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Recession? Where to wait it out?

John

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It's looking more and more like we'll be seeing at least a short recession, along with continued decline in the US dollar. I'm meeting with my financial adviser later today to move some things around. I already have several options figured out, but I'm interested in more ideas.

Where are all of you stashing your money to ride this out?
 

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Russ H

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Where are all of you stashing your money to ride this out?
OMG, this is a GREAT opportunity!

Savvy investors buy when prices are down.

Foolish investors waits until things go nuts, then want to get in on all the action.

Our biggest problem right now is deciding what *not* to do-- there are just too many great investments/projects! (I remember Kimber, Diane or AroundtheWorld saying the same thing a few weeks ago).

Markets change, yes. You don't want to be invested NOW in something that's going to trend downwards in a recession-- but you may want to time things so you pick up whatever you know when it starts to bottom out.

Picking the bottom is hard-- but that's where the money is in a recession.

For us, this is a *fantastic* time-- construction is WAY down, meaning we have lots of contractors competing for the projects we're working on. No 6-10 month waits-- they want to start NOW! Our only problem today is we need more money, b/c so many contractors are available, we can do multiple projects simultaneously-- and get them up and running faster!

It's looking like we'll have the additional funds within the next few weeks, if all goes well. :)

Or perhaps I misread your post-- do you really plan on doing *nothing* with your money while everyone who has not planned ahead panics and sells cheap?

-Russ H.
 

JScott

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Here's what I've done:

- I'm keeping a lot in cash right now (which was planned, as I intend to start doing Real Estate deals in the next couple months, and want the cash for those deals);

- I have reallocated my portfolio to hold a higher percentage of bonds, a lower percentage or emerging markets equities (which have had an annualized gain of over 50% the past few years, so were out of balance anyway), a lower percentage of small cap US equities, and a lower percentage of high-yield (i.e., junk) bonds;

- I have sold off all my REITs (since I'll be investing directly in real estate myself);

- I have increased my private equity holdings (angel investments).
 
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John

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Thanks guys. I'm basically looking for relatively "safe" investments to hold my cash while watching for the bottom and then jumping back in. I may even just leave it in a money market fund for a while.
 

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Recession? Where to wait it out?
The answer you weren't looking for:
By continual investment in myself, my [future] business, my health, my close relationships, and my education. You will find that an investment in yourself pays in ANY MARKET!!!


The answer you were looking for:
Money markets, municipal bonds, EURO currency and commodity resources such as oil, gold, and silver.
 

Jorge

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If you think emerging markets are not going to be affected with a US recession you're dreaming....
I'm kind of ignorant on this topic. Could you explain a little further? I'm really interested.

Thanks!
 

JScott

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If you think emerging markets are not going to be affected with a US recession you're dreaming....
I'm going to assume this was in reference to my post (since I was the only one, I believe, who mentioned emerging markets)...

As I mentioned in my post, I've reduced my emerging markets exposure, because I agree they'll be affected.
 

NerdSmasher

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Honestly, I don't see how you could go wrong with oil stocks currently... Recession or not, until an alternative is found, we're gonna be using a lot of it, lol. Heck, the recession could be caused because of the high price of oil... which would probably only get higher during the recession! Terrible how that would just extend it... but, still a good investment for our purposes, I imagine.
 

hakrjak

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I still like rental property in markets where the downturn isn't really hitting too hard. How can you beat 5.5% 30 year fixed mortgage rates? Here in Colorado Springs, we have a lot of foreclosures -- but prices are still edging upward, and days on market is still only a little over 60 days at any time these days. It's still not hard to find cashflowing properties with little down.

Besides this, I've switched my 401k over to money market about a month ago, and just yesterday moved it into funds that invest in emerging markets overseas, and company stock now that the DOW and NASDAQ are oversold in my opinion.

Cheers,

- Hakrjak
 

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randallg99

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i wrote extensively in another thread that the financial sector is going to be crushed. We have not had a single day melt down (gulp, yet) since there have been incremental injections and lowering rates but ultimately, we are headed into a shit storm without any gear.

the ramifications of a trying financial sector places a huge burden on the economy since much of the economic activity has been 100% correlated with leverage. There is currently evidence that credit card debt is now maxed and this was the 3rd tier the pundits were praying against. After negative savings and a liquidity crunch, the credit has shifted from one paradigm to the next and it is getting maxed at every stop.

