It would be extremely difficult to miss the tumultuous activity in the financial markets these days. Everyone is talking about the financial industry, the debt market, failing systems, corporate collapses, bailouts…it goes on and on. The financial landscape is changing by the hour, if the not the minute. This is a historic time in the United States - one that we have not seen for many years and hopefully will never see again. In this article I will discuss the Government's Backstop Plan and the effects it could have on you and the real estate market. I will also touch on the fundamentals you need to focus on in a volatile market.
Friday morning (9.26.08), President Bush came out with a brief statement using very decisive words to stress that a plan will be put together. There is no disagreement in the need for aiding the market, but there is great disagreement in how. Regardless of your political perspective or stance, the country must come together to ensure that the financial markets are stabilized and limit the detrimental effects of this tremendous downturn.
Today it seems that the market and the economy are in a holding pattern, waiting for details on the government's backstop plan. These details will add light and life to the financial market and add liquidity to the market so that credit will be granted again. The details will also add light to the real estate market. We are not at the bottom of prices. We are not done with foreclosures. However, the Plan could help to minimize the foreclosures by adjusting mortgages that are hurting people. This in turn reduces the number of low comparables entering the market to slow, and hopefully stop, sinking real estate prices. In addition, with liquidity in the market, community businesses and individuals will be able to get the credit and cash they need to continue business, send children to college, and buy that house that is currently sinking in value.
From a real estate and investing perspective, there are some fundamentals and attractive strategies to consider to help keep your money safe and even create a healthy return. At the very base of keeping your money safe you need to think about the failing banks and brokerage institutions; you need to think about deposit insurance and the amount of money you have in your accounts.
The Federal Deposit Insurance Corporation (FDIC) insures bank deposits. You should visit the website www.fdic.gov and review your accounts to ensure that you are covered and what you need to do if anything should happen to your bank. Here is some of the important information taken from the FDIC website:
What Does the FDIC Insure?
The Federal Deposit Insurance Corporation (FDIC) is a government corporation that insures all deposits at insured banks, including checking and savings accounts, money market deposit accounts, and certificates of deposit (CDs), up to the insurance limit. Use this form to find out if your bank is insured.
How Much Does It Cover?
The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.
Ways To Increase Your Coverage
Since accounts at different banks are insured separately, the easiest way to increase your coverage is to simply keep less than $100,000 at any one bank. You could have $100,000 each at 500 different banks, and be insured for $50 million in total.
You may also qualify for more than $100,000 in coverage at one insured bank if you own deposit accounts in different ownership categories. For example, here is a way that a husband and wife could qualify for $600,000 in total insurance all at one bank:
The Securities Investor Protector Corporation (SIPC) helps to recover losses for investors if a SIPC member broker/dealer is closed due to bankruptcy or other financial hardship. If you have brokerage accounts you should visit the website at www.sipc.org to ensure you are working with an SIPC member and that you understand what you would need to do if something should happen to your brokerage firm.
Once you have peace of mind about your money in banks and institutions, you can turn your focus to the money you have invested in real estate. You know that the best strategy is to buy low and sell high, but how do you do that and where do you do that today? You don't want to buy a second home or vacation property to hold for a short time and look for appreciation. Those days are gone. We are not yet close enough to the bottom of prices and you will need a lot of cash to hold these properties to eventually see the return. Here is what you can do:
Do Nothing: Put your money in a safe account and wait until you see the market cycle start to climb again. The advantage is that you won't lose. The disadvantage is that you won't gain.
Private Lending: Credit markets are dry and the legalities around them are stricter. That means there is more demand for private lending and more return to be obtained. Look to established channels to lend through, and do plenty of due diligence before jumping in. The advantage to this is you don't need to utilize your credit or purchase anything. You gain a return for lending your own money.
Rental Property: Buy a cash flow positive rental property. Look for a market that has seen slow and steady growth, has increasing population and employment, or a market that has a housing shortage due to that growth or due to high foreclosures. As I have written about before, if people cannot or are not buying homes, people will rent. The rental market is climbing as the home buying market is falling. You do need to be able to obtain an attractive mortgage. The upside is that your money is working for you, there are no out of pocket costs, and the market will eventually turn up again.
Look Internationally: The international market offers many advantages. Off shore investing offers diversification, foreign exchange advantages, tax and legal benefits, and many times higher returns. No investment is without risk, so there is due diligence to be done. You need to look for credible and experienced companies to work with if you don't want to go at it alone. You will share some of the return, but you will also gain by their involvement in due diligence, legal, tax and negotiation activities.
Distressed Assets: If you are an accredited investor, please contact us for more information about purchasing distressed mortgage assets.
The financial, credit/debt, and real estate markets are in turmoil. Politics has been interjected as well. It is a tough time for everyone, but you can be sure that just as the cycle is down today, it will be up again in the future. Take care of your cash today! And if you can, continue to invest. There are always the right investment vehicles in any market cycle.
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