You must be logged in to reply to this topic.
-
Hi All,
There has been a lot of terrific info shared about the state of the US housing market and economy. Thanks to everyone involved and for sharing. It is just another reason why cashflow depot is so valuable.
House prices have been driven up quite a bit in many areas. For investors with multiple houses this provides a lot of options about strategies and next steps.
In my view cashflow is king. As Pete Fortunato pointed out he held many properties during a previous downturn and while his equity was wiped away his cashflow was not. I think that is the key. Ultimately this is why my wife and I invest, for ongoing cashflow that will cover our living expenses and then grow our estate.
1 challenge – we have some balloons. Yes, I know these are not favorable, but they were necessary to get some good deals done. And we were able to purchase properties at such a discount we have been able to refinance into new 5yr balloons at or above our cost basis. So none of our funds are tied up in the properties. Additionally, these notes are non-recourse. So essentially, isn’t a 5 year balloon with little to none of your capital invested like a really secure lease option? All that is at risk is the house. We are not even close to the 5 year terms on any of these, but still we are working on getting into long term fixed rate notes eventually.
We have a property we are selling (pool home owned 4 years) that will free up 100k or so. We also are researching buying 2 duplexes with owner financing (200-250k). We are considering doing a 1031 exchange with the proceeds of the sale to defer taxes and have the seller hold a note on the duplexes. We can essentially pay no taxes on the sell transaction, buy 4 units with tenants in place increasing our cashflow 3Xs what it was on the 1 house and get some cash out. (There will be cash left after the down payment we make with the proceeds of the sale). BUT the seller will likely want a balloon, since we have done another financed deal with him I know he requires that. But he gives great terms at 4% 30 year amort no recourse. SO do we do this new seller financed deal or cashout, pay the taxes and paydown some of the other balloons.
My determination of the debt risk is that since the properties with the balloons have little of our capital invested, are non recourse, and are with reasonable private lenders I calculate they are not very high risk like most balloon notes and are ok to keep in place and acquire another high income producing property.
And overall given the state of the housing comeback and economy, even though property values are up substantially again, if we find a deal that cashflows comfortably with little of our own cash at risk shouldn’t we continue buying?
Thoughts? Feedback? Questions?
Thanks!
The guy who offers seller financing with a balloon is sharp. He know that what goes up will come down. By offering a 5 year balloon, the chances of you being able to refinance when the balloon pops are slim to nothing because that is the same cylcle when prices will be on the decline. So, he knows he has a good chance of getting the house back. That is why if offers those rates with a balloon.
Your best bet would be to
refinance in to a 30 year fixed rate loan as fast as possible before the prices start going down.
or
sell some to pay off others.We had this same conversation with people in 2007-2008. DEJA VU… all over again
One forecast is for valuations to decline over the next 4 to 6 years as more SFH’s come on the market as the
“Boomers” start to downsize/die off and leave an empty house behind. This concept will of course fluctuate
market to market based on the shadow foreclosure inventory and population. Big price bubble areas of the 2000’s may decline another 20% – 40% from the recent slide of 2008 – 2012. So, that 5yr balloon may end up
being worth more than the house. Non-recourse, yes, but there goes your income stream.
The only salvation of this scenario would be if the lender needed a chunk of cash before the balloon came due and perhaps you could negotiate a discount on what’s owed($2 off for each $1 paid),
but that is a wild card, not 5 Aces. The Winter Shakeout* is coming, CASH will be KING, de-leverage your debt,
and build up cash reserves. The new market looks to be retirement areas, the lake home, or RV parks.
Remember, the “Pig in the Python” is the Baby Boom generation and it is reaching it’s zenith economically.
The Echo Boomers aren’t as many as their parents and they are waiting longer to make the big purchases of
lifestyle(homes, cars, children, etc.). Yes my friends, these are going to be interesting times.* The Demographic Cliff by Harry S. Dent
Hey Mac
I just finished that book. It is a great read! Highly recommended.
Dent has some great advice for real estate investors in chapter 7.Once again, the days of appreciation will soon be over. I think we will have price decline even more than the last time.
If you can hold on to your cash flow you will survive.
But you can’t hold on to cash flow if there is a balloon on your mortgage.
You must be logged in to reply to this topic.
