First of all I want you guys to watch “The Big Short” the movie is awesome! It will really help you with Real Estate literacy!
The movie dives into the controversial housing credit fiasco of the early 2000’s, and the inevitable…”pop” caused by the delinquency rates soaring after the AAA- B loans defaulted, and how a few lucky investors called the propagation of uncertainty (or propagation of error) within the housing market loan legitimacy.
Real estate investment can be such a lucrative field. Especially in drastically increasing housing prices. A small commission on a few million dollar deals obviously goes a long way! This is looking at it from a brokers point of view, but there has been a recent shift, there has been an increase in foreign investment for Vancouver properties.
REITs, is an investment vehicle for real estate that is comparable to a mutual fund, allowing both small and large investors to acquire ownership in real estate ventures, own and in some cases operate commercial properties such as apartment complexes, hospitals, office buildings, timber land, warehouses, hotels and shopping malls.
All REITs must have at least 100 shareholders, no five of whom can hold more than 50% of shares between them. At least 75% of a REIT’s assets must be invested in real estate, cash or U.S. Treasuries; 75% of gross income must be derived from real estate.
REITs are required by law to maintain dividend payout ratios of at least 90%, making them a favourite for income-seeking investors. REITs can deduct these dividends and avoid most or all tax liabilities, though investors still pay income tax on the payouts they receive. Many REITs have dividend reinvestment plans (DRIPs), allowing returns to compound over time.
There are three main REIT’s:
- Equity REIT’s (Properties)
- Mortgage REIT’s
- Hybrid (Properties & Mortgages)
Let’s go over a few loan definitions, and the varieties that they can take, as well as some actions you can take that pertain to said loans:
Sub-prime: referring to credit or loan arrangements for borrowers with a poor credit history, typically having unfavorable conditions such as high interest rates.
Bond shorting: Bonds, like any other security, experience market fluctuations, it is possible to short sell a bond. Short selling is a way to profit from a declining security (such as a stock or a bond) by selling it without owning it
Default Rate: The rate of borrowers who fail to remain current on their loans. It is a critical piece of information used by lenders to determine their risk exposure and economists to evaluate the health of the overall economy. OR The interest rate charged to a borrower when payments on a revolving line of credit are overdue.
Collateralized Debt Obligations (CDO’s): Can be exponential, and/ or synthetic, and is a type of structured asset-backed security (ABS). Originally developed for the corporate debt markets, over time CDOs evolved to encompass the mortgage and mortgage-backed security (“MBS”) markets.
A Synthetic CDO (collateralized debt obligation) is a variation of a CDO that generally uses credit default swaps and other derivatives to obtain its investment goals.
However in 2015 the major federal banks decided to “rebrand” these CDO’s, under a new, fancier name: bespoke tranche opportunity. A type of collateralized debt obligation (CDO) that a dealer creates for a specific group of investors. The CDO is structured according to the investors’ needs. The investor group then typically buys a single tranche of the bespoke CDO. The remaining tranches are then held by the dealer, who will usually attempt to hedge against losses.
Tranche being a portion of something, especially money.
Adjustable- Rate Mortgage (ARM): A type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin.
3/27 mortgages have a three-year fixed-interest-rate period after which the interest rate begins to float based on an index plus a margin (known as the fully indexed interest rate). There is a high probability that the fully indexed interest rate will be substantially higher than the initial three-year fixed interest rate; therefore, to avoid payment shock, the intent of 3/27 mortgage borrowers is to be able to refinance the mortgage before the interest rate begins to adjust.
A floating interest rate, also known as a variable or adjustable rate, refers to any type of debt instrument, such as a loan, bond, mortgage, or credit, that does not have a fixed rate of interest over the life of the instrument.
Fixed Rate: A standardized rate that will not be altered.
Variable Rate: A variable interest rate means that the interest you are charged changes as whatever index your loan is based on changes. Loans can be based on the rate of the one-year T-bill or the prime lending rate among other factors. The prime lending rate as defined by the Federal Reserve is the rate set by the majority of the top 25 U.S. banks and is used “to price short-term business loans.” This results in fluctuations in the amount you have to repay to keep current. Depending on the terms of your loan, it could change as often as monthly.
Delinquency Rate: The percentage of loans within a loan portfolio that have delinquent payments. The delinquency rate is simply the number of loans that have delinquent payments divided by the total number of loans an institution holds. Typically, delinquency rates on loans are affected by the credit quality of the borrower and macroeconomic factors such as unemployment.
Random Definition Alert:
401(k) Plan is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan.