something entrepreneurial from home to potentially provide a path to a second career for both spouses?  

I also thought about the insights I gained by playing Robert Kiyosaki’s Cashflow 101 game. I remember rolling the dice and discovering that I lost my job. But since I had previoously bought a small busienss and had some income producing rental property, I was set back during the job hiatus, but I was able to keep going, get another job, without skipping too many beats financially.   It seemed really valuable to have made the moves to diversify my income before encountering stormy times jobwise.

I also remember reading tax planning books and attending other seminars where tax advisors made it clear that the IRS allows for 20-30 tax write-offs for legitimate business owners, but only 2-3 for non-business owners, and mostly if they own their own home. Renters don’t get much in the way of tax relief. So I knew that it made sense for anyone to get set up be a legitimate small business owner, even if the owner was employed fulltime and the business was a home based business done seriously for a profit on the side. I knew that many ambitious people never let the notion of a 40 hour work week limit the number of hours they invested in doing productive things to improve themselves or to generate income. I was never able to relate to the concept of “Oh, It’s Monday, another week of work”, or “It’s Wednesday, hump day, halfway through the work week”, or “Thank God it’s Friday, TGIF”. I was always willing to put in something extra to get to where I wanted to go.

I think that many people who are currently well employed tend to think their situations will last forever, like the real estate boom would last forever. Or more likely people know they need to do something extra to diversify their income sources, but they are just so busy raising a family and working extra hours at work that they put off getting started. Procrastination is so easy to fall into when you think you need more money than you have to get started, or more time than you have to get started. The key insight that people need to have as early in their working life as possible is that time is your friend if you get started with 20-30 40 years of time to let compounding work for you. And it’s not a matter of lack of money or lack of time. You can always partner with those who have money and who have time. It’s a matter of lack of desire and commitment to an emotional future lifestyle or future life options and then it’s a matter of a lack of ideas. We all tend to let the good be the enemy of the great. I suppose people who are faced with life changing circumstances early in life will be motivated to make decisions that get them on a path to greater financial independence. The rest of us think that we are on the right path becuase we are doing OK, relatively better than our peers.  We fail to consider what could go wrong with our current plan. I do believe we all need to aim for the stars in order to hit the moon.

So I was surprised that more people were not taking advantage of the workshop and the free consulting. I did notice that 80% of the attendees were sharp looking women.  So maybe that’s a good reason for guys to attend next weekend. 

I recently attended an FHA training by Terri Buckman of Franklin American Mortgage. Below is the press release from the government on new FHA loan limits which will make applying for an FHA loan an attractive alternative for homebuyers looking for low downpayment loans, even in high priced California!

Terri referred to the old days (circa 1990) where people who did not qualify under the stringent guidelines of lenders simply took steps to partner with non-occupant co-buyers. What a concept! Bring in a partner who will on paper help you be responsible for the payments in the eyes of the lender and the law, even if you were sure that you’d be able to handle the whole payment yourself.

In the late 1990’s with the advent of the low starter rates and low starter payment option ARM loans more people qualified at least during the starter periods of 1,3,5,7 years– at the risk of incurring negative amortization. And 1,3,5 years later, just like the policeman in the movie, Casablanca, they were shocked, shocked to discover their dilemma.

With the advent of stated loans instead of full documentation loans, borrowers were able to pay a bit more in rate and fees in order to have the lender accept their word for the sources of income used to make payments. They did not have to document their income, it was “stated”. Stated loans were designed to help non-employee independent contractors who have significant writeoffs due to running their own businesses, but who have good cash flow and are able to make payments on loans that traditional debt to income ratios would not have allowed. Naturally lenders chose to apply stated loans to anyone who would pay the premium and did not all require that employees with documentable income use full documentation loans. This, of course, appealed to everybody, but it opened the floodgates to all and helped buyers buy bigger houses than they could afford and helped investors really stretch into investment properties that they could not afford to carry if any little thing were to go wrong– like declining prices making refinancing impossible when flexible rate loans would reset to market rates as the starter/teaser rates expired.

With today’s return to higher lending standards and reduced risk for the bank, stated loans are going away. And partnering with co-borrowers is coming back into fashion, even for those with strong incomes, but little downpayment. In a FHA loan, gifts from family are allowed for downpayment.

