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I heard something awfully scary and thought provoking the other day. A friend of mine is “considering foreclosure” on his investment home, yet he’s not having any financial troubles! He explained that he just doesn’t want the home anymore and just wants to give it back!

I know this sounds ridiculous. But his thought process could actually be legitimate to some people. He bought an old multi family home a few years ago, and from day one has had problems with tenants not paying, extended vacancies, and a slew of repairs. He’s explained that the tenant issues he’s okay with - but given the age of the home, he’s concerned that in five years or less he’ll have to start replacing furnaces, appliances, rooftops, and other things that the property won’t be generating income to cover. And given the real estate crisis we are on - obviously he hasn’t found a buyer. He’s willing to let go of the place for just enough to cover his mortgage. But with that said - the millions of people foreclosing on their homes is starting to actually make him think if he should intentionally foreclose. His logic goes that foreclosing is an awful thing, but if I own the home I’ll end up losing thousands of dollars in repairs. I might as well throw it away before it really starts to suck money away from me.

I applaud his logic but abhor his decision making skills! There is one fundamental thing that investors in their playground can never ever forget  - all investments work on cycles That means every good investment you’ve made will always falter into difficult times. As an investor, it’s foolish for us to throw our hands up in the air when the going gets tough. Perservering through tough times is just part of being an investor. Would you sell all your stocks just because you’re in the red? No - this is a surefire way to lose money over the short and long-term. You’d hang on to your stocks until they pick up again. Even if some remain in the red, your diversified portfolio will compensate for the losses in due time. Real estate is no different - let the good times ride and then fight through the tough times.

So a message to my colleague who’s got his head on backwards… here are some clear reasons why you should avoid foreclosure at all costs instead of just throwing your hands up and saying “take it”:

1. Foreclosing on an investment home doesn’t necessarily free you of debt. If the bank can’t sell it for the amount you owe - they will inherently come back to you with a bill.
2. After foreclosing - you still will owe the taxes incurred up until title was transferred.
3. Foreclosures remain prominent on your report for seven years.
4. According to federal guidelines, you won’t be offered a federal home loan after a foreclosure for five years. Which means you’ll definitely be renting for the next sixty months at the bare minimum.
5. Even landlords don’t like tenants with foreclosures - they interpret it as “this guy didn’t pay his bills and lost his house because of it. How do I know he’ll pay the rent??” If you can’t buy and you have a hard time finding a place to rent - get used to Mom’s basement.
6. Once your five year period elapses, a bank is now able to offer you a loan but is unlikely to do so. You basically screwed over a different bank five years earlier - why should they get the next honor?
7. Your only resort will be private lenders. These guys make tons of money screwing people like you with ridiculously high rates because they know you can’t find anything better. A 10-15% rate on a home loan isn’t exactly the right thing to get you back on track.

If you have been struck in the unfortunate position of foreclosing - there are ways to combat the credit woes over the next several years. I’ll write a post on that later, but for now it’s suffice to say that foreclosing should never be considered an “option” but more so as a method of desperation or last resort.

If you’re trying to find out where to invest your money - you’re well aware that it is a mess out there. We’ve got the most volatile trading days ever recorded, the dollar slumping to never before seen lows, oil prices at $110/barrel, subprime mortgage delinquencies in record numbers, foreclosures on every block in the country, a surplus of unsold homes throughout the nation, the banking sector writing off billions of dollars and asking for hundreds of millions in help, dogs and cats living together — mass hysteria!

But what is really going on?

The crux of the entire problem falls into real estate. There - that’s the whole problem. Everything else that is unrelated is simply magnifying an already bad issue. This is a consumer-based recession. This means that the stock market isn’t to blame for all the losses - the consumer is. We’ve been bidding up real estate prices so fast and so high for the last ten years - that now we are at unmanageable levels. When anything in life has an asking price that is worth more than its intrinsic value - it’s only a matter of time for the prices to go down to something more reasonable. Write that down. So with real estate prices dropping, consumers now have mortgages worth more than their home’s value. Many people are in financally-trying situations because they can’t seem to sell their home, or they own two homes and can’t make the payments on one. The many unfortunate ones are forced to foreclose on their homes, and banks don’t like this one bit because now they own real estate (they are not in the business of managing properties). The banks now try and dump their real estate for super low prices, further pushing down the general real estate price market. The further down the prices go, the more trying financial times that people end up in. So what do consumers do - spend less! And there you have it - a consumer based recession. As long as consumers spend less, consumer-focused companies don’t do as hot. When they miss their earnings and revenue estimates, their stocks drop. And once their stocks drop, those same consumers now lose money in the equity markets, causing them to tighten their spending even more!

It’s a viciuos cycle, and oil and heating prices, a slumping dollar, inflationary concerns, and increased volatitility are all simply exacerbating this situation.

“So when is the end of this?” Wait for real estate prices to return to somewhat normal levels, most likely at some point in 2009, and it’ll be a slow and gradual rebuilding over the following five years. Once people are comfortable making their monthly payments all over again - their spending will loosen - and the economy will do somewhat better.

For the record, I didn’t care too much for Rich Dad Poor Dad initially. It was too basic for me. But after some reflecting, I realized that the general population really needs this basic understanding. The average American essentially struggles to make ends meet - regardless of how much income they make. People with six figure salaries have more bills and debt that they can afford. So in hindsight, cheers to Robert Kiyosaki and the Rich Dad team for some basic and fundamental personal finance lessons.

