How to buy real estate in a high interest rate environment



On Monday, the average interest rate on a 30-year fixed mortgage hit a whopping 7.43%, a level not seen in the U.S. in about 20 years.

High debt means buyers will pay significantly more for a home today than they did when interest rates were below 3% two years ago.

According to Insider’s mortgage calculator, if you build a $400,000 home at a 3% interest rate, your monthly payments will be about $1,349 after a 20% down payment. The same setup would cost $2,222 per month at current mortgage rates.

This is a drag for real estate investors who rely on monthly rental income for cash flow. But buyers will have to get used to tight margins, said Sam Primm, a 35-year-old real estate investor who owns more than 200 properties. Prim and his best friend Lucas Walls purchased his first investment property when he was 26 years old. Since then, they have learned how to take advantage of different types of loans and expanded their portfolios without using their own money.

One thing Prim has realized in over nine years of experience is that there is never a perfect environment in which to buy a home. When interest rates are high, debt makes purchases more expensive. However, when interest rates are low, demand increases and home prices rise.

Regardless of which way the pendulum swings, investors can navigate the housing market with a few tips. Here, Insider shares his five tips gleaned from interviews with smart and creative investors when taking out a loan for their next purchase. Insiders viewed documents proving ownership of the property.

Invest regardless of interest rates

Prim says the key is to focus on maintaining positive cash flow on a monthly basis so that rental income can cover real estate expenses. This allows you to hold onto an asset that appreciates in value while weathering a volatile housing market until things calm down.

One way to do that in a high interest rate environment is to long term mortgage. That way, he says, your monthly payments will be lower, even if long-term interest rates are higher. To offset this increase, you can make higher payments some months, which will be applied to your principal. Prim added that if the savings exceed closing costs, borrowers can also choose to refinance their mortgages when interest rates drop.

Spend more time finding good dealssaid Sharon Tsung, 33, who owns more than 21 rental properties across the United States. She bought her first home in 2013 with her brother in the San Francisco Bay Area, where home prices are above the national average. She didn’t have enough savings to make her down payment and she didn’t have two years of steady income to qualify for her mortgage, so her brother co-signed and they Paid her $30,000. She gradually repaid him and bought him out.

It was a three-bedroom, two-and-a-half bathroom home priced at $240,000. It was quite expensive at the time, Tseng said. But those prices are long gone.

According to recent Zillow estimates, Tseung’s property value has now doubled to $603,000, and his rent is about $3,148. According to Insider’s mortgage calculator, if a buyer bought this home today with a 20% down payment, her monthly mortgage costs would be $3,350. This does not take into account additional costs, making it a cash-flow negative investment.

That’s why she started looking for out-of-state deals in places like Jacksonville, Fla., where the median home price is about $295,000, according to Zillow. A less expensive home can help offset the amount you spend on debt financing. It also allows you to make a larger down payment.

But getting a better deal often means looking outside the market, rather than combing through the MLS, she noted. And that may involve contacting wholesalers, sending direct mail or obtaining off-market items from distributors, she added. Tseung also recommends considering tools like her Driving for Dollars, an app you can use to find off-market properties in areas you’re interested in and get owner contact information. .

When Chris Gerbig bought his first property, he couldn’t meet the 20% down payment requirement and turned to a Federal Housing Administration (FHA) loan that only required a 3.5% down payment. These loans often have low interest rates. As of Monday, the interest rate on a 30-year FHA loan was 6.75%.

But this sweet deal only applies to primary residences. Currently, Mr. Gerbig owns his 129 rental units worth more than $28 million and is always on the lookout to make the most of his cash.he did something like this recently seller financing Good value. This is when the seller offers to become a banker and allow you to make monthly payments on the property with interest. Gerbig, who has worked on both sides of these types of transactions, says this is a less common way of determining financing, but it can offer very attractive interest rates.

He prefers seller financing. Because he allows the parties to agree on terms that suit their needs, such as lower interest rates and higher down payments. Gerbig said he often agrees to this setup when sellers no longer want to manage the property but want to continue to earn monthly cash flow from it.

Matthew Tortoriello, a real estate investor who started buying real estate in 2008 by pooling $5,000 with two others to cover a $15,000 down payment, said buyers need to get used to creative financing. . This simply refers to less common ways of purchasing real estate, including those listed above. To date, he and his business partners own approximately 742 rental units with various types of loans.

In August 2022, he obtained a $1 million loan from the seller at a 2% interest rate to purchase the occupied commercial building, according to documents reviewed by Insider. The total value of the estate was $2.2 million. He used the remaining amount creatively by utilizing his 1031 exchange with his $265,000. This involves deferring the taxes on previously purchased real estate to the next investment purchase. He then secured the remaining $910,000 from a bank at an interest rate of 6.5%.

Another option buyers should consider is Assumed mortgage loan, this means taking over the existing mortgage on the property you purchase. Although this is not advertised, asking the agent to offer this option to the seller is one of the ways Tortoriello has secured this loan in the past. Looking for properties that have been on the market for at least three months is one way he increases the likelihood that sellers will consider this option.

There are additional government-backed loans available to buyers.For example, Anna Snyder VA loan, her first purchase was supported by the Department of Veterans Affairs. This is a way for active duty military or veterans to purchase a home with no down payment. She used this to buy her four-bedroom, three-bathroom home in Lemoore, California, for $268,000.

He advises non-military members to take advantage of down payment incentives offered at the state level for first-time home buyers. Terms of these programs vary by state, but they can be used in conjunction with FHA or conventional financing, he noted. There are also USDA loans, which are mortgages offered by the Department of Agriculture for properties in some rural areas. These loans can provide qualified buyers with up to 100% of the funds needed, including closing costs.

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