Real Estate Books & Financial Advice

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DollarOutta15cents_IHB

New member
First time poster, long time reader.



I have been reading the profiles by IR for some time now. Also I have read quite a few of his analysis posts along with the comments on this board. From it all I have learned about rental parity, renting vs. owning, the bubble, structured financing, etc.



A little about myself. Recent transplant from the Pasadena area. Just starting my career, 27 years old (2nd year attorney). I am currently in 90k of student loan debt. I live with a couple in Woodbury (I believe its in the Treo plan). Anyways I pay $935/month including utilities, which you really can't beat living alone. But debating renting a 1br somewhere in the area and eat the extra costs.



That being said, I have a few questions:



1) What are some good real estate books to read, in terms of learning about investing in real estate, real estate transactions, financing, being a landlord etc? I realize a vast majority of the people here are saying prices will continue to fall, but I still like to get a head start on my education so that I know what's going on when the time is right. I am currently reading the book by IR, but I have a hunger for more.



2) With 90k in debt, what do you suggest I do? As I'm sure some of you know, the interest is not deductible if you make over 70k (a category I am in). My interest on 70k of the loan is at 4.5% and the other 20k is at 5.7%. I am trying to pay off the 5.7% loans as quickly as possible. The loans are set to be paid off in 20 years, but I'm trying to get rid of them as soon as possible. Should I just make the standard payments and save up money for a larger down payment on a home, and then refinance the student loans into the home, so that the interest is deductible (even a slightly higher interest rate)? Or should I just try to reduce my debt over the next year or so, but then be stuck with a much smaller down payment, when it is time to buy. Or is there another option that I'm not thinking of?



Any advice would be great on both questions.
 
It all depends on how much you have saved. If you feel you could live comfortably for a year on your savings, then I would start thinking about a financial plan to deal with all of these things. The economy is pretty shaky and I don't know what your specialty is but lawyers are being laid off right and left lately (this is why I say that you should have one full year of savings). Saving for a house is also a great plan. If you have the cash, there should be some great opportunities in 2-3 years. You might also consider buying a duplex (or more) and living in one unit and renting out the others. My husband did this when he was in his late 20's and the property has given us some great rental income, there are some areas where deals on apartments are very reasonable now. Good luck and welcome!
 
[quote author="DollarOutta15cents" date=1239241308]First time poster, long time reader.



I have been reading the profiles by IR for some time now. Also I have read quite a few of his analysis posts along with the comments on this board. From it all I have learned about rental parity, renting vs. owning, the bubble, structured financing, etc.



A little about myself. Recent transplant from the Pasadena area. Just starting my career, 27 years old (2nd year attorney). I am currently in 90k of student loan debt. I live with a couple in Woodbury (I believe its in the Treo plan). Anyways I pay $935/month including utilities, which you really can't beat living alone. But debating renting a 1br somewhere in the area and eat the extra costs.



That being said, I have a few questions:



1) What are some good real estate books to read, in terms of learning about investing in real estate, real estate transactions, financing, being a landlord etc? I realize a vast majority of the people here are saying prices will continue to fall, but I still like to get a head start on my education so that I know what's going on when the time is right. I am currently reading the book by IR, but I have a hunger for more.



2) With 90k in debt, what do you suggest I do? As I'm sure some of you know, the interest is not deductible if you make over 70k (a category I am in). My interest on 70k of the loan is at 4.5% and the other 20k is at 5.7%. I am trying to pay off the 5.7% loans as quickly as possible. The loans are set to be paid off in 20 years, but I'm trying to get rid of them as soon as possible. Should I just make the standard payments and save up money for a larger down payment on a home, and then refinance the student loans into the home, so that the interest is deductible (even a slightly higher interest rate)? Or should I just try to reduce my debt over the next year or so, but then be stuck with a much smaller down payment, when it is time to buy. Or is there another option that I'm not thinking of?



Any advice would be great on both questions.</blockquote>


The best real estate advice you will find anywhere is contained in the collective works of <a href="http://www.johntreed.com/">John T. Reed</a>. I can recommend him, his website and his books highly.



Your question of saving versus paying down debt is debated even among financial planners. Personally, I am an advocate of eliminating debt. Debt sucks. I used to have it, and I do not miss it. IMO, you benefit most by paying off debt, but it will delay your saving for a home. You should probably balance the two until you have enough for a 3.5% FHA downpayment and some reserve cash. Then aggressively pay down the student loans. This way you will be able to buy, and you will be retiring debt. Once you pay off your student loans, assuming you have already purchased, you can turn your attention to paying down the mortgage until you have 20% equity and you can refinance out of the FHA loan.
 
The edge of getting rid of debt is the return is lead pipe cinch certain.



If you have a loan at 4% or you might get 5%, you are giving up on a certain 4% to maybe get 5%. Maybe.
 