See this excerpt from the FHA website (http://portal.hud.gov/portal/page?_pageid=33,717077&_dad=portal&_schema=PORTAL )

FHA Max Limits Include 14 CA Counties

* FHA Press Release * 

WASHINGTON  – Tens of thousands of California families could be eligible this year to purchase or refinance their homes using affordable, government-backed mortgages, thanks to the economic growth package signed into law by President Bush.  The Economic Stimulus Act of 2008 will allow HUD’s Federal Housing Administration (FHA) to temporarily increase its loan limits and insure larger mortgages at a more affordable price in high cost areas of the country. 

“The Bush Administration is expanding the pool of eligible borrowers, enabling more American families to qualify for safe, affordable FHA-insured mortgage loans.  These temporarily higher loan limits are a shot in the arm for communities trying to sustain property values, bringing much-needed liquidity to the mortgage market, while helping many current homeowners who desperately need to refinance,” said HUD Secretary Alphonso Jackson at a forum on how to prevent foreclosure at the Operation Hope Center in Los Angeles and a Hope Now Alliance event in Anaheim.

Beginning tomorrow, HUD will offer temporary FHA loan limits that will range from $271,050 to $729,750.  Overall, the change in loan limits will help provide economic stability to America ’s communities and give nearly 240,000 additional homeowners and homebuyers a safer, more affordable mortgage alternative.  The maximum amount of $729,750 will only be applicable to extremely high-cost metropolitan areas such as: Los Angeles County , San Francisco County , Orange County , and Santa Barbara County .  Previously, FHA’s loan limits in these very high-cost areas were capped at $362,790.

The Economic Stimulus Act of 2008 permits FHA to insure loans on amounts up to 125 percent of the area median house price, when that amount is between the national minimum ($271,050) and maximum ($729,750). The new minimum and maximum loan limits are based on 65 percent and 175 percent of the conforming loan limits for Government-Sponsored Enterprises in 2008, which is $417,000.  The FHA used a combination of existing government data sets and available commercial information to determine the median sales price for each area.  The change in loan limits are applicable to all FHA-insured mortgage loans endorsed after HUD publishes the increased loan limits tomorrow, and it lasts until December 31, 2008 . 

By increasing loan limits nationwide, FHA will provide much needed liquidity and stability to housing markets across the country.  Already, as conventional sources of mortgage credit have been contracting, FHA has been filling the void. From September to December 2007, FHA facilitated more than $38 billion of much-needed mortgage activity in the housing market, more than $15 billion of which was through FHASecure, FHA’s refinancing product.  By focusing on 30-year fixed rate mortgages, FHA helps homeowners avoid and escape the risks associated exotic subprime mortgage products, which have resulted in rising default and foreclosure rates.

“This is not an easy crisis to address, and there is no silver-bullet, but I know that we can help hundreds of thousands of people keep their homes, and we can calm the waters,” said Jackson .

In January 2009, FHA’s maximum loan limit will return to $362,790, unless the U.S. Congress approves bipartisan legislation to permanently increase loan limits as part of the FHA Modernization bill, which is still awaiting final approval on Capitol Hill. 

“In January 2009 the loan limits will return to their previous setting,” Jackson said.  “That is why we need to permanently raise the loan limits to an acceptable level that more accurately reflect housing prices nationwide.  We also need to make the minimum down payment more flexible and create a fairer insurance premium structure.  This will allow more families to use FHA.” 

FHA loan limits are based on the county in which the property is located.  However, for properties located in metropolitan or micropolitan statistical areas, the limit is set at that of the county with the highest limit within the metropolitan or micropolitan area. 

The new temporary FHA loan limits for California are attached below.  The full text of the Secretary’s remarks can be found on the HUD website.

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HUD is the nation’s housing agency committed to increasing homeownership, particularly among minorities; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development, and enforces the nation’s fair housing laws. More information about HUD and its programs is available on the Internet at  <http://listener.bliemail.com/forwarder.aspx?ID=a7ce4bbc-f4e6-439c-b9c3-12c87f0c7c0b|http%3a%2f%2frs6.net%2ftn.jsp%3fe%3d001GPnSaxHALMI9V0m-SS_aDrDc9GjPPLxF764nDn3D98O3HU8HasMH4X4vcljEJJroGI2weVOCxAFTcXuMM7YBwg%3d%3d> www.hud.gov and  <http://listener.bliemail.com/forwarder.aspx?ID=a7ce4bbc-f4e6-439c-b9c3-12c87f0c7c0b|http%3a%2f%2frs6.net%2ftn.jsp%3fe%3d001GPnSaxHALMLfalvNA5G0OJQdZAhCv-yTc2_iTBJOIL8MsnNYM0rnG9zRKsZKhdvV6JXfosypIhVdeASJRLMIaZLaujeErR2a> espanol.hud.gov. For more information about FHA products, please visit  <http://listener.bliemail.com/forwarder.aspx?ID=a7ce4bbc-f4e6-439c-b9c3-12c87f0c7c0b|http%3a%2f%2frs6.net%2ftn.jsp%3fe%3d001GPnSaxHALMLY6P5Am8cR-6cv87njBipB2zQ3VIQJyrQo7OTydYfIj5xjYdLT_9otCmzUR6qNTQ3NBvoPHuTrAg%3d%3d> www.fha.gov.