Todays NY Times had an absolutely shocking chart in the biz section about defaults. Mortgage, consumer and CDS defaults are increasing at an incredible pace and there is no sign of slowing down. Almost 5% of mortgages are now 30-90 day default status. Credit cards and credit default swaps (CDS) are right up there with the rate of defaults. Mortgages are under the spot light right now, but we have to keep an eye on the CDS market. Once there is insolvency there, the US economy will really hit new lows. This unfortunately is not the alarming statistic. there is more-

Banks budget for 1-2% default... not 5%... this is 200-500% higher default that the banks typically keep in reserve!!!! its going to create a whole new world of hurt for a lot of people out there.

Now, this has been said before, but to make money in this environment you better not think for a minute the government gives 2 shits about the person who wrote on here a few months back regarding his own experience in a foreclosure... or anyone losing their house to the bank whether its 100k or 100mil. the govt is scared at the knees once that bank becomes insolvent... joe6pack is left to his own devices. It will have a chilling affect through out the entire assets markets unseen since 1930s.

now that banks have no choice but to tighten their belts, it makes it harder for people like me and you to go to Mr Banker and get a $1mil loan because they either a) wont have the funds or b) have such stringent regulations that make it prohibitive to borrow the money.

these are ideas and not recommendations-

*short the following- banks, short big houses (ML, Goldman, Lehman, etc), commercial and residential property owners and/or REITs.

*keep money in agency/grade AAA rated debt - but who the hell believes the ratings companies anymore?

*I would not invest any more allocation into oil now that the economy has absolutely started to show slowdown. The Euro is right behind the US. Oil seemed to have hit its ceiling at 100. I could be wrong, but the easy money has already been made in oil. Natural gas is another story. NG is priced proportionately low vs. oil and has room to grow. Now that colder weather is setting in, we should keep an eye on inventory levels.

*I also would not invest in foreign equities solely to hedge the US dollar since the US$ is already at a very low point.

*As more credit problems surface, I would put more money into gold. I originally expected gold to hit 900 by mid year 2008, but we already tapped it. I do expect gold to hit $2000 within 18-24 months. Junior mining companies are best positioned to exponentially grow from this at a 500-1000% rate of stock price growth if gold does continue to increase. This sector requires an iron stomach since many gyrations and corrections will occur.

*I also expect world economy to slow down. while there is competition for world economic status, the US remains the 800 lb gorilla in the room for a least one more generation and much of the rest of the world depends on US economy to hold strong... There are several sectors that went crazy in the last year due to hype. Dry Bulk Shipping companies and many companies associated with China are due for more severe corrections.

*I also see an aging population with limited choices at this juncture for elderly related products and care seem to becoming an important segment and very profitable. This sector touches an extremely emotional aspect and thats an easy sell... I want to say Pharmas will be a good bet, but I have to wipe a sweat from my brow any time I read their financials. They are such a hit or miss sector.

* we have got to believe real estate will crash much further from where it is now and boys and girls - this is where the money of all money will be made. Buy it the RK way, and make sure your cash flow is at the bare minimum positively cash flowing and the rewards will be astonishing. It wont be a one year flip, or 3 years. But in 10 years, the motherlodes of investing will pay off handsomely.

good luck.
 

Russ H

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Randdallg99 said:
. . .now that banks have no choice but to tighten their belts, it makes it harder for people like me and you to go to Mr Banker and get a $1mil loan because they either a) wont have the funds or b) have such stringent regulations that make it prohibitive to borrow the money.
In the few months that you've been talking about this, we've gotten over $400,000 in loans.

We're now working on getting another $650-850K. Several banks (as well as the SBA) are competing for our business.

While it's true that the markets are NOT crazy busy insane like they were a year or so ago, they're also not different from, say, 10 years ago.

I'll post when we get the money (prob a few months away still).

-Russ H.
 

SteveO

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Again, I am not disagreeing with the assessment. Like Russ, I just want to comment.

