People frequently go to the bank to see what they offer. You should never just take what the banks offer, negotiate! If one bank makes an offer take into another bank to see if they’ll better the offer. It’s not like walking into to Best Buy and purchasing a product, this is designed to be negotiable and if you just take whatever is offered it’s like burning money.

Never take adjustable rate mortgages. You can’t plan a business or a household budget on a payment schedule you can’t control. While a low interest rate may look more attractive in the beginning, it can turn into a nightmare in the upcoming years. Just ask thethousands of underwater home owners or x-home owners from this last housing buuble.

Get advice from experts like your accountant or people you know in the industry who are current on the market.

Know everything possible about the property you are buying and its value. It’s much easier to get a good property financed than a bad one. The bank will be more flexible if it knows it can sell the property more easily if you belly up on your payments.

It’s not just in my neighborhood, it’s in the whole city. I always think to myself, “Man it would suck to be the owner of commercial real estate right now.” They must be taking some serious rental losses. If you own resident property it’s probably not great but people have to live somewhere.

I’m amazed at how stubborn property owners are. I browse the property listings periodically and there are property that have been on the market for rent for at least a year and they never lower the asking price, all the while the properties all around them empty out as well.

In the US , commercial real estate values are down 44% from their peek, if that’s any sign of what’s to come here.

This recession is going to be long and deep, at least here in Spain. Hopefully we can position ourselves to take advantage of it. In a few years, who knows, maybe there will be some great property, residential or commercial, ripe for the picking…  We have to keep learning and prepare the best we can.

Recently in the news in the states there has been talk about many new housing starts as signs of a recovering housing market. Although some experts say this is just an illusion. States subsidise the construction of houses to keep people working and hold up an illusion of an improving market and to help stabalize the economy.

Technically all Americans are subsidising housing as taxpayers are footing the bill for now completely government controlled housing agencies Fanny Mae and Freddy Mac. These organizations are STILL backing home loans. Fanny and Freddie (and FHA) could cost US tax payers approximatlely $1 trillion.

I heard several references to the ‘FHA’ in discussion about banks and mortgages so I looked it up. FHA stands for the Federal Housing Administration who runs programs to promote home ownership.

This association hands out what are called FHA loans. These loans are insured against default. If someone lends money to a borrower they don’t have to worry about losing money if the borrower can’t pay because the FHA will pay. The FHA charges the home buyer and upfront and monthly fee to cover its back when someone defaults.

I don’t mean to sound righteous but I think it’s totally unethical for anyone to walk away from their debts. If the people who bought the homes don’t pay for them, someone else will end up paying for them, and in most cases that falls on the rest of us with bailouts and money printing.

For years I ignored my school loans and they actually went to collection. The loans were from the US and I wasn’t even living there anymore and had no intentions of returning, so technically I could have escaped every paying them back. Nevertheless I got my !@##!! together and paid off the loans with a big monthly sum over a period of three years. It felt great to rid myself of that debt and it felt even better to live up to my obligations and do what was right.

60 minutes recently did a special on people walking away from their mortgages. The thing is, these people can actually afford to pay their mortgage but their houses are not worth what they paid. I’m not exactly crazy about what banks do to make money, but if I were a bank and I lent someone $300,000 for a house and instead of paying me my $300,000 back they give me an asset that is only worth $200,000. Is that right?

FICO is always an important factor banks (in the US) take into account for making the decision to lend or not. Scores tend to range from 300 to 850.

FICO is a bit simplistic and has some shortcomings. For example, anyone can request a credit card and promptly pay it off each month to raise their FICO score. FICO also doesn’t take into account the person’s income.

When the rating agencies (Moody’s and S&P) rated the safety of mortgage loans they asked for average FICO scores of all the parties the loans were made to, the average only needed to be around 615 to get an AAA rating. The big problem with the system is that there was a mix of very reliable lendees and very unreliable lendees. Taking an overall average was quite useless as there could be many people included in the bonds created with these mortgages that were not creditworthy, creating  great risk of defaults.

Nevertheless, the bonds were given high ‘safety’ scores as investments by the ratings agencies, which appears to have also made a big contribution to the whole subprime meltdown. After all, would financial institutions buy so many bonds if they were deemed risky?

I love this book, ‘the big short’, it’s giving me a much clearer vision of what happened in the housing market that sparked the financial crisis. It’s not too technical. It’s easy for someone like me to understand.

In Bakersfield, California a non-english speaking mexican strawberry picker with an annual income of $14,000 was lent $724,000 to buy a house!

I remember a couple years back a guy named Casey Serin appeared on Rich Dad’s insider videos to explain how he managed to buy 7 properties with no money and nothing down which he was planning to flip for profit. At that moment we had reached the top of the bubble and there were no more buyers. Now he was stuck with these 7 expensive mortgages and facing serious financial problems. I wonder how he is doing now. Hopefully he is working his way out that mess and doing better. We e-mailed back and forth a few times and he seemed like a pretty nice guy.

The lesson was never to speculate (at least not invest on the sole basis of expecting the price to go up) , always invest for cash flow or monthly returns.

Compound interest is the theory pf adding accumulated interest or earning back to the principal.  Other terms used interchangeably with compound interest rates include annual percentage rate, effective annual rate, and effective interest rate.  Compound interest generally prevails in finance and economics.  It is worth mentioning that there was time in human civilization when compound interest was considered as the worst type of usury.  Compound interest was extremely condemned by Roman law in addition to common laws of other countries.