California County Limits

Obs prop_addr_st county_nm med_price FHA_1unit

185 CA Alameda County 995000 729750 – MAX

186 CA Alpine County 438000 547500

187 CA Amador County 355000 443750

188 CA Butte County 320000 400000

189 CA Calaveras County 370000 462500

190 CA Colusa County 318000 397500

191 CA Contra Costa County 995000 729750 – MAX

192 CA Del Norte County 249000 311250

193 CA El Dorado County 464000 580000

194 CA Fresno County 305000 381250

195 CA Glenn County 230000 287500

196 CA Humboldt County 315000 393750

197 CA Imperial County 260000 325000

198 CA Inyo County 350000 437500

199 CA Kern County 295000 368750

200 CA Kings County 260000 325000

201 CA Lake County 321000 401250

202 CA Lassen County 200000 271050

203 CA Los Angeles County 710000 729750 – MAX

204 CA Madera County 340000 425000

205 CA Marin County 995000 729750 – MAX

206 CA Mariposa County 330000 412500

207 CA Mendocino County 410000 512500

208 CA Merced County 378000 472500

209 CA Modoc County 125000 271050

210 CA Mono County 370000 462500

211 CA Monterey County 599000 729750 – MAX

212 CA Napa County 615000 729750 – MAX

213 CA Nevada County 450000 562500

214 CA Orange County 710000 729750 – MAX

215 CA Placer County 464000 580000

216 CA Plumas County 328000 410000

217 CA Riverside County 400000 500000

218 CA Sacramento County 464000 580000

219 CA San Benito County 790000 729750 – MAX 220 CA San Bernardino County 400000 500000

221 CA San Diego County 558000 697500

222 CA San Francisco County 995000 729750 – MAX

223 CA San Joaquin County 391000 488750

224 CA San Luis Obispo County 550000 687500

225 CA San Mateo County 995000 729750 – MAX

226 CA Santa Barbara County 615000 729750 – MAX

227 CA Santa Clara County 790000 729750 – MAX

228 CA Santa Cruz County 719000 729750 – MAX

229 CA Shasta County 339000 423750

230 CA Sierra County 228000 285000

231 CA Siskiyou County 235000 293750

232 CA Solano County 446000 557500

233 CA Sonoma County 530000 662500

234 CA Stanislaus County 339000 423750

235 CA Sutter County 340000 425000

236 CA Tehama County 250000 312500

237 CA Trinity County 200000 271050

238 CA Tulare County 260000 325000

239 CA Tuolumne County 350000 437500

240 CA Ventura County 599000 729750 – MAX

241 CA Yolo County 464000 580000

242 CA Yuba County 340000 425000

I have been helping homeowners answer this question a lot lately. It seems that when the stock market took a dive at the end of January long term rates went down for a couple of days  but then went back up. So loan brokers and bankers contacted clients waiting in the wings and locked the lower rates during that window. There was lots of added loan activity due to that very short term rate drop, including rate adjustments on already locked loans. Borrowers were offered the opportunity to slide the rate down by paying extra points. Also lenders experienced brokers who locked loans that were not able to be closed. Perhaps these loans were “hopeful” loans that the broker thought ought to close, or perhaps these loans were double-up locks that the broker made to help insure that some lender would approve the loan package. In any case, lenders got zapped with lots of extra activity and a lower pull through ratio than normal. The pull through ratio is the number of loans that get locked that actually fund. Brokers locking loans that do not close actually costs the lenders big dollars. Lender get blocks of funds to lend out from investors during a certain time window and at certain terms. If the lender commits hundreds of thousands of dollars to a certain borrower during the 30 day lock period, but the borrower does not qualify or the loan package is a duplicate and eventually the loan goes to another bank, the lender is really out thousands of dollars. The opportunity cost of committing funds to a loan that does not close is huge.