[quote author="IrvineRenter" date=1239269194]

Your question of saving versus paying down debt is debated even among financial planners. Personally, I am an advocate of eliminating debt. Debt sucks. I used to have it, and I do not miss it. IMO, you benefit most by paying off debt, but it will delay your saving for a home. You should probably balance the two until you have enough for a 3.5% FHA downpayment and some reserve cash. Then aggressively pay down the student loans. This way you will be able to buy, and you will be retiring debt. Once you pay off your student loans, assuming you have already purchased, you can turn your attention to paying down the mortgage until you have 20% equity and you can refinance out of the FHA loan.</blockquote>


Forgive me for my ignorance, and if there is a thread that already has this info, please direct me, but can you elaborate more on the FHA loan and then refinancing. From my understanding, historically FHA loans have been for people with lower credit scores, and with smaller down payments. The downside of these loans were that the interest rates were a bit higher, and they were a bit more of a hassle when it came to the seller accepting a buyer using an FHA loan. From reading here, I was under the impression that FHA loans are nearly as low as conventional loans now? What are the benefits of refinancing to a conventional loan once i get 20% equity? Is it "just" the lower interest rate? Am I missing something?



This leads to a second question I have for IR, or any of the other astute members of this forum. IR usually profiles these homes where the owner withdraws equity from a HELOC and then refinances, and then gets a second, then gets this and that, or however they do it. Can someone explain what is going on exactly. I understand the basic concept which is they are essentially borrowing cash using the equity from their home. But can someone explain why they are using a HELOC and then refinancing, and then getting a second or whatever else they do (essentially the science behind it).
 
[quote author="DollarOutta15cents" date=1239325919][quote author="IrvineRenter" date=1239269194]

Your question of saving versus paying down debt is debated even among financial planners. Personally, I am an advocate of eliminating debt. Debt sucks. I used to have it, and I do not miss it. IMO, you benefit most by paying off debt, but it will delay your saving for a home. You should probably balance the two until you have enough for a 3.5% FHA downpayment and some reserve cash. Then aggressively pay down the student loans. This way you will be able to buy, and you will be retiring debt. Once you pay off your student loans, assuming you have already purchased, you can turn your attention to paying down the mortgage until you have 20% equity and you can refinance out of the FHA loan.</blockquote>


Forgive me for my ignorance, and if there is a thread that already has this info, please direct me, but can you elaborate more on the FHA loan and then refinancing. From my understanding, historically FHA loans have been for people with lower credit scores, and with smaller down payments. The downside of these loans were that the interest rates were a bit higher, and they were a bit more of a hassle when it came to the seller accepting a buyer using an FHA loan. From reading here, I was under the impression that FHA loans are nearly as low as conventional loans now? What are the benefits of refinancing to a conventional loan once i get 20% equity? Is it "just" the lower interest rate? Am I missing something?



This leads to a second question I have for IR, or any of the other astute members of this forum. IR usually profiles these homes where the owner withdraws equity from a HELOC and then refinances, and then gets a second, then gets this and that, or however they do it. Can someone explain what is going on exactly. I understand the basic concept which is they are essentially borrowing cash using the equity from their home. But can someone explain why they are using a HELOC and then refinancing, and then getting a second or whatever else they do (essentially the science behind it).</blockquote>


I'm sure IR will answer the FHA portion of your question. I believe most people got a HELOC because they were easy to get and much less expensive than a refi. However, most of the HELOC's were variable interest rates and went up. When the rate goes up (or they are otherwise maxed in credit) they refi'd into a lower rate than the HELOC and at the same time took more money out of the house. I don't really think you can call it a "science", unless you want to call it the "science of greed". For many people this just became an addiction, how else can you explain people who make 50K a year having remodeled kitchens, new high end cars and European vacations every year?
 
<strong></strong>I don't really think you can call it a "science", unless you want to call it the "science of greed". For many people this just became an addiction, how else can you explain people who make 50K a year having remodeled kitchens, new high end cars and European vacations every year?<strong></strong>



I like this. Nicely stated.
 
[quote author="DollarOutta15cents" date=1239325919][quote author="IrvineRenter" date=1239269194]



This leads to a second question I have for IR, or any of the other astute members of this forum. IR usually profiles these homes where the owner withdraws equity from a HELOC and then refinances, and then gets a second, then gets this and that, or however they do it. Can someone explain what is going on exactly. I understand the basic concept which is they are essentially borrowing cash using the equity from their home. But can someone explain why they are using a HELOC and then refinancing, and then getting a second or whatever else they do (essentially the science behind it).</blockquote>


They did this because they could and got greedy. This was only free money to the extent they leveraged it against a perceived rise in equity (which had no real basis). These homeowners still owed the money, but when you can withdraw the cash $100K at a time, it's like an ATM, because if you were to borrow the traditional way, you wouldn't be able to get financing for a vacation and it would be difficult for large home improvement projects unless you did a HELOC. Because creative financing was available, they could refinance the whole debt. So these middle-class assholes were living like they were rich. In reality, they are all small timers. Amatuers really. Now many are defaulting on their loans/HELOCS. Yet they are still driving their Escalades, carrying LV or Gucci purses and having their jet skis sit in their garage.
 