The word “yield” signifies a rate of return that is derived from compounding, reinvestment, or varying market value of a security.  Two factors have great effect on compounding: the periodic interest rate; and the frequency with which the interest is compounded.  The frequency of compounding is generally annual, semi-annual, quarterly, monthly, or daily.  The periodic interest rate is simply the interest to be charged for each period.  A nominal interest rate is an annual rate that has not been “adjusted” for compounding.  For example, if Mr. Li invested in real estate in Hong Kong in January of 2008 with an initial capital of $10,000 that pays a yearly interest rate of 4% that is compounded quarterly then the table below shows the value of his property at a given quarter

The yearly interest rate is 4%, which also represents your nominal rate since it has not been adjusted.  To obtain the periodic rate for quarterly compounding, divide 4 (interest) by 4 (number of quarters in a year) and you get 1 or the quarterly ROI.

When an interest is earned by an investor it is converted into a capital.  The process of compound interest entails reinvestment of capital; the dollar earned for each quarter is reinvested.  On March 2008 Mr. Li earned $100 which was added to his initial investment making his new capital for June 2008 $10,100 and so on.

Checking how often interest is compounded is a smart thing to do before deciding to invest in any real property.  Obviously, the more frequent it compounds, the faster you reach your financial goals.  These are basic information you have to know if you seriously intend to maximize the full potentials of your investment.  Also, it can save you with so much troubles and headaches in the future.

The most basic computation in evaluating the rate of return for a real property investment is the simple interest. Calculation of simple interest consists of 3 elements: principal, rate, and time. The principal is the initial amount of investment. The rate, also referred to as rate on investment (ROI), is the interest rate of your investment at a given period of time.

Let me give you an example, Ms. Anne has decided to invest his bank savings worth $10,000 to a newly developed, residential district in Detroit, Michigan. The property consultant mentioned an annual interest rate of 7% after 2 years.

Principal = $20,000 Rate = 5% Time = 2 year

Simple Interest = Principal x Rate x Time

= $10,000 x .05 x 2

= $1,000

In 2 years time, your $10,000 investment will earn $1,000. Your property’s value then will be principal plus interest or $11,000. Obviously this is a simple scenario using simple interest. What if you have 2 property investments that need proper evaluation? Referring to Ms. Anne’s case discussed above, she decided to add more money so that her total annual earned interest will reach $1,500 or 7.5% of initial investment (instead of $1,000). If she expects the interest rate to increase to 9% how much additional money does she need to achieve her target?

Using the same formula:

Simple Interest = Principal x Rate x Time , since we have 2 investment periods, then

Simple Interest (period 1) + Simple Interest (period 2) = Simple Interest (total) , or

Principal x Rate x Time (period 1) + Principal x Rate x Time (period 2) = Principal x Rate x Time (total)

Substituting the values from the table:

(20,000 x .07 x 2) + (2 x .11 x y) = (20,000 + y) x .10 x 2

Solving for y will give you the value of $16,666.67. This means that Ms. Anne has to invest an additional of approximately $16,700 to attain her target.

Another computation frequently used in financing and economy is the compounded interest. Simple interest has lower yield or future value since the interest earned in compound is reinvested as capital. Knowing the fundamental interest calculation can help you make better offer to your clients. The properties you are selling can become more appealing if you can give them an idea how much it will worth after a period of time. If you are on the other side of the negotiation, you can evaluate the property on your own and even verify claims and assertions on a certain investment.

Below are basic points that will have an impact to your cash flow and eventually your real estate investment.  Items found on the cash flow-in are circumstances wherein you expect some cash flowing in to your portfolio.  On the cash flow-out column are obviously items that will result to cash out transaction.

These are just some of the things you need to know that may affect your cash flow management.  The next thing you should do is compute for the sum of all your cash flow-in and cash flow-out transactions.  If the sum of all cash flow-ins is significantly higher than the sum of all cash flow-outs then it is a good investment.

Cash is king not profit.  Even if your real estate has the highest rate of return in your entire investment portfolio, if cash management is not effectively maintained it will eat up your profit over time.  so before jumping into real estate investments, do your assignments first – read good materials, ask opinions of highly experienced people, and check your cash flow.

People in the investing and financing arena best know what Rule of 72 is all about. If you meet one who does not have any idea of it, then it is safe to assume he is on the wrong side of the world. Rule of 72 is a simple formula for computing the estimated number of years for your investment to double given a fixed annual rate of return. For example, in 2008 an amount of $10,000 is invested by Gary at 10%. It will be doubled using the principle below:

Number of years to double = 72

——————–

Interest Rate

= 72

——————–

10

= 7.2

Dividing 72 by the annual interest rate will give you the approximate number of years for your investment to double. This means that Gary can expect his investment to reach $20,000 after 7.2 years or by the year 2015. Sounds very simple you may think but that is not the whole picture. The following observations are worth knowing to fully understand the Rule of 72:

The computed number is just estimation. If you use a manual calculation or some programs it would give the figure 7.2725 years which more accurate.

It is safe to use the Rule of 72 for interest rates falling between 3% and 12%. The estimation is less precise at higher interest rates. For instance, if the return is 100%, dividing 72 by 100 will give us .72 years where in fact it will double in just one year.

Changes on income taxes, commission, inflation, etc. are not addressed in this rule. If for some reasons the government raised income taxes then your rate of return will also be affected. When this happens, it will be longer for you to achieve the two-fold of your investment.

The interest is understood to compound annually. For return that compounds frequently, then expect to double your property value faster than the computed years when Rule of 72 was used.

In 1494, Fra Luca Pacioli, made a similar theory in one of his published works on Mathematics – Summa de Arithmetica. Apparently, no explanation or derivation was given about the observation.

Knowledge is power. What you do with what you know makes all the difference. The world of investing and personal finance is very exciting and risky at the same time. No matter how accurate the information you got, how much risk you took, there will be times that all you can do is hope for the best and expect for the worse. The Rule of 72 is one tool available to give you an idea, a practical estimation, on what to expect in terms of your investment.