So the take away for borrowers is that it is a good idea to get your paperwork together and work with a broker or banker to get your loan package complete and ready to go so that when the rates rach a point where it is economical to refinance you can lock and close fast. This means doing you homework on the appraised value of your home in this market. Some values have gone down, so ask your broker or banker to do a product profile. This will include several moarket comparables and be an estimate of the value an appraiser will come up with. Do this before you ask your broker or banker to lock a loan. Also get your financial records organized so you can easily fill out the Uniform Loan Application (form 1003) and supply the backup documents to the underwriter.

I have been offering to do a free product profile analysis and assessment of current loan for prospective clients. This has been very beneficial for them since they know whether or not to be concerned about the need to refinance right away. They are less stressed and are more strategic in their mortgage decision making. Just because a banker says we’ll refinance your loan with no points and no closing costs, do not assume it is the best  decision. Some bankers are expecting homeowners to refinance during 2008 and simply want to lock you in to their bank for the refinance. This is not necessarily a bad thing and if you get the right rate at no fees and no closing costs you should be congratulated. But, how do you know it is the right rate? You’ve got to get your broker or banker to help you make a decision based on long term benefits to you, not just a reflexive knee jerk refinance when the rates drop a little bit.

I attended the ICG two day real estate conference this past weekend and it was eye opening. ICG brought together realtors representing 17 real estate investments. Land from Arkansas, Texas, Georgia, the UK. New single family homes in Orlando, Florida,  Charlotte, North Carolina,  Atlanta, Georgia, denver, Colorado, Dominican Republic, Savannah, Georgia, Bay St. Louis and Jackson and Hattiesburg, Mississippi, New Orleanms, LA, Oklahoma City, Oklahoma, Tulsa, Oklahoma, Raleigh, North Carolina. Special packages were offered such as no-money down land, new homes with deep builder’s discount, Gulf Opportunity (GO) Zone. Special techniques were offered such as non-recourse loans to buy properties with self directed IRA, increasing cash flow with residential cost segregation reports, lifetime financial strategies by coordination of insurance and real estate investments, delaying and minimizing taxes with proper planning. A special loan program offered from MacQuarrie bank in Australia offers accelerated loan payoff by combining a homeowner’s special bank account with a home loan and paying interest on deposits in the acocunt at the same rate as the home loan. This loan pays on the float in the bank account and motivates borrowers with strong cash flow and a savings habit to accumulate extra funds in the account and lower principal and hence interest payments. Readers of this blog will recognize this loan model as the same as the Home Ownership Accelerator from CMG Mortgage and GMAC Bank, an American bank. www.cmghome.com  Naturally I am able to help people understand and benefit from this innovative loan model. www.cmgcobblestone.com

One very interesting investment option that would especially appeal to beginning investors was called “Share the Wealth”. It is an equity share program offered by Missy McCall-Hammond, President & Founder of TurnKey Investments of Hamilton, Ohio. (www.turnkeyinvestments.biz) Think of being able to purchase a home in the $150,000 range in Southwestern Ohio, the Cincinnati-Dayton metro area, the only Ohio metro area to rank in the top 100  in Forbes Magazine’s “Best Places 2000″. The home has already been rehabbed and rented to good tenants. The net investment would be $3500 in closing costs and securing a 90% loan. You use your good credit to qualify for the loan and take advantage of all the income tax depreciation. The payments of principal, interest taxes and insurance are covered by your property manager partner who also takes care of renting the home to tenants and in fact handles that for you so there is no risk to you for coevering vacancies. You share any needed capital expenses 50-50.  The property manager partner gives you an immediate 5% of purchase price option for the right to purchase the home at mutually agreed terms in 5/10 years so half of your 10% downpayment comes back to you immediately at escrow. Missy even had a special additional offer that returned the other 5% back as well, but I am fuzzy on it so you’ll have to ask her. Then after five years you split the equity appreciation 50-50 after any paydown of principal is credited to you.  This is a win-win investment opportunity in a part of Ohio that is economically healthy with good rental  and appreciation prospects.

In my opinion, this is an investment “partnership” model that makes good sense for investors who take on the property manager role and for investers who take on the financer role. When I bought my second home I was married and we had a second income so we could afford to keep the first home that I bought as a single person and rent it out. But the third  house stretched us financially and we sold the second house to buy the third. Big mistake. In fact, if I had thought about partnering when I bought my third house, I would have kept both my first house and second house and rented them both out. I would have brought in investor dollars to the partnership through equity share which would have enabled me to purchase the third home. This would have been only a slight modification of what Missy Mccall-Hammond is doing, but would have been doable. Since at that time in my life I bought a truck anyway and got involved with my own home rennovation and maintenance, I could have easily taken on the property manager role. I did not have a lack of cash really. I had a lack of ideas.