I talked to a couple of lenders recently that told me conduits are coming back into the market. They want to compete for the loans that I have been looking at.
 

Andrew

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Aug 8, 2007
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I agree with randall. Now is the time to play it safe. I use the same attitude as an investor as I do with my business. Be realistic and honest. When you use leverage, ask yourself what the worst case scenario is.
 

randallg99

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In the few months that you've been talking about this, we've gotten over $400,000 in loans.

We're now working on getting another $650-850K. Several banks (as well as the SBA) are interested.

While it's true that the markets are crazy busy insane like they were a year or so ago, they're also not different from, say, 10 years ago.

I'll post when we get the money (prob a few months away still).

-Russ H.

Again, I am not disagreeing with the assessment. Like Russ, I just want to comment.

I talked to a couple of lenders recently that told me conduits are coming back into the market. They want to compete for the loans that I have been looking at.

It has only been a few months and the cycle is much worse for institutions than I expected. Lot's of mortgage companies are now out of biz, banks are threatening insolvency, bond defaults are rising and CDS's are now surfacing as a risk to the institutions much greater than mortgages will ever impact global economy.

Of course qualified people will always be able to get loans... loans originated and securitized have dramatically dropped off... there is a lot less activity whether it's because people are not as qualified, collateral is not as strong, debt ratios are too high, less people applying... I dunno, your pick.

Please let us know how the SBA process goes for you (if you decide to go that route) When we switched banks a few years ago, it was like we were new citizens in a new world starting over again when we went for an SBA loan and the volume of paperwork and attorney fees started piling beyond belief. I would only go the SBA route in the future as a last resort. It was a 7 yr note for 500k at 6.75% (about 1pt higher than going rate at the time) with an enormous amount of over-collateral and layers of crap. The scenario would have been different if we had maintained a relationship with the one facility...

and Steve is correct, there has been more liquidity injected into the commercial markets since the spreads on LIBOR trades have been stellar (signaling more money available) whether the fed injections are working or foreign capital is seeping in, who knows? Institutions are getting a bit more aggressive now that they can make some money on the spread and they will aggressively compete especially now there are a lot less applications.

but guys, banks really like investors like us (Russ/SteveO/anyone with significant assets) because we are probably the exception to the rule. with the assumption we have decent net worth and there are opportunities we can exploit that those who have little in the form of assets are not able to.

Any joe6pack cannot qualify for an SBA let alone a bank loan unless there is qualified collateral.

and start ups of small businesses will be severely impacted since vast majority of startups rely on home equity for initial funding.

anyway- the markets have been severely impacted by credit crunch... foreclosures and defaults are increasing at highest pace in recorded history. I base much of my investment decision on this very fact alone and I am also basing much of my investment decisions on the demographic shifts our society will experience in the next generation.

if you are going to invest in real estate, I believe there will be more downside in the vast majority of the country. All of my offers are minimum 30% below asking prices.

Credit cards historically have a higher default rate than homes and autos, but this chart from the NYTimes is pretty chilling and exemplifies my thought process that banks will have no choice but to hunker down until defaults stabalize.

http://www.nytimes.com/imagepages/2008/01/14/business/20080114_SPEND_GRAPH.html

January 14, 2008
 

Russ H

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Please let us know how the SBA process goes for you (if you decide to go that route) When we switched banks a few years ago, it was like we were new citizens in a new world starting over again when we went for an SBA loan and the volume of paperwork and attorney fees started piling beyond belief. I would only go the SBA route in the future as a last resort. It was a 7 yr note for 500k at 6.75% (about 1pt higher than going rate at the time) with an enormous amount of over-collateral and layers of crap.
Any joe6pack cannot qualify for an SBA let alone a bank loan unless there is qualified collateral.
This would be our third SBA loan.

I was very much a "joe6pack" when we applied for our first SBA loan. We had NEVER invested in or run any business other than our own S-businesses.

Yes, the loan takes lots of paperwork. But have you seen the paperwork for buying a house lately? The only real difference between the two loans is that the title co. and RE agent are so familiar w/the house loan docs that they *breeze* through them (and the title co fills out most of what we need to do, save for signatures)-- but an SBA loan requires the APPLICANT to fill out much of the paperwork.

