The Village Discovers The Idiot Works at AIG

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Before we even talk about news today, let me share with you the latest outrage of the moment. 

 

The latest sign of outright stupidity, executives from American International Group (AIG), the insurance conglomerate that was recently bailed out by taxpayers to the tune of $85 billion, held a party.  But it wasn’t just any old party, according to the Washington Post.  Folks this one cost over $440,000 and was held at the 5-start St. Regis Resort.  They spent over $139,000 on rooms, over $147,000 on banquets, and $3,000 for in room dining.  And because these executives have had a rough few weeks, they spent over $23,000 at the spa.

 

I know, I know you say…Chris, you’re always telling us to think positive, live a life of abundance and not of scarcity, and think BIG.  Well these folks certainly thought big alright.  But when the village calls and asks where its idiot went, let them know he was at the St. Regis working with AIG. 

 

Now…moving on.  The stock market struggled again today, dropping below 9,000 as investor panic continues, sending the market to its lowest intraday level since July 1, 2003.  What weighed on the Dow?  General Motors hit a 58 year low today…so if you had bought $1 in General Motors stock in 1950 it would be worth $1 today (not including dividends, of course). 

 

In a sign of global financial crisis, Iceland suspended all stock trading today and took over the country’s third largest bank.  The nation’s government also setup a new bank that will take over the operations of the other failed banks. 

 

Now, on to our real estate investor education section …

 

Money Matters in Tough Economic Times – Should You Reduce Your Debt Load or Increase It?

With the recent demise of the investment banking model, tightening lending standards, rising unemployment, failing car sales and nervous credit card companies the issue of debt load is quickly becoming a topic of concern and controversy. Should you reduce your debt load or increase it? There are pros and cons to each decision every short sale investor should be aware of in order to make an informed decision about their personal situation.

Scenario #1: Reduce your own debt load. Common wisdom holds that paying down debt is a good thing since it protects you from unexpected events like job loss due to down-sizing or other financial turmoil. The ability to pay cash saves money typically allocated to interest payments.  Additionally, having a low debt to income ratio makes you appear more financially stable.

Considerations: While owing little to no debt is indeed one method to avoid interest payments it must be tempered with rising rates of inflation and the actual cost of borrowing. Today’s interest rates are still at historic lows especially when measured against inflation.  As for the low debt to income ratio – it also makes you a great target for potential lawsuits in addition to allowing your money to sit on the sidelines instead of work for you.

Scenario #2: The bank reduces your credit limit. HELOC’s, LOC’s and even credit cards may soon feel the impact of tighter lending standards resulting in decreased lines of credit and increased debt to income ratios which could curb your ability to obtain new financing or – worst case scenario – put you over the credit limit and result in additional fines and higher interest rates.

Considerations: Banks are cutting back on credit and expected to continue to do so in the immediate future. Keep an eye on your debt to income ratio by maintaining a healthy reserve and “buffer” when buying short sale properties. Liquidity is critical as is the ability to demonstrate a track record of success.

Scenario #3: Increase debt load.  As credit becomes more difficult to obtain – it also becomes more valuable. Rather than decreasing credit lines, now may be the time to increase your credit to preserve your buying power and liquidity during tough times.

Consideration: Despite all the discussion of “moral hazard” and other philosophical debates, take time to consider which person the bank is more likely to work with should things go wrong…

Individual A: Mr. A has diligently paid down his debt and has 50 percent equity in his home. Unfortunately, inflation and lack of return on recent investments has left him barely able to keep pace with inflation on his salary. When his job is downsized, unemployment runs out and he is unable to increase his credit line or make minimum payments. Mr. A is facing foreclosure and a loss of all his equity.

Individual B: Mr. B makes prudent use of credit cards, a line of credit and has several million dollars of debt spread across several real estate investments. He also was downsized but has significant monthly cash flow resulting from his real estate investments. Although Mr. B is also facing financial hardship, his real estate is highly leveraged and not attractive to the bank.

Now…ask yourself one simple question…if you were the banker would you be more likely to work with Mr. A or Mr. B to help with short term financing or a bridge loan?

See you at the top!

 

 

Chris McLaughlin, J.D., M.B.A.
web: http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com

Phone: (800) 452-7627

P.S.: 

How about instead of wasting taxpayer dollars getting a free ride and having a great party, you actually make money in this market on your own?  Join us for our fr’ee Webinar tonight that will reveal the Top 12 Strategies on Getting Rich with Short Sales (if AGI will waste $400k, imagine what a dumb bank might take on your next proposal):

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P.P.S.: If you really want to get started building your wealth, now that recognize that your 401(k) isn’t going to do it, what are you waiting for?  Take action today! A journey of a thousand miles begins with a single step. Take that step right now by clicking here:

 

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