Can Devaluation Affect A Mortgage Contract? Have A Residential Rental, Mortgage & Cashflowing At Low Interest

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AngryCitizen
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Can Devaluation Affect A Mortgage Contract? Have A Residential Rental, Mortgage & Cashflowing At Low Interest

I'd like to ask the thread about thoughts on how residential rental assets will do in the near future. If one got into a house at a decent price, (interest rates are relatively cheap with good credit), and is cashflowing the house with responsible renters, (yeah, talent and luck are required here, but that's true of any investment), isn't it true that the contract with the lender remains the same in a currency devaluation situation? In other words, won't I be able to repay the loan with cheaper currency? Doesn't a change in an exisiting contract VOID THE CONTRACT? I don't see anything in my mortgage that says otherwise. Any thoughts?? Thanks in advance!

“I wish it need not have happened in my time," said Frodo.
"So do I," said Gandalf, "and so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given us.”

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Frodo: "I wish it need not have happened in my time," Gandalf: "So do I. And so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given to us." J.R.R. Tolkien (1892 - 1973) The Fellowship Of The Ring

zozem
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In 1933, the last time the US

In 1933, the last time the US government devalued the dollar, they simply changed the fixed exchange rate of dollars to gold. But that was back when we were on a gold standard. At this point in time, how it happens is uncertain. They could create more dollars OR just let the price of gold go up by no longer suppressing the price. In fact, this will probably start to happen anyway, in April, when the daily NY/London gold price fix, moves to China with the scheduled start of the Yuan based Gold fix. I heard the Shanghai gold exchange is already 50 times the size of COMEX.

One thing for sure, after such a devaluation, the price of everything goes up. That is, all the dollars in your pocket, being worth less, require more to buy the same product. I'm not a lawyer but I believe all contracts stay intact. While it might also seem that the US government's debt instantly becomes less, AND the value of your outstanding mortgage debt also becomes less, I doubt it will work out that way. Let's look at a few logical scenarios to see why.

1- Your mortgage payments remain the same and all you renters continue paying the same rent. In this scenario you stand even. 

2- Food and all necessities of life go up in price. Some of your renters choose to eat rather than pay the rent. You have to choose to evict or lower the rent. And since your current rents weren't automatically lowered under the devaluation, they proably seem high to new tenants.

3- You decide to sell the property. And because it is a hard asset, you'd expect it's value would appreciate. In theory at least. But with all the commotion of the devaluation and the many problems with defaulting renters, selling the property at a pre-devaluation price becomes problematic, to say the least.

4- Best case scenario: you lower your rents to keep you tenants, and although you're still making your mortgage payments, you monthly cash flow has also been devalued.

5- Or you choose to wait it out and sell. With your lowered rents and lower cash flow, your property is healthy again. But not all property owners faired so well, and sitting on negative cash flow properties have taken to offering fire sale prices, which puts your offering into a very difficult and competitive market.

Whatever calamity follows a currency devaluation: whether the old school bankers OR some new leadership take hold, I am betting that the stock market will remain functioning. Even if it has to be shut down temporarily. So I'm holding a lot of mining shares. They seem to appreciate even more than the physical metal.

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Rental Income!

   There are many things to consider when considering rental property.  Every area of the country has differing rental rates and vacancy rates. 

   We have been building new units for ourselves and for friends with fiat bucks.  We have several advantages over most in savings:   Our family real estate company (saves commissions on buying and selling). Our home/rental construction company (saves big fiat as we do much of the construction work).  Take fiat out of savings account (we are giving up a 0.2% savings rate for a 10% cap rate on the new units, try that in finding a used unit). 

If one wants to use a real estate agent to find a rental unit, you will have a difficult time finding a good return.   If you must borrow the funds from the banksters, your cap rate may drop to 2% or even less. 

There is an "art" to investing in rentals.  It takes years of work to refine the project into a money making event.  We have found that we can build our units for about 25% below the current assessed price and sales prices.  Never buy old, cheep, run down units.  Those are the units that will bring continual trouble and one will dream of the day that they are resold.  (Enough said)   Jim

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@ NW VIEW - Say Again?

NW VIEW wrote:

Never buy old, cheep, run down units.  Those are the units that will bring continual trouble and one will dream of the day that they are resold.  (Enough said)   Jim

I have been swooping crackerboxes and crapshacks for rentals, whether REO's or Lien Sales for over four decades and never lost a nickel on any of same.

Care to explain your logic there.

Cheers,

S. Rex

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Why Not, SR?

I have been in the real estate industry since 1974.  We owned two offices and the family still owns a local real estate company.  We have built homes and rental units for over 30 years and have followed the rate of return on the "old/needing continual fixing/needing upgrades/ and tenants in those units who are late with their rents and often move out in the night."

  If it works for you, well wonderful and keep up the great work.  We have bought REO's and repos and done very well over the years.  We fix them and resale them.   S.R., if I give all of our inside information, you will need to send me a pizza.   jim

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Spartacus Rex
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NW VIEW wrote: I have been in

NW VIEW wrote:

I have been in the real estate industry since 1974. 

What a coincidence.

'72 here

We owned two offices and the family still owns a local real estate company.  We have built homes and rental units for over 30 years and have followed the rate of return on the "old/needing continual fixing/needing upgrades/ and tenants in those units who are late with their rents and often move out in the night."