I understand that they were borrrowing money, and livin' the good life. But what I don't understand is how it was done (that's what I'm referring to when I say the science - obviously now a poor choice of words). But perhaps someone could walk through the story line of someone who buys, gets a HELOC, refis, and why that owner, got a second heloc instead of refinancing or whatever it may be. IR shows a history of the financing of the home, but they always seem to be different. Somtimes they put 20% down then get a HELOC, sometimes they refinance, sometimes they get a second HELOC, sometimes they get a second mortgage. So what I was really asking was why they used this method or that method to extract the money (and live the good life).
 
[quote author="DollarOutta15cents" date=1239339698]I understand that they were borrrowing money, and livin' the good life. But what I don't understand is how it was done (that's what I'm referring to when I say the science - obviously now a poor choice of words). But perhaps someone could walk through the story line of someone who buys, gets a HELOC, refis, and why that owner, got a second heloc instead of refinancing or whatever it may be. IR shows a history of the financing of the home, but they always seem to be different. Somtimes they put 20% down then get a HELOC, sometimes they refinance, sometimes they get a second HELOC, sometimes they get a second mortgage. So what I was really asking was why they used this method or that method to extract the money (and live the good life).</blockquote>


I think you are imagining this was difficult. All people did was meet with a mortgage broker who filled out a bunch of paperwork. The homeowner would sign the papers, then they would go pick up a check. It is no more complicated than going to a bank and making a withdrawal on your account. It was too easy, that was the problem.



As for the FHA, it is a program designed to help people buy homes that do not have a 20% downpayment. The interest rates are a little higher and you pay FHA insurance, but the spread is not very high. The insurance adds to your monthly payment. Since there are additional costs in the loan, and since the FHA will not allow you to borrow stupid amounts of money (They are concerned about being repaid), you can borrow less money with the FHA. This makes your bid less competitive, and it forces you to settle for less house. This will be less of a problem over the next decade because the FHA and the GSEs are going to be the only games in town. The FHA is a good program.
 
[quote author="DollarOutta15cents" date=1239339698]I understand that they were borrrowing money, and livin' the good life. But what I don't understand is how it was done (that's what I'm referring to when I say the science - obviously now a poor choice of words). But perhaps someone could walk through the story line of someone who buys, gets a HELOC, refis, and why that owner, got a second heloc instead of refinancing or whatever it may be. IR shows a history of the financing of the home, but they always seem to be different. Somtimes they put 20% down then get a HELOC, sometimes they refinance, sometimes they get a second HELOC, sometimes they get a second mortgage. So what I was really asking was why they used this method or that method to extract the money (and live the good life).</blockquote>


Well here's what our neighbors did:



1997 bought a small house in Santa Ana - purchased for around 200K

Refinanced that house five years later and took out a 50K HELOC

2003 put 20K down on a house in Irvine and financed the rest (700K house)

Rent out the Santa Ana house

2004 Take out a 200K HELOC against the Irvine house

2006 - Top of the crazy bubble - purchase a house in Anaheim Hills for 1.55 Million - Put 100K down and finance the rest

Load up the house with plasmas, 6 bedrooms, outdoor BBQ areas, pools, buy new Land Cruiser, New Lexus for the wife

Rent out the Irvine House

2007 Trouble Starts

Foreclose on the Santa Ana house - walk away from the HELOC and Mortgage - The total Default was 585K

Foreclose on the Anaheim Hills house - Total Default 1.475M - Back to the bank

Move back in to the Irvine House

Property taxes 1 year delinquent - Preforeclosure on the Irvine House

Delinquent HOA fees - Abstract Judgement from Toyota Motor Corporation on the Irvine House



And there you have it! So they probably took about about 600K from all of their homes over the past 6 years. They are in trouble now, however. I can't imagine the 1099s they must be getting to pay back the taxes on those defaulted HELOCs.



They still live in Irvine. They still drive their fancy cars. They still use all the HOA ammenities even though they don't pay their dues. But not for long.



It's not hard to figure out. I owe 250K on a house worth conservatively 650K. I could easily get a HELOC for 150K. I could then use that to put down on a 450K house in this down market and the whole ball starts rolling again. Obviously lending rules are so much more stringent that I'd never get away with it with my salary.



Basically people used their houses for ATMs. HELOCs were free. You could have a 100K balance and pay $200 a month (interest only) and write it off at that! Who cares if the principle never goes down! Our neighbors bought boats, redid their kitchens and yards to the limit, bought second and third houses, took three cruises a year. I have not seen a single one officially get served papers and told to vacate their houses, but that should happen according to the foreclosure sites that list their homes with Notices of Default.
 
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