So it seems like a crapload of paper.

I find the terms of your loans interesting. Our first SBA loan was a 504-- for 20 years, at 5.75% interest. We've already paid a significant chunk of it off, and we've only had it for 4 years!

The second loan was a 7a that we needed FAST to close on a property. We got it in 3 1/2 weeks, for a rate that was a tad higher than standard residential loans. But it was WAY WAY cheaper than our alternatives-- hard money loans.

We refi'd and paid off the SBA loan 2 years later. Yes, it had a significant pre-payment penality. But the property had gone from being worth $1.5M to $2.8M (and we didn't do any major improvements, we just bought right). So paying $24,000 in pre-payment penalties was a small thing when our monthly payments went down by $3K/mo (and our equity had increased by $1.3M, 400% more than we had into the prop at that time.

Do I like the SBA?

Yep.

But only when it makes sense. In a lot of cases, if you can get residential grade RE loans, the fannie mae/freddie mac stuff is a lot cheaper.

-Russ H.

PS It doesn't hurt that my wife worked for FEMA before she became a hired gun. She is an absolute wiz with government paperwork. I am not worthy! :hl:
 

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I talked to a loan officer from BoA and with a mortgage broker. Both are offering me very nice loans, very low or none origination points, no-docs, quick closing, minimal downpayment (although banks are asking for higher reserves) for me to buy SFHs if I want to. I am seeing a few houses that are cash flowing and I can get in with pretty much no money down... hmm for some reason this down turn is looking attractive to me. And they are coming to me, I am not

Now I need to go back and concentrate on those multi deals and see how can I get them going.

So probably I will 'weather' this storm by buying more units.
 

andviv

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Based on what the banker I talked to about SBA loans, they like some type of businesses better than others. Depending on your business they can facilitate loans for acquiring property for 'expanding' your business. They do not lend money to buy investment property, but they do if the property 'is' the business (like in Russ' case, the B&B). I'd think in Russ' case they will give him money as his business is expanding. Loans for 'starting' a business were more difficult to obtain (again, all of this is based on my conversation with the bank's loan officer in charge of their SBA loans).
 

Russ H

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Good points, andviv. The only SBA loans we've gotten have been for an existing B&B (the 504) and to develop a new B&B (the 7a).

So I really have no experience with the SBA's receptivity to other types of businesses.

-Russ H.
 

MJ DeMarco

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I talked to a loan officer from BoA and with a mortgage broker. Both are offering me very nice loans, very low or none origination points, no-docs, quick closing, minimal downpayment (although banks are asking for higher reserves) for me to buy SFHs if I want to.
I just closed today on a $1 million dollar loan with no closing costs. I had to jump thru a little more hoops than normal ... asset verifications, tax returns -- the last few loans I drew weren't as thorough.

In my loan search, foreign money (HSBC [Shanghai] and ING [Netherlands]) seems to be supplying money to the credit markets. In my case, I used ING - all other offers came from foreign money.
 

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Pinnacle

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I had a plan to buy some mortgage notes when the markets dipped a bit more. I would take randall's advice with purchasing homes and apply the offer of 70% asking price to the purchase of the notes. Defaulted mortgages, especially since they are in such massive volume, I know will be available for pennies on the dollar.
 

andviv

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I had a plan to buy some mortgage notes when the markets dipped a bit more. I would take randall's advice with purchasing homes and apply the offer of 70% asking price to the purchase of the notes. Defaulted mortgages, especially since they are in such massive volume, I know will be available for pennies on the dollar.
This was something I was looking at as well. The people I've been talking to told me that banks will give huge discounts but you have to buy volume (meaning a few million dollars). I don't know how it would be handled if I decide to buy, say, $750K or $500K, or even less (maybe one or two notes for very good properties).

It'd great to get more info about this.
 

Edge

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This was something I was looking at as well. The people I've been talking to told me that banks will give huge discounts but you have to buy volume (meaning a few million dollars). I don't know how it would be handled if I decide to buy, say, $750K or $500K, or even less (maybe one or two notes for very good properties).

It'd great to get more info about this.
I think a lot of the money is being made by being the one to purchase in bulk and breaking it out to the smaller guys.
 

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