Don’t invest in a vacuum
Let’s face it – we live in a world-wide economy. And property investing in the United States requires being cognizant of the potential pitfalls that await us from overseas markets. It seems like every day there are new, gloomy reports of impending financial disaster coming out of Europe. The latest news comes this week from Spain, as their banking industry seems poised to collapse. Banco Popular, as well as Bankia and Bakinter, three of the largest banks in Spain, have been downgraded by the credit ratings agency Standard & Poors. S & P lowered their ratings to near-junk standards, as these banks have been hit hard by increasingly bad loans, especially mortgages.
In addition, Bankia, which is Spain’s largest mortgage maker, announced on Friday that it required an infusion of an additional 24 billion dollars to stay afloat. Spain had seized the bank earlier this month, due to the bank’s huge portfolio of delinquent mortgage loans. The greatest fear is that Spain will not have the ability to raise the funds to keep Bankia alive. If this mammoth lender were to collapse, the entire European banking community will be rocked to its core. Of course, the reverberations will be felt here in the states, much like a financial tsunami hitting our shores.
The bursting of their bubble
Spain is currently experiencing the same bubble burst in real estate that began here several years ago. However, their central government may have waited too late to try to repair the rupture to their economy. There is a double whammy on the horizon for them: the genuine threat of a run on Spain’s banks, combined with the government’s inability to raise funds to cover all the bank losses in the short term. Currently, short term debt is being offered by the government there at a whopping 7 percent in order to entice foreign investors. It’s a very ugly situation indeed.
Will Germany have to come to the rescue again, as they have several times already with Greece? It’s looking more and more like a strong possibility. But at some point, Germany itself will be simply unable to financially take the lead as the main country in helping to bail out weaker European Union countries. The writing’s on the European wall – and it’s not looking very positive in the long term.
For this reason, property investors here in the Unites States should be extremely concerned about the negative consequences that lie in wait for us. What exactly does this mean for the small investor in our country and the ability to obtain an investment property mortgage? Will the overseas crisis come to our shores? And if so, when?
The tsunami ahead
As I’ve written before, I think this financial tsunami will occur in some form, and will be making its way over the Atlantic to our shores by late this year. And the net effect for small property investors will be a further tightening of credit. It will be
much harder to get an investment property mortgage later this year and going forward well into next year as the crisis in Europe develops and intensifies.
So the end result is that you should be planning your buys of investment property accordingly. If you haven’t already this year, be sure to speed up your property purchases as soon as possible, and do not wait till the end of the year to try to go out searching for property and locking up an investment property mortgage. By the end of this year banks in the United States will be feeling the crippling effects of what is going on overseas. Banks here will try to tighten their credit in order to ensure mortgage repayments, ratcheting up their standards for lending in the process. Small investors will be hit with higher FICO scores in order to qualify for a mortgage, as well as much lower loan-to-value ratios on all new mortgages.
A new bottom line
The new bottom line is that it will be much more difficult to increase leverage on your properties. More stringent qualifying standards will apply not only when you try to purchase new investment property by obtaining an investment property mortgage, but also when you refinance any of your existing properties. So your ability to leverage will plummet, and that will mean more cash out of pocket in order to help finance your new purchases. With less leverage of course, you will not be able to grow your real estate investment holdings as quickly. It will also create a scenario where your returns on investment will be substantially reduced as well.
So be aware of all that’s going on in Europe right now. Banco Popular, Bankia and Bankinter are not merely names of distant lenders – their failure would have far-reaching effects on how you purchase your investment property here in the states. To protect yourself, purchase and lock in an investment property mortgage now, well in advance of the end of this year. And plan accordingly. You should be planning your next year’s purchases based on the assumption that higher credit scores will be necessary to obtain that investment property mortgage, and your ability to leverage will be lessened. Also prepare for a reduction in mortgage loan-to-value ratios offered by lenders here. This means you’ll have to make up the difference utilizing your own cash on any new investment purchase.
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