What You Should Know About the Rebounding Economy

Economies do well, then they do very poorly, that is just the nature of economies. Right now it appears that we are in a rebounding economy, which is of course great news. When an economic recovery starts happening, businesses spend more, unemployment goes down, and the under employed get back to working in their field. Furthermore, businesses and people come up with new technologies and ideas, including making already existing products more efficient. But, not everyone truly understands what a rebounding economy is and what it isn’t.

Sentiment is Key

Consumer sentiment is so important in a rebounding economy. The way people feel dictates how they act. When times are good, people are spending money, investing in new businesses, and businesses are hiring and producing new products. Sentiment has improved greatly in the last few months, as the recovery has started, people are starting to spend their extra income instead of stashing it. This helps get the economy going. To understand the recovering economy you must follow and understand consumer sentiment.

Investment

A lot of businesses in the United States have been sitting on a lot of money, or giving dividends. Though they have been afraid to invest in new products or ideas, this is slowly changing. Now businesses are starting to invest in new technologies, new ideas, and most importantly, people. This has a domino effect on the economy since money sitting in the bank does nobody any good. This is especially true for business; interest rates are so low, leaving money in the bank does nothing for their bottom line.

Stock Market

We have seen the stock market reach highs over the last months and weeks. This is a good sign people have faith in companies and in the integrity of the system. Capital gains taxes are good for state governments too as this can help fund badly needed projects that may have been neglected in the financial crisis. Not every large company has had their stock come back, but well run companies have largely come back stronger than ever.

Currency

In the United States, the dollar became a lot weaker, which in itself is not bad. But over time, during this recovery, the dollar has certainly strengthened against the Euro and other currencies. What needs to be watched out for is whether the dollar is gaining strength because we are fixing our problems or because Europe is getting worse.

Unemployment

The nation’s unemployment situation is slowly improving, which is great. It should be noted that, in a recovery, these things can take time. A hiring boom may be several months away; companies need to prepare for this. Many companies cut their staff to the bare minimum. Now with investment dollars flowing and the economy improving, they certainly will be hiring in great numbers. Employment is ever so important in any recovery.

Gas Prices

One way to notice the recovery is to notice gas is still not cheap. This is because consumers obviously can afford this. Although this is not good news, it is certainly the truth. If the economy were on more shaky ground, the price of oil would be much lower.

The economy is certainly improving at a rapid rate, and we are way better off than 2008. But this recovery could stall and lead us back to square one. Looking at most of the indicators, it does not appear this will happen. (Top image: Flickr | petesimon)

* Dawn Caruthers writes about economics, finance & mortgage quotes.

Hidden Profit Potential of Real Estate Lease Options

If you’ve never taken the time to understand how a real estate lease option works, today is as good a day as any. We’ll keep it short and sweet. Why should you pay attention? Because a lease option provides a mechanism that can boost your profit above and beyond what is available through the traditional property sales technique. A lease option does this by borrowing a twist from the stock market known as “premium,” though in real estate we refer to it as “consideration.”

Why consideration is your friend…

At a foundational level, when you sell/lease a property to a tenant via the lease option method, you are essentially renting the property at an agreed upon amount, with an option for the tenant to buy at an agreed upon price at some point in the future. If you’re familiar with the rent-to-own industry, you understand how the process works. But here’s the kicker. The tenant pays an amount of money up front, known as consideration, which might be several thousand dollars, in return for the right to purchase outright in the future.

For a tenant (who hopes to be a buyer one day), the lease option allows time to get financing together or repair bad credit. It’s really a win-win situation for both sides, though we’re focusing primarily on the seller here. The next question becomes, “What happens if the seller can’t follow through with the purchase at the appointed time?” No worries. This actually happens quite often. On the whole, many more lease options expire than are ever exercised. The good news is that the seller can then turn around and enter another lease option arrangement with another buyer (or even the same buyer), collecting another payment for consideration in the process.

See the beauty here? Theoretically, you could continue to collect consideration payments over and over as long as there was interest in the property. Sure, there’s the chance someone might eventually be able to buy you out but that’s not a bad thing, is it? The bottom line is this: even if the very first lease option you ever sell is exercised by the tenant at the appointed time, you still got money up front, and up front money is never a bad thing.

The Commercial Investing Center Team

Flickr / Steve Snodgrass

Warren Buffett: Single Family Homes an “Attractive Asset Class”

While we normally devote our time here to a discussion of the ins and outs of commercial investing, a recent interview given by world famous investor Warren Buffett caught our attention. In the short segment on CNBC, this renowned stock guru spoke the words that Jason Hartman has been saying for decades, labeling single family residential homes an “attractive asset class.” Keep in mind that this guy is ALWAYS in stocks, yet there he was claiming that investors would be wise to consider adding income properties to their portfolio.

