Recently I read an article written by Michael Snyder, a graduate of the University of Florida law school. I found it very interesting. This article was titled “Sell Everything!”
His headline read, “Royal Bank of Scotland Tells Investors to Fear 2016 Financial Cataclysm.” The 20th largest bank in the world is predicting that 2016 will be a cataclysmic year and Investors should be afraid. This prediction of course is aimed at the stock market, but there is a connection between stocks and real estate many real estate investors aren’t thinking about.
As the stock market is currently going into a Bear Market and people fear losing all of the value in the stocks they own, many will panic and start to sell thinking they must get out NOW if they want to keep as much of their equity as possible. It is also important to realize that when the market goes down, the companies who issued the stock, many times must also lay off workers to stay profitable. This is the bad part that few real estate investors think about. Why is this important? It’s important because when this happens, many people won’t be able to pay their mortgage payments and slowly those people will start going into foreclosure and eventually lose their homes. For a period of time renting may be their only option. I believe owning rental property is a smart move for those who start buying income properties today.
So, What is to Happen to Those Who Lose Their Homes to Foreclosure? Do They Disappear Into the Abyss or Will They Somehow Find Another Place to Live? It’s Time to Position Ourselves for Great Opportunity!
This is where we as real estate investors, can have the upper hand and help these people get back on their feet, or at least help them survive through this crisis. If real estate investors buy houses at the inflated prices I am seeing today because of low inventory on the Multiple Listing Service, it only stands to reason that the payments these investors will be forced to pay will be much higher than if they were able to negotiate a lower price and therefore a lower monthly payment. By negotiating a much lower monthly payment on the houses we buy, that will allow us to pass on a much lower rent to the people who may have lost a good paying job and are now working for much less than they were before the financial crisis. If we are able to negotiate a lower monthly payment when we buy a property, in the event of a financial melt-down we will be able to pass along lower rents to the people hit the hardest financially. And we will still be able to continue paying for the properties we buy, and have the rent cover the monthly payment and all of the expenses connected with those properties.
We could lower our rents to where we make very little or no monthly cash flow if necessary, but is that a bad thing? We investors may still be able to get a small cash flow and as long as we continue to make the mortgage payments on the properties we own, we are still getting loan pay down every month, depreciation and appreciation. We will also still be building equity instead of losing our properties to foreclosure. This is because if we have much higher payments, we may not be able to keep them rented at a rent high enough to make the high mortgage payments. I think it is important to always be conscious of the fact that the economy at this point in time, can turn on a dime and everything we have worked so hard to acquire could be at risk.
I believe every investor should always negotiate their deals with the sellers that will allow them to get terms in order to pass along lower rents to their future tenants if necessary. It is also important to be able to do this without losing all of their properties and continuing to survive through another financial crisis.
Think about what I just mentioned and keep it in your mind when buying any income property. You must think about it if you are going to keep any property long term. The price you pay for any property is somewhat less important if you can get terms that will allow you to easily make the monthly mortgage payment every month, regardless of the economy and the financial markets. I believe there are plenty of opportunities for all of us if we pay attention to the market.
Until Next Month, Good Luck and Happy Investing!