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August 30, 2006


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Would you just hold onto the house or would you try to rent it out?

I have a couple of options:

1. Rent it.

2. Let a non-profit use it and take a write-off. (I'd need to investigate this option futher.)

Since you have cash reserves and low debt, I would suggest an arbitrage between the prime rate and the cost of the home. If you can foot a substantial amount of cash (~40%) you are much more immune to the pain of high interest rates than the person who struggles to make a 20% down payment. The zero down folks are destined for foreclosure if their luck turns sour, but I wouldn't focus on them too much -- the foreclosure market is awash with speculators.

What I sense about your situation leads me to believe that you could make a killing by picking up a few good properties with distressed sellers. If interest rates are high you will eliminate a large swath of the buying populace, thereby driving the price down. Plan to hold for 5-10 years and you ought to fare very well.

My personal take is that the bubble will leak and fizzle for 3-4 years, so I wouldn't be on the prowl for an investment property right now.

Whats happening is the market is correcting itself, and lemming investors are being flushed out while the real investors step in. This is a great time to buy for investors.

The key is in how you buy (in any market). Find the local "real deal" real estate investors in your area. Chances are they have deals coming to them left and right, and there is more than enough to go around if you want in. That's how it is for us here (Phx/Tucson) and the crew of real estate investors I run with.

One question- why would you pay all cash for one house, instead of using it to make a down payment to buy several houses? If you buy right, you can pull a little money out of the house to hold it. Leverage- that's one of the best things about real estate.

My plan, along with my partners, is to continue seeking out well priced properties in our target area, usually in some form of distress.

As for me, I plan to wait a year since I doubt any mortgage could come close to beating the lower rent that I was able to obtain recently. (To buy the houses I was looking at a few months ago would have required a 400K 10 or 30 year interest only mortgage at around 6.75%, which would have yielded a monthly PITI of b/w $2400 and $2700. My rent just dropped from $1440 to $1330.) I figure in 3-6 months, 9 tops, the FOMC drops rates. 10 year rates are already on the down swing for clear reasons, but I want to see a 1.5% yield drop. That will also benefit the fixed income portion of my portfolio nicely.

Anyway, in a year, I figure I'll find a property to call home under much improved circumstances, at better rates, and with lower overhead. My RE investing should lead me to properties with lower acquisition costs and even if not, there should be signs of lowering in the market, at least to more fundamentally reasonable levels. As for the business side, our focus will be on rental properties in our target area.

I love this business.


This was an interesting thread; it was useful to get a US perspective on the real estate market.


Steve Jones

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