Hmm, as far as "homes" go, I am willing to do Custom if the margin is there, even tract is the subdivision is large enough, but simply to compete for nickels against the big homebuilders?

No thanks, as it was far more profitable to focus on commercial tilt ups and those sweet "self storage" while land was still reasonable.

When it comes to tenants, perhaps it is possible that I am a better judge of character / better at qualifying same, as I have low turn over, but then again, I am not that greedy, and know how to write a contract that let's them know they want to be my friend and keep me happy, not piss me off and be my enemy.

If it works for you, well wonderful and keep up the great work. 

We have bought REO's and repos and done very well over the years. 

Then,,,, what am I missing?

We fix them and resale them.  

Let me guess, so had some tax loss/ write offs expiring, thus influencing the decision to sell?

S.R., if I give all of our inside information, you will need to send me a pizza.   jim

Wow, that is some extraordinarily 'reasonable' proprietary info, unless that is a Beluga Caviar Pizza you are talking about there James. laugh

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@ Spartacus Rex

Sounds like you have a good handle on the industry.  However, just in case, if there is an outside chance that I have earned a pizza, here is the best menu around:

http://www.papapetes.com/menu/

Jim

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zozem
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No doubt, real estate is a

No doubt, real estate is a good investment if you know what you are doing.

Anyone else have some insights on what might happen to rental properties if/when there is a dollar devaluation? I think Jim Willie said there would be two devaluations.

Is there any way for a property manager to prepare for such a possibility? Maybe long term options, that you hope you'll never cash in, as an insurance policy.

I was reading Simon Black's daily message. He said:

"The subprime bubble was “only” $1.3 trillion.  Today, conservative estimates show that there’s over $7 trillion in negative rate bonds. What could possibly go wrong?"

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Papa Petes in Longview

Oh boy, how I do miss that place. One day I will be back!

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AngryCitizen
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Zozem

Or:

6) Keep the property rented and collect a net of $5k/yr after mortgage & expenses, and pay for my kid's college with it, keeping it rented at the current rent or higher. (It's a landlord's market in this popular, small SW town and it's not hard to rent.) Although it's an older home, it's in good shape & easy to keep up. The way the rental contract's written, any plumbing, etc is the renter's responsibility. We seem to have a knack of picking responsible renters, (who are trying to recover from defaulting on their mortgage, don't you know.)

Back to the contract / law question about devaluation and the mortgage contract....Any more ideas?

Thanks for the previous input & in advance for the future input! I'm sure I'm not alone in this boat.

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Frodo: "I wish it need not have happened in my time," Gandalf: "So do I. And so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given to us." J.R.R. Tolkien (1892 - 1973) The Fellowship Of The Ring

AngryCitizen
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Landlord Choices

It's a good cash flow, but what would happen in a devaluation environment?

Any thoughts?

Thank you in advance...

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Frodo: "I wish it need not have happened in my time," Gandalf: "So do I. And so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given to us." J.R.R. Tolkien (1892 - 1973) The Fellowship Of The Ring

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@ AC

I'm not exactly sure what, (or the reason why), you are concerned with your mortgage, since you have stated that it is current / not in arrears.

Unless your specific mortgage contract contains a provision whereby you must at least maintain same below a specific Loan To Value (LTV) ratio, whereby should property values in your local market suddenly drop precipitously, thereby causing a "margin call" so to speak, requiring to pay down the outstanding balance to bring back within the  LTV Ration stated in the Mortgage, and a failure to do so within the specified time given for Remedy, would allow for the Bank to call the entire Loan it, however such would be clearly stated in your Mortgage Agreement, which one presumes you read prior to signing.

Also it is quite common for Banks to have a provision within the Mortgage Agreement stating that the Property Taxes must be kept current as a condition for funding the Loan, whereby if you failed to meet that obligation, they could call in the entire Loan as immediately due and payable.

One might suspect that you have a copy of your Mortgage Agreement and should not have too much trouble in locating any such clauses therein, however if that fails, simply pick up the phone and call your Mortgage provider/servicer and simply ask them directly.

Cheers,

S. Rex

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Devaluation of the $ and Mortgage

SR,

Thanks for that perspective on my question. I had not considered that property value could cause a problem, (since I am not delinquent on the loan).

That's why I axed the question-to learn something I didn't see~thanks!

Any more insight is appreciated, as I ask the question to attempt to determine if this asset is:

1) Worth keeping or should I sell out & pay the tax on the cap gain.

2) What has to be done to make it worth keeping & weigh the costs of doing what's needed.

3) Peek behind door #3 to see if there's more I had not considered.

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Frodo: "I wish it need not have happened in my time," Gandalf: "So do I. And so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given to us." J.R.R. Tolkien (1892 - 1973) The Fellowship Of The Ring

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Bad News For Real Estate

Somewhere in the last three days, I clicked on something here on TFMR. It was an article about the coming devaluation. It mentioned that existing home loans would be recalculated in the event that the dollar is devalued. I thought it sucked but since I don't do rentals, it wasn't a big deal to me and now I can't remember where I saw it.

I do know this : Core city slum lords might want to divest ASAP since there could be riots and property damage when people figure out that "Change" means "a Change for the worse". At the very least, make sure your rental property is insured for fire, riot and civil unrest. This could get real bad real soon.

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