I recommend first time investors dip their toes into the water and contact Missy.

I attended a real estate investment workshop last week offered by Paul Conrow and Steve Swanson of www.conferwithus.com. A simple spreadsheet tool was an eye-opener for the audience. It enables a person or couple to input assumptions on current savings, future savings planned, future after tax income desired in today’s dollars, planned rate of appreciation of your retirement investments before and after retirement, and so on. The bottom line is a figure that is either a shortfall or an overage. Either you are falling short of your goal and need to increase your savings/investment rate or you are in good shape and can dial it back an still achieve your goals. For anyone juggling the expense of raising and educating kids, paying a mortgage and taxes, setting some funds aside for 401K and other retirement savings the eye opener was that it was possible to use the next 10-15 years and some additional capital to achieve higher returns than just relying on the stock market. I have highlighted the approach in a previous post on this blog. Just search the blog for investment real estate.

 Here’s a sample scenario of the use of their income estimator tool. Check it out. Makes you want to attend one of their seminars, which are all free, by the way.

On the front page of The Wall Street Journal, Wednesday, Feb 27, 2008 is a great graph of lowered short term Fed-funds target (to 3%) and the sideways or slightly increasing mortgage rates for conforming loans (up to $417,000) and non-conforming Jumbo loans (over $417,000). Of course the conforming loan limit will go up in selected high priced areas of the country as soon as the government and the lending industry can figure out the pricing of Jumbo-Lite loans. But the Wednesday graph clearly shows that just because the FED lowers short term overnight bank to bank lending rates, the long term 30 year mortgage rates do not necessarily follow suit. Fixed rates on Jumbo and conforming loan amounts are cycling around 7.0% and 6.0% respectively. The longer term mortgage rates are affected more by the confidence of the banking system in risks associated with committing money to borrowers for 30 years. If perceived risks are high, then rates charged on mortgages will be high. If the banking system is leery of inflation coming back as a factor that will make future dollars worth much less the banking system will charge more for long term loans. If the FED continues to lower short term rates as it is hinting it will, then cheaper short term money will worsen inflationary pressures, so the FED is caught between a rock and a hard place. One monetary policy tool of setting short term interest rates may not be enough to combat both potential recession and potential inflation. It sure would be nice to have the cost of owning a home more in line with the cost of renting a home since that is more of a sustainable situation for the economy. But for that to happen average prices need to come down still further and rents will have to come up. I’ll find some charts on those topics and make a future post on this blog.

Here is the link to the article: http://online.wsj.com/article/SB120403496764693703.html written by Kelly Evans, Serena Ng and Ruth Simon

My takeaway from this ongoing soap opera situation is that a large part of the home buying market will continue to be “stuck” waiting for prices to drop further and then to stabilize. In desirable areas the demand for housing is building and at some point the dam will break and desirable areas will see multiple offer syndrome again. Sellers will get uppity again and buyers will compete for houses. So in my opinion buyers with good credit and cash flow should do their homework in 2008 and target their next move so they can act to get a very good deal. Don’t let the great deal get in the way of a very good deal. Over the long haul prices will recover and even if you purchase at a price that seesaws a bit before resuming appreciation over the long haul you’ll benefit from having bought in a very good location at a very good price. If you’re forced to try to time the market because you need every penny of price and every hundredth of a percent of interest rate to qualify to make the deal then you’ll be acting with the masses and you’ll end up paying more anyway because of supply and demand. When everybody is trying to buy you’ll pay more. 2008 is the year of the qualified buyer.

Oh, also the rate chart also suggests that if you are approached by a loan broker who says the FED is lowering rates now and it is time to refinance, be careful, be very, very careful. Your current loan may actually be pretty good since variable interest loans actually do benefit from the FED funds rate drops.  Libor doesn’t have to, but once again Libor has belatedly tracked the Fed Funds Rate on the way down. This means that your payments on current ARM loans may be going down, not up. And  since current fixed rates have not dropped by that much, refinancing every year or so is simply not always an economical move. Make sure that your banker or broker quotes you the number of years to payback the costs of refinance. See one of my prior posts on getting Good Faith Estimates from multiple lenders just to make sure that you are not being manipulated. At the same time don’t drag discussions on and on with multiple lenders and jerk them around. The banks are letting the brokers know that locking loans with multiple banks and then walking away from all but one of them is not a good practice. It’s costly for the lenders to commit funds for 30 days. So do make sure you are getting a fair quote and do comparison shop, but be a good consumer and do your homework ahead of time by reading blogs, for example. Then you’ll be able to make a good mortgage decision and be in control of the process.