My very quick summary of the book: invest your money and live by your returns. That’s basically it. We all have steady expenses every month. $300 for car payments, $500 credit card payments, $2000 on a mortgage, etc. What Rich Dad Poor Dad teaches is instead of letting all the monthly bills pile up faster than your income does, you should invest your money and earn a return higher than those expenses. For example - real estate (arguably the best long-term investment even today): if you make a solid purchase of an income generating property. So the property you purchase carries total monthly expenses including mortgage and tax of say $1500. And let’s say you rent it out for $2000, netting you $500 in monthly income. Great - there’s your justification for buying a nice car. So your actual expense doesn’t increase by purchasing this car if done so after purchasing an investment vehicle.

Clear enough for you? Now - just do it five times over to cover your total monthly expenses. It’s hard work - but a great long-term plan.

I’m hearing a lot of talk nowadays about how real estate is “not what it used to be” and is not the place to go to make money anymore. This is a total fallacy.

Every good investment works cyclically. This means that there are good and better times for every investment. Buying into the stock market today is probably not the best investment (risk profile is too high in this market). But it doesn’t mean that the markets have gotten too efficient to make income in. All it takes is time and patience for the markets to retreat to realistically priced levels. As far as real estate goes - there was a time not so long ago when you could throw $10,000 into a piece of real estate and turn around and sell for $50,000 a year later. All the factors driving real estate worked in our favor. Now - it’s the real world. There are still thousands of good real estate investments. However now’s the time that you have to be careful and do your homework before going out and buying everything you can.

Good investments are hard work. The real estate boom we’ve had the last several years can be compared to the dot-com era. Prices of good (not necessarily great) companies were pushed higher and higher on false pretense. People are now talking about how real estate markets will be “hit hard”. Translation - they’re returning to fair value! It’s that simple. Buying a good stock in an average market or a good income generating property in an average real estate market takes work. What is the company’s intrinsic value, what should the stock be selling at, what are the key factors in the company’s growth, what risk does the company face near-term, what is the competitive landscape? OR - what should the property be selling for based on the cash flow it generates, is the property undervalued or overvalued and why, can you buy with equity priced in, what are your expenses estimated to be, what large one-time expenses are forecasted within five years, what are the typical tenant profiles, what risk of non-paying tenants are you exposed to, and what risk can you tolerate? All these questions need to be vetted and asked thoroughly before making any real investment decision. Your answers will guide you to good investments in only average investment markets.

More and more foreign investors are lining up to make investments in Indian real estate. They are believed to have raised $3.5 billion and above $2.5 billion have already been invested by overseas real estate funds in India till date. The list includes the names such as Blackstone Group ($1 billion), Goldman Sachs ($1 billion), Citigroup Property Investors ($ 125 million), Morgan Stanley ($70 million) and GE Commercial Finance Real Estate ($63 million).

However, this is not an end to the list. It further goes listing JP Morgan, Lehman Brothers, Warren Buffett’s Berkshire Hathaway, Colony Capital, Merril Lynch, and Starwood Capital.

The change in policy of February 2005 has paved ways for foreign investments in construction projects with fast approvals. The major attraction is returns of 25% offered by realty projects in India that certainly appears hard to come by the US and Western Europe.

Of all, Goldman Sachs seems to be the most determined player and has been combing through Indian property market for more than a year now. The company, indeed, encouraged several other investors to look forward to real estate trends in the country.

India’s urban office space market is what attracts investors. It is 60 million sq ft as compared to New York City’s 400 million sq ft or New Jersey 175 million sq ft. Tishman Spyer was the first US developer to invest in India. ln 2006, the New York City based firm entered into a joint venture with ICICI Venture Funds of Mumbai that will have a war chest of $2.5 billion.

Speyer- ICICI Venture has signed memorandum of understanding for two construction projects in India. One is a $200 million project for residential and commercial development on 42 acres in Bangalore’s prime Whitefield suburb. Another project is in Karnataka’s Devanahalli, where Tishman Speyer and ICICI Venture Funds are purchasing a 25 acre plot whose final use has not yet been decided.

A buddy of mine called me up recently. He said he has an associate (coincidentally his realtor) who is facing foreclosure in under a month. And this person is desperate to avoid foreclosure at all costs. A true investor seeking streaming income will see this as a potential to help someone (which has its own value in itself) in addition to acquiring an undervalued property with ease.

We are in the time of foreclosures. All it takes is looking around. If you spend any time at all outside of the house, it’s virtually guaranteed that you know someone who knows someone else facing foreclosure and desperately looking for a buyer. Talk to people you know. Call up a few realtors. Pay a small fee for one of these online services. I’ve never personally done that one - but I’ve never necessarily heard of them being awful either. Check out blog listings (one great blog I found was http://countrywide-foreclosures.blogspot.com/. There’s about one and a half billion dollars worth of foreclosures for you to pick from). So what do you do then? Do your homework, run your comps, find out if this is really profitable, and get on the phone and make an offer. Don’t be shy or timid. You’re facing a great deal and a chance to help somebody. Properties may go for 10, 20, even 30% below market value.

Great. You’ve acquired a dirt cheap property. What next? Because you’ve already studied your market and comparables before you purchased the investment, you know what this property should be selling at. Now all that’s left over is to do the necessary work to actually bring up to market value. Sometimes, pre-foreclosure properties may need a lot of rehab work. You may have to get your hands dirty a little bit, but at the end you’re looking at turning around and selling this property for a huge profit.

The best part is this - when you’re facing such a generous profit margin - you can always undercut the price ensuring a quick sale. Sure you may get a small portion less, but let’s not be greedy. If your goal is short-term profit (thereby enabling the ability for long-term cash flow), you want to get in and get out as fast as possible.