If this is the first you’ve heard of this type of investing, sit back for a spell and let us tell you about something we’ve known for a long time. Income property investing is the BEST bang for your book in history, and that’s not just our opinion. Thanks to the power of borrowing and leverage, the numbers bear it out. But we’re getting ahead of ourselves. Let’s backtrack a bit and analyze why the Sage of Omaha is running around touting the advantages of real estate. To understand th reasons behind Hartman and Buffett’s bullishness on single family residential investing, you first have to understand the two different types of debt.

Bad Debt
Too many people have a knee jerk reaction to the idea of debt, thinking it’s automatically bad. While there certainly are types of debt which can ruin your financial life (think credit cards), other types can actually make you wealthy. Other kinds of bad debt? High interest loans taken out to purchase things like cars, vacations, and plasma televisions. Expressed another way – consumerism. Not that it’s bad to want to grab your share of the byproducts of the western shopping world. The problem kicks in when you borrow money to do it. One reason this kind of debt instantly becomes an albatross around your neck is that the items degrade in value so quickly.

Good Debt
To understand exactly what Buffett refers to when he talks of single family residential homes, we need to delve into the concept of good debt. In general, good debt can be described as money borrowed to purchase an asset which creates cash flow or increases in value. Good debt might be a truck you buy which allows you to generate income from a business. Pay attention to the word “might.” If you go into debt to get a $90,000 vehicle when $30,000 would have sufficed, well, that’s a not good debt. The best example of good debt that most people are familiar with is the house they took out a mortgage on, live in, and will one day own outright. Periodic market fluctuations aside, history has proved that it’s rarely a bad idea to buy real estate, due to the fact that it’s a scarce commodity (last time we checked, they weren’t planning on making any more), and the earth’s ever increasing population.

So investors should run out and snap up as many properties as they can afford, rent them out, and quickly pay off the mortgages? Not exactly. This approach puts you in the ballpark of the smartest approach to real estate investing, but there’s one small problem with this thinking. In reality, you should NEVER plan on paying off the mortgage, but rather refinance periodically, then take the money generated and buy more single family residential homes.

This idea that it makes more financial sense to only pay the interest on a mortgage and never plan to pay the thing off is difficult for many Americans to swallow, especially those raised by a certain generation of parents and grandparents to pay your debts off quickly. Far be it from us to claim your elders are wrong, but in this new inflationary day and age, they’re wrong. The reality is that a low interest, long term mortgage associated with an income generating property is, hands down, the best inflation hedge around.

Which calls to mind a saying that goes something like this: “If you owe the bank a hundred dollars, it’s your problem. If you owe the bank a hundred million dollars, it’s the bank’s problem.” Which really has nothing to do with the present discussion except to emphasize that your power in dealing with your bank is likely directly proportional to how much money you owe them. But we digress.

How can it be that you fight the effects of inflation by owning long term real estate debt?

Is your brain fresh, because what we’re about to talk about can turn your concept of financial reality inside out. The basic idea is this. When the currency of nation, such as the American dollar, is in a continual state of being devalued, you’re better off holding something that is, for lack of a better term, the polar opposite. What is the opposite of a pile of money? How about a pile of debt? The practical application is this. Assuming that annual inflation runs at about 5% (which is a delirious federal underestimate), a dollar in your pocket today will be worth – in real terms of what you can buy with – only about 95 cents in one year. Assume another 5% decline the year after that and, by the end of year two, your dollar buys only about 90 cents worth of the stuff it used to.

The continual erosion of purchasing power in the face of inflation is the modern day citizen’s lot in life unless that person learns to look at real estate differently. Let’s switch the idea around and analyze the idea of a mortgage from the perspective of the banker. We’ve already established that inflation reduces buying power by devaluing currency. Consider that the mortgage your bank holds is simply a balance sheet based in dollars. Dollars you owe them. Stay with us as we point out the economic reality that, once again, in terms of purchasing power, the loan you assume to purchase a piece of property is also being devalued by the destructive effects of inflation. That’s bad for the banker (though you shouldn’t feel too sorry for him. He’ll get by with fees and whatnot) but good for you.

The amount of money you owe on the mortgaged property is dwindling away year by year. Do you see the absolute beauty of this? By holding onto properly structure long term debt, you preserve your purchasing power, all the while gaining ownership in history’s best asset class.

What Jason Hartman recognized a long time ago and Warren Buffett implied in his recent comments, is that investing in single family residential homes is a win/win scenario for you. Here’s the short version. You use someone else’s money to buy an asset that you’ll eventually own, meanwhile renting it out to generate enough cash to cover the monthly loan note. With house prices still drooping and rental rates rising, there’s a great chance you’ll come out with positive cash flow to boot.

Click here to watch the short video in which Buffett discusses his bullish view on single family residential investing.

The Commercial Investing Center Team

 

 

 

 

 

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