Waiting for increased conforming loan limits to cut your interest rate? Patience required! Now that Congress and President Bush have put into law the stimulus bill to temporarily raises the loan limits for Fannie Mae, Freddie Mac and the Federal Housing Administration, the hard work begins.  (As a reminder: The bill raises Fannie Mae, Freddie Mac and FHA loan limits up to 125% of median homes prices with a cap of $729,750.) Deciding who will benefit Original estimates by the National Association of Home Builders that 3 million homeowners could benefit from the new “Jumbo Conforming” or “Jumbo Light” loans have been lowered to half that already as Fannie, Freddie and FHA work over which U.S. counties have median home prices high enough to qualify for a higher limit. “The NAHB had hoped that as many as 29 metropolitan areas would qualify for the maximum $729,725 ceiling,” said columnist Lew Sichelman. “It now appears that less than 10 will make it.” The good news? Most of those counties are in California.  When Will the Limits Rise? Good question. This is where your patience comes in. The Securities Industry and Financial Markets Association (SIFMA) warned that lower interest rates on these new Jumbo Light loans may be months or years off because the market will have to learn how to price the new loans before they buy them as part of mortgage-backed securities (MBSs). Confused? Frustrated? Call me! I will put you on my list of clients who want to be notified when we know what the new interest rates will be.

As mentioned in a prior post on this blog, here is registration information for the ICGRE.com conference this coming weekend. Deadline for discounted registration is tomorrow, Feb 26.

Check our website for more events and updates

I just read an advertisement for a book, “The Tao of Warren Buffett”, written by Mary Buffett, a former daughter-in-law according to the ad and author with David Clark of “Buffetology”, an internationally acclaimed investment book.  What really struck me in the advertisement is the statement that:Had you invested just $10,000 in Buffett’s holding company Berkshire Hathaway in 1965, your investment would be worth nearly $30 million today. In contrast, $10,000 in the S&P 500 would have risen to roughly $500,000.

The ad goes on to pose the question: Do you need to be a genius to accumulate wealth like Buffett?

In “The Tao of Warren Buffett” you’ll discover the answer is a resounding “no.”

Buffett believes that anyone with common sense and a sound investing philosophy can make a fortune investing.

I’ve got to read this book.  The compound annual growth rate over 42 years with Buffett was 21%, with S&P stocks almost 10%, a factor of two.

This gap between the results of Buffet decision making and the results of S&P index management decision making  is not due to buy/sell strategies as Buffett buys and holds companies and lets management of his invested companies alone. Buffett buys according to his philosophy. Having a “sound investment philosophy” is one of those fundamentals that people usually don’t think enough about. They “just do it”. They just invest, give money to someone with lots of trust and hope. That’s pretty much the process of investing in mutual funds as part of a 401K program. It’s investing on autopilot. Pe0ple who are basically very busy with careers and family don’t even pay much attention to how the investment is doing, except to feel a sense of disappointment at year end when taxes need to be filed and statements are actually perused.  “Shouldn’t the fund have increased in value MORE?”   ”How much is being taken out for fund management?” “Is the fund manager earning more than I am?”

 So there’s a sense of “I’m not sure if what I am doing with investments is going to get me anywhere I want to go.”

I believe there are a lot of successful, career-minded and family-minded  people who would like to feel more confident that regardless of what and how they have done financially to-date, they can still make a plan happen in the next 10-15 years.

I’ll be blogging in more detail on some investment groups mentioned previously in this blog since I’m convinced that the need to figure out how to get from $1 Million net worth to $3 Million net worth is more important than ever since pensions have gone away for most employees and employees are on their own to prepare for retirement.  The direct returns may not be quite as high as Warren Buffet has been able to achieve by favorably buying and holding solid companies that perform and grow in a global economy. But, real estate is a highly leveraged investment. So an investor can purchase a $200,000 property for only $40,000, or even $20,000 down. Also real estate can be leased out so a mortgage loan can be paid by tenants. And interest expense and maintenance of real estate is tax deductible. And real estate as income property is depreciable over 27.5 years. We’ll develop an understanding of the return on investment calculation for real estate.  It may be surprising what can be done in 10-15 years.