Investing in Your Home

Someone once told me that there are two types of investors out there: professionals and amateurs. Professionals are people that make money investing, whether that is stock, bonds, forex, real estate, whatever the medium they choose to practice the point is they are profitable. Amateur investors on the other hand are very rarely profitable, and when they are they tend to lose it in future investments. They may choose to focus on the same mediums but whatever the reason, when chips are counted they are usually in the red with many many battle scars.

Ultimately there is a single mindset that is responsible for this paradigm. The ameteur question before taking a position in a particular investment is 'how much money can I make' while the professional in the same situation is asking 'how much money can I lose.'

Think about this difference for a moment. Now ask yourself what would you rather hear "good news" or "bad news." If you are starting or already think like a professional you want the bad news, because the bad news is what forces you to consider potential loss. Moreover it puts you in a position to be proactive and do what needs to be done to ensure whatever the bad news is, it doesn't have a major effect on your life. Good news on the other hand is awesome to receive and makes us feel good, but rarely does good news force us into a particular investment... after all we want to be in the investment before the good news hits the wire so we take advantage of that news and the profit that will follow. What is the old saying lurking the the background of this last thought?

Buy low, sell high. Easily said, but how do we accomplish this? The answer is above... we must ask ourselves before each investment "how much can I lose?"

Let's explore this with a real life example. Depending on which source, 2005 was the peak of the real estate market. Since then and very recently we have seen real estate value fall dramatically across the Country. The boom in real estate was a result of many things but primarily the availability of financing, exotic programs that allowed people to defer interest, and/or finance 100% of the purchase. At this time and the years proceeding, it was not uncommon for people to pay more than the list price for real estate, and agent's were spouting the impossibility of home pricing falling.

The amateur investor looked at this situation and agreed with the listing agent...and their train of thought went something like this: "home prices can't come down, real estate is safe, they can only go up, and how long am I going to sit on the sidelines not making any money. I'll buy now, and sell for profit when the market caps. But how can I afford it... option ARM perhaps, Billy's got one and he loves it, only pays 837 bucks a month on his 400,000 dollar home loan. Figures he'll sell in a couple years and buy a larger home, after all he's got 5 years deferred interest which the market and appreciation is essentially pay for. This is a no brainer. We need to start getting offers on the table before it's too late." The sad reality is this is not fiction, and many people fell into this trap and are now facing serious financial consequences.

The professional investor look at this situation a little differently... and their train of thought went something like this: "Yeah real estate is hot right now, but it can't go on forever, and when this cycle runs it's course we're going to see this bubble pop big time. Think about it. All these people buying homes with no money down. Taking out adjustable rate and deferred interest programs. When rates adjust higher, we're going to see a lot of people unable to make their new payment. If you ask me this is a catastrophy waiting to happen, and when it does guess who is going to be on the side line picking up homes for pennies on the dollar. Short sales and foreclosures is what I'll be looking at. Not to buy now, no no no, thinking three maybe four years down the road once this cycle turns the other direction. After all I don't pay retail for gifts when the Christmas sale is a couple months away."

Yes the professional has successfully weathered this storm, while the ametuer who may have made some quick appreciation in the short term is now probably underwater and deep in the red.

So while the amateur is thinking, 'me me me, now now now' the professional is more reserved 'is now the time, what can I lose." The amateur is exclamatory!!!! The professional is questioning.

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What prompted these thoughts this Sunday morning? I was thinking about the majority. The fact of the matter is about 95% of us think and act like amateur investors, while the remaining 5% profit from these mistakes by taking the time, asking the right questions, forming a plan, and being patient for the right opportunity to execute.

Right now we have seen interest rates reach all time lows. Point in fact it was not too long ago that we recorded to lowest 30 year fixed rate ever offered in our Country. Yet despite this fact, there are still many people sitting on Adjustable Rate Mortgages because right now their rate happens to be lower than what is offered on a 30 year fixed.

I feel sorry for these people. Inevitably we are going to see the value of the dollar fall (inflation), which will consequently force the indices up which is going to bring the adjustable rates up as well. By the time they recognize that they should refinance, 30 year fixed programs will be much higher and the benefit will be minimum. It's like putting a band aid on a wound, that we could have avoided by not running the knife across our arm. Rather than use the band aid to stop the bleeding, simply take the knife away from your arm and don't cut yourself.

Let me sight a specific point in our history that will help highlight what could happen. When President Jimmy Carter was in office back in the 1970s we saw fixed interest rates reach 18%. This was about 40 years ago... (do me a favor and google long term economic cycles you'll see they run in about 40 year increments depending the source). This happened in our lifetime, yet most people have either forgotten, don't know rates can go that high, or are simply ignoring the issue. Now if this happens, and it most definitely could (hyper inflation is a nasty beast no one can control and we're rattling it's cage) then your max rate on your adjustable rate mortgage is going to become a reality. Financing into a better vehicle won't be an option, and you'll be paying 9-14% (depending on your cap) when you could have refinanced now into a 30 year fixed at a rate of 4.75%

Now tell me what do you think the professionals have already done? They've refinanced so not to take any unnecessary risk. Unfortunately 95% of us, have decided whether consciously or not that this risk is worth taking.

And we wonder why most of the wealth in this Country is controlled by 5%.

I am happy to help anyone looking for solutions. Now is the time to discuss your options. After all knowing your options is the first step towards making a plan. And to be a professional we all must plan.