Our Blog

"“How The Economy Is Affecting Real Estate Investors”
By: J. Scott Scheel

Lately, we have been hearing about the need for the financial industry bailout, that the US is in a recession, and that times are tough.

The reality is that what is happening in the financial industry today is really not any different from what was happening in the 1980’s. Commercial interest rates ranged between 8-9%, banks were merging everyday, and everyone was worried about how they would get their next loan funded.

The real problem facing America is the devaluation of the dollar and the increased costs of energy. What most people do not realize is that these factors can affect us as real estate investors in many ways.

Increased Operating Costs
First and probably the most obvious way we are affected is through increased costs. Real estate investors have felt the pain of increased costs to operate their properties over the last several years.

Heating costs have tripled over the last five years and crude oil has gone from $25.00 a barrel in 2003 to $146 a barrel in June of 2008, and has now settled to around $110 a barrel in September of 2008.

Oil is used in so many aspects of our lives from transportation, to manufacturing, to heating, so it is easy to see why living expenses have increased so substantially.

This, in conjunction with the devaluation of the dollar, has also increased the cost of operations.

We have seen these increased costs affect utility costs. It has affected our costs for repairs and maintenance since construction material costs have increased along with the cost to transport the goods. Finally, our overall supplies and office expenses have increased.

These increased costs have affected the bottom line, decreased our cash flow from operations, and decreased the value of our properties.

Since the value of the dollar has dropped, Americans can now buy less overseas than they used to be able to. In 2005, the Euro was worth $1.22 according to the Federal Reserve.

This summer the Euro was worth $1.58. This means there was a 28% increase in all merchandise manufactured in Europe and sold in the United States. In other words, if you went to Europe, it would cost you 28% more money than it did in 2005. However, it would be a 28% savings for Europeans buying US-made goods and products.

Fewer Traditional Funds Available to Borrow
With the decreased value of the US dollar, investors who used to invest their cash in the United States have switched their investment preference. Scarcity of funds means that just getting a loan will be more difficult and rates will be higher. The banks will be lending to only the best of the best prospects.

More foreign investors will invest in US assets. They will be able to get more for their money here since the Euro and the Yen will have more buying power. The scarcity of funds will also force some lenders to leave the real estate market all together.

Changes to Bank Loan Terms
Another potential issue is that lenders may shy away from any sort of fixed-rate loan in an effort to hedge against any changes in interest rates.

The banks do not want to find themselves in a situation where they are paying investors 9% for their funds, but have long-term loans funding real estate deals locked in at 6-6.5%. We will see lenders offering variable rate loans and starting at a little higher interest so the banks can protect themselves from market rate fluctuations.

Lenders will also decrease the terms at which they allow real estate investors to finance the loan. They will do this as another step to hedge against changes in the rate market.

Instead of long term loans, loans will mature in three years or shorter, forcing borrowers to be sure they stay on track with their cash flow and giving the banks the flexibility to change their investment strategy if necessary.

Last, lenders will decrease the loan-to-value in what they lend. This will protect the banks from declining values on properties due to lower NOI levels and the decreased value of the dollar.

For example: Today, if they lent at an 80% LTV on a $500,000 property, they would have a $400,000 loan. If the value of the property decreased by 10 %, the new value of the property would be $450,000. Now, the bank’s LTV based on the new value would be 90% and far more risky.

Not all Doom and Gloom
Even given the above-mentioned factors, all is not doom and gloom for real estate investors. If you follow the principals that have been successful, you know there are still a lot of deals out there that are yours for the taking.

You can buy properties in this market at prices lower than you may ever seen before. Also, rates are still low, averaging in the 6.5-7.5% range through traditional banks. This means that if you are a qualified buyer, you can finance your property for low interest rates and have a lower debt payment to service.

Many lenders have adjusted rate indexes to go off of the international indexes such as LIBOR (the London Interbank Offered Rate) to make their mortgage-backed securities easier to sell on the international market.

By using the Opportunity Evaluator Software, you will have the confidence of knowing you are buying your properties correctly, not over-leveraging or overpaying for them, which will allow you to withstand the changes in the current market place.

The above article was written by Scott Scheel who is a trusted advisor on Nationwide Property Investments' team of professionals. He specializes in commercial real estate investments and some of the strategies and techniques we use today were taught to us by Mr. Scheel.

We are looking for official sponsors for our live radio show "Creating Wealth Through Real Estate". The show educates and informs the public on a variety of topics which relate to real estate and real estate investing. It includes retirement planning, tax planning, buying and selling techniques, and much more. We have regular guest speakers who are some of the sharpest minds in real estate.

The sponsorship would include internet advertising on both our website as well as the radio station website (the largest internet traffic commercial website in the area), commercials each week on the show, guest speakers each month, and much more.

Please contact us for details and additional information on this limited opportunity. Only one sponsor for each area of business (one realtor, one accountant, etc.) Call us at 800-469-2260 or email us at info@nationwidepropertyinvestments.com

Supreme Court Rules That Creditors May Not Seize IRA Assets in Bankruptcy Proceedings

In a huge victory for managed and self-directed IRA owners everywhere, the U.S. Supreme Court ruled last week that IRAs receive Federal Creditor Protection. This means that creditors cannot seize assets in an Individual Retirement Account.

The Supreme Court ruled unanimously that IRAs should join pensions, 401(k)s, Social Security and other benefits tied to age, illness or disability, that are afforded protection under federal bankruptcy law and thus shielded from creditors in bankruptcy proceedings.

Until recently, IRA protection was covered by state laws, which varied to a great extent on coverage provided. This ambiguity led to a great deal of confusion and uncertainty for IRA owners wondering how their assets were protected from creditors.

The case before the Supreme Court was heard because of a lower court ruling against IRA protection based on the faulty notion that since investors can make IRA withdrawals at any time, IRAs are similar to savings accounts, which are unprotected from creditors under bankruptcy law.

Justice Clarence Thomas, writing for the Court, said a bankrupt Arkansas couple was entitled to keep more than $55,000 in retirement savings from creditors. He reasoned that IRAs are benefits tied to a person's age under the federal statute because a tax penalty is imposed if a person makes withdrawals before age 60.

Interestingly enough, the court did not choose to address the topic of whether very large IRA accounts would be protected under the federal bankruptcy code. The code has a provision stating that certain assets (such as retirement plans) that are deemed to be "reasonably necessary" to support a debtor and his/her family are protected from creditors.

The uncertainty of what is "reasonably necessary" means some assets in extremely large IRAs might not be protected. Having said that, this issue will surely be brought to the court's attention in the future. However, for the time being, the vast majority of Americans will not have to worry about creditor attachment of their IRAs.

The ruling comes at a time when IRA assets are set to reach the $3 TRILLION mark and, for many Americans, the IRA has become their most significant retirement asset. Having the same protection in bankruptcy that workers receive for their 401(k) plans and company pensions shields a nest egg relied upon by millions of Americans and provides another layer of financial protection.

October 17, 2008