Inflation & Recession What is the Market?
Inflation & Recession
There’s a lot of talk about what’s going to happen when
inflation starts to show up in our economy.
I personally have a lot of debt. I don’t have a lot of debt on
any individual property…in fact I have less than 50% debt per
property. A lot of that debt is non-recourse (Collateral only)
but when you add it up I have a lot of debt.
The theory is that having debt is good when inflation sours.
Think about it: you owe millions of dollars on something. The
dollar becomes worth HALF of what it used to be worth. Your
debt just got cut in HALF. It works in reverse when you are owed money.
So, owner financing houses seems to work against you…and so does owning notes.
You are owed a fixed amount every month for the payments and
the dollars you collect now buy half as much at the grocery store.
If the dollar is worth 50% less than the cost to buy a 2×4,
to build a house with, will cost twice as much at Home Depot…
does that make the price of an existing house double?
Those 2x4s are already arranged in the form of a house. The
house was built with 2x4s that cost $4 dollars each but now
that same 2×4 costs $8. Does it make labor double?…materials
and labor are both double? ..or does labor get cheap when the
economy is bad…I think labor gets cheap.
Some people I know are moving towards rental units so they can
level the playing field when inflation hits. I believe if you
are renting houses it could get so bad that renters just don’t
pay. I think the home owners will hang in there tougher and at
least pay and not call me with their upkeep issues.
The other thing that gets overlooked when you plug owner
financing into inflation or appreciation conversations is that
there is always some fall out when you owner finance houses.
Not every person eventually pays their house off. Some fail; at
least 10% even in the good times, even in my model, even with
all my expertise.
So when you think about appreciation…the owner financing
model is NOT completely cut out. Owner financiers will get some
houses back and they do get to sell those houses again at the
new market price.
The question is, “what is the market?” The CASH MARKET and
OWNER FINANCE MARKET are two completely different markets.
When the recession of 2008 hit I was able to take advantage of
both markets. I took back 35% of my owner financed homes. I was
able to recapture any appreciation that had happened from the
time I bought the house until the time they moved out…some
had paid for up to 6 years and then simply disappeared.
When the recession hit, the prices of houses in San Antonio
drop about 15% to 20% in the nice areas and about 10% to
15% in the lesser parts of town, where fewer buyers could
qualify for a loan.
Then they raised the credit score bar from 580 to 650
to qualify for a long term government backed loan.
Now, NOBODY in the LESSER PARTS OF TOWN could
qualify for a loan and the prices dropped 30%.
Houses prices dropped back to the times I was writing about in
my book MY LIFE & 1, 000 HOUSES
(I was writing about my real estate dealing between 1996 – 2008).
Here’s the BIG weird dynamic…
- What happens to rents when no one can qualify for a loan to buy?
- When people can’t buy, what happens to rents?
- Do rents go down? …or do rents go up?
- Rents go up!
Suddenly, in the recession, I was buying houses for what I used
to pay for them 12 years ago. I was buying with other people’s
money (OPM) and then owner financing those houses to renters
who wanted to own. I based my sales price on the rents. If a
person can pay $850 for rent, then I’d back into my sales price
based on that monthly rental payment. The goal was to sell this
renter a home for the same monthly payment they were paying for
For the full effect of this example, know that I acquired the
property and am “all in” for $35, 000.
So, I want to sell my property and I want to establish a viable
Owner Financed Value… I establish that the rents in the area
for this particular type of house are $850.
– $100 property taxes
– $ 50 for Insurance
= $700 left over for Principal + Interest
It’s easy to establish very accurate rent numbers online. You
can do it in minutes while sitting in front of a house if you
have a smart phone or if you have a laptop with a link to the
Use RentoMeter.com, Trulia.com and Zillow.com for
$700 payment means the buyer can afford to finance $70, 000
(If you use the terms 10.5% for 20 years)
The exact amortization payment is $710.66….close enough!
So if the buyer can afford to FINANCE $70, 000, what is the
Add 10% as a general rule.
$77, 000 is the sales price!
So if the goal is to move a person from renting at $850 to
buying at $850…
What happens to my sales prices if rents are going up?
That’s right…during the recession my owner financed houses
were appreciating as far as I was concerned.
It was the perfect storm; Prices on little houses were falling
because no one could get a loan. I was buying those houses
with Private Money (Money from Private Lenders) at rock bottom cash
prices. But the OWNER FINANCED VALUE of the houses was rising
like a rocket because the rental pool was flooded with demand!
My spread was getting bigger at both ends; I was buying for
less and selling for more.
To top things off, I was getting much better buyers than I had
ever seen, and the buyers were better payers and had more down
payment than I was use to getting.
REMEMBER: Back then we DID NOT have to get an appraisal to sell
a property with owner financing – period! Today, as long as the
buyer is a qualified buyer; meaning the buy has enough income
to make the payment – Qualified Mortgage (QM). As long as it’s
a QM we don’t need an appraisal.
I hate being a landlord so much; I think I’m going to stick to
my owner financed model through the upcoming turmoil. I’m
thinking, I won’t get rich but I won’t go under either. My
losses to inflation will be offset by the houses I get back and
by my ability to double my money when I buy in the down times.
To believe in this model you have to believe at least 2 things:
#1. People would rather own a home if it costs the same as
#2. There is a line of renters waiting to buy your home if the
current payer fails.
And perhaps there is a 3rd thing you need to believe in….
#3. Wealth comes from chaos
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