Here’s the watered down version…..  Basically, the Florida State Board of Administration manages aprroximately $42 billion in short term investments which includes the state pension program and the investment pool for both local governments and the state school districts.  Word gets out that the investment managers bought assest backed commercial paper that has defaulted.  Local governments and school districts get nervous and start pulling their money from the pool.  If the run on the pool continues, the pool then may face bankruptcy.  You know how the story ends.  The last one there is the one that doesn’t get their money.  And Florida isn’t the only state that invests in these pools.

 So, local governments and school districts are lossing their money due to someone investing “$2 billion in structured investment vehicles and other subprime-tainted debt”. This is estimated to be 20% of the pool.  Further, the pool has been reduced by 44% percent from the recent redemptions of Orange County and other local governments and school districts that were fast on their feet.  The only thing that has stopped the mass bleeding is an emergency meeting and decision to halt all withdrawals from the fund.  Orange County got 100% of their money.  However, for those that are now stuck and are forced to sit and watch…… well those districts won’t be so lucky.

How widespread is the problem?  The unfortunate part of the story is that other states such as Conneticut, Montana, Maine, Washington, etc. all hold similiar investments.  There are literally thousands of school, fire, water and other local districts that entrusted their fund managers to invest their money.  These managers invested in high risk paper that they didn’t understand.  All they saw was the high profits and ignored the risks.  After all, who knew subprime would be THAT risky!  Thought you would have a pension as a state worker?  You may think about a back up plan.

Local markets that are holding their own or apprecaiting in the Denver Metro are areas with the highest performing schools, close and convenient to business and cultural centers and developed, mature communities.  Price point is also a noticeable factor.  There are less buyer incentives being offered and far less foreclosures among properties listed above the $350,000 range.  The most incentives and foreclosures will be found in the price range under $130,000.  So, if you are looking to buy it may be a great time to look at investment properties.  However, if you are looking for a steal in suburbia where the schools are top notch and the backyard is on the golf course…. well these places aren’t the bargains the listing makes them out to be.  Investments are selling for half of what they last sold for while most upper end neighborhoods are getting some appreciation. 

There is a possibility that huge discounts could be seen in the price ranges over $350,000 if we find ourselves confronted with the big “R” (recession).  But it’s anyone’s guess.  I can tell you that we are starting to see a few foreclosures in the price ranges over $500,000.  However, I have a theory that these homes will be mostly newer homes.  The “old money” is in the established neighborhoods while the “new money” people who made a buck in the real estate rush are the ones that bought the new house on the golf course.  The “old money” folks are in no rush to sell and these neighborhoods will hold stable while the “new money” folks will be trying to down size themselves out of trouble.

How much more downward movement can the Denver area expect?  I say not much unless we are talking properties that are already in foreclosure.  After all, prices have remained stable here for the last four years while place like California, Nevada, Florida and Arizona have seen explosive price increases.  Denver is now more affordable than many of these places.  And with a full blown credit crisis it is likely that the government will step in and offer some type of “bail out” for homeowners that haven’t faced resets on mortgages yet.  Further, folks that wanted to sell but can’t get what they wanted will end up renting their house out or just sitting tight.  And with vacancy rates at lows and rents increasing, this may be a way for some to ride the tide.

Bottom line…… I have personally been looking for a “steal” in neighbors with great schools and easy access to major highways, etc. and I haven’t found it.  However, I am finding it hard to choose an investment property becuase deals are abound.  And when I think an investment is a good deal, the price drops again or another one comes on the market that is better.  Evaluate your reason for buying or selling and then make the determination based on your personal needs….. not national media hype.

First lets talk about the “why”.  Historically the national home ownership rate has been about 63%.  The rise in risky loans made it easy for anyone breathing to reach the dream of home ownership.  Our ownership rate increased to about 70% over the last few years.  However, the current trend is showing a decline.  We have dropped to about 68% and it is still on the downward slide.  All those folks that really should have been renters to begin with are going into foreclosure and witll be back where they started shortly… renting.  Now, while the over supply of inventory and foreclosures are pushing prices down in many areas these same areas are seeing a rise in demand for rental property.  This rise in rental demand keeps pushing vacancy rates down and rental rates up.  In investment circles you hear stories of a families that sold their home through a short sale or pre-foreclosure and are now renting a home four doors down.

The “why” by the numbers could surprise you even more.  In some areas you can purchase a single family residence for almost half of what it last sold for.  For example, my mother in law sold a property in 2003 for $184,900.  It is currently owned by the bank and is listed for sale at $119,000 and it is very likely that it will actually sell for less.  There are hundreds of examples just like this.  Many of these areas are still experiencing high foreclosure rates (some upwards of 78% over the last year).  So, the “fix and flip” won’t work.  But these high foreclosure areas are also experiencing the highest demand for rentals.  If you purchase one of these properties at $100,000 and finance 80% your PITI (principle, interest, taxes and insurance) would run about $650 but the rents investors are collecting in these areas are between $900 and $1,200 a month.  Further, rents are rising about 3-5% a year while vacancy rates are below 5%.  And if you look at the current building trends, there are very few new units coming on line. The numbers are showing a trend that supports owning investment property.  How does an extra $500 a month sound to you?

Now before getting too excited we better discuss the “who” part of the equation.  There is no “free lunch” so you have to think hard about the risks involved.  Whether it is time, money or effort…. you will be giving it up.  With the tightening of credit standards you will have to be ready to put some money down.  Further, most of these “deals” require some repair.  And finally, many people aren’t comfortable being a landlord.  But if you have some money in the bank, a good credit score and aren’t afraid of a little work there is money to be made.  And if you think you aren’t in the optimal position right now, you may be surprised how quickly you can get there by doing some planning.

A little planning goes a long way.  If you don’t have liquid cash but have a retirement account (401k, IRA, etc) it is possible to put that money to work.  If you credit score is less than 720 there are some quick fixes to help boost that score.  And if you think you aren’t cut out to be a landlord, well many properties will see a positive cash flow even with hiring a professional property manager.  The key to being successful is to plan and do the homework first.  Don’t fall trap to the television shows.  Surround yourself with experienced professionals.  They are out there and willing to share their stories.  If you are interested but don’t know where to start or the questions to ask, start with the following:

1.  Do I know what my credit score is?

2.  Do I have some cash reserves AND money for a down payment (savings, 401k, IRA, stocks, CD’s, etc.)?

3.  Do I have an understanding of construction (repair costs, time lines, permitting, etc.)?

4.  Do I have the time to manage a “project”?

5.  Do I understand the liabilities and benefits thoroughly?

If you don’t have a sure answer to these questions you need to get them to before getting started.  And even if you answered “no” to some of the questions it doesn’t mean that you are suited to own investment property.  You just may need to hire professionals to help get you on your way.  Many professionals don’t charge for their services up front and often will educate you for free in hopes that you will use their services later.  Further, there are many experienced investors out there that are willing to share their experiences with no motive other than to share their success.

If you have specific questions or want help getting started you can email me at andrea@1228home.com