The housing market is entering waters that have been mostly uncharted for a very long time. Interest rates at the time of this writing are in the mid 7s! Just one year ago, they were down in the mid to low 2s! That is quite a jump for such a short period of time. What does this mean for the everyday American? What does this mean for home buyers and sellers? How do investors navigate this market and still thrive? All of these are questions everyone wants to find the answers to. First, let’s take a look at how we got here and how being prepared would help you thrive in this market.
The difference a year makes
Just over a year ago, I was selling houses faster than they could be listed. Everyone was looking to sell and take advantage of the hot market. Home prices, particularly in desirable areas such as where I live on Long Island, New York, saw home prices like we’ve never seen before. Every house I listed I got above the asking price. Bidding wars ensued and all I had to do was sit back, wait for the best and highest offer to come in, and collect my check. It was a realtor’s dream. Stick a sign in the lawn and host an open house where 100+ people show up. Those days are long gone and thankfully so. More and more realtors are calling it quits as buyer and seller pools have dried up. In my opinion, during this time we will see 70%-80% of realtors and other non-serious real estate professionals call it quits (not to say realtors aren’t serious, just simply that most are not very skilled at their job). It is now survival of the fittest where the best and most hungry get the large chunk of the business. Rates have climbed from the time I was selling all those houses just over a year ago to now over 5 basis points! This affects everything! It affects the value of homes because money is becoming so expensive that it is pricing a lot of not so long ago qualified buyers out of the mix. Because of this, houses are staying on the market for longer and longer. Expired listings are up and average days on the market are skyrocketing. Sellers are late to the party that was the last 2-3 years and refuse to adjust the price of their homes in accordance with market conditions. The tide is shifting to more of a buyers market where buyers have much more leverage than sellers do. There are no more 100+ people open houses, no more bidding wars, and no more 10%-20% above ask offers. We should be prepared to see interest rates continue to rise to 10% and maybe even north of that. The Fed, who is in control of interest rate fluctuations, has the idea here to cool off the market to counter the rising inflation plaguing everyday Americans. The thought of The Fed here is that when housing prices soar out of control like they have been, the value of money decreases. In order to maintain the value of the American dollar, The Fed has responded by putting the seemingly eternal fire out on the housing market.
The value of property then vs. now
Due to rising interest rates, we are beginning to see homes sit on the market due to their unaffordability. This is causing home values to decrease for the first time in a long time. People who bought homes for $1,000,000 a year ago might be looking at a property value around $750,000 just 12-24 months later. Holding long-term, this is not an issue. If monthly payments being low is all you care about, then the reduced value of your home may not affect you much. However, if you plan on selling and think you can make a quick return on your property, think again! It is getting more and more difficult to do that by the day and sellers are really beginning to feel this pain.
What does this mean for investors?
Investing in real estate in times like these is something that is not as sexy as it was just a year ago. The market is unstable and people are scared to invest in it. The rising cost of borrowing money kills a lot of the cash flow that investors love to see in rental properties. However, the rate of rent has steadily and incrementally increased and continues to do so as I write this. Even though interest rates for investment properties are up in the high 7s to low 8s right now, there is still money to be made in real estate. Long-term, the housing market is and has been one of the most stable things you can invest in. To combat rising interest rates, investors can prepare themselves to make money in this market using creative finance. This involves a few methods in which I will describe below.
1. Seller Finance
Seller financing is a strategy used in which the seller essentially becomes the bank and loans you a large portion of the property value just as a bank would in return for an interest rate return. There are so many variations of seller finance that I use every single day, however, the functionality remains more or less the same. Typically, this allows you to choose an interest rate that works for yourself and the seller in a way that you can cash flow from the property and the seller can collect interest on loaning you that amount. This type of financing is very popular for savvy investors during difficult markets because they understand that this method bypasses the banks and high interest rates and leads to a mutually beneficial transaction.
2. Subject to
Investing subject to the existing mortgage is something I am beginning to do more of. Just 2 weeks ago, I closed on a property in Des Moines, Iowa subject to. What this means is that the seller is selling you their property while keeping the existing debt on that property in place under their name. This allows you to get into properties with rates as cheap as 2.5% and cash flow better than almost any other situation under these market conditions. To perform these transactions as safely as possible, you’ll likely need to gain permission to speak with the seller’s lender and explain the situation so that they can tell you what needs to be done. To protect the seller, I generally put what’s called a performance deed in place which means the seller would reclaim the property from me in the event of a defaulted payment in lieu of bank foreclosure. This protects the seller and the seller’s credit under this deal structure. Sellers who do this are generally trying to sell but the value of their property is less than what they want to sell it for meaning they’ll essentially have to pay money out of pocket to sell their house. As discussed before with the interest rate correction, the value of properties will see a downturn over the next 12-24 months. This is a market ripe for subject to investment.
3. BRRRR
BRRRR is simply an acronym for buy, renovate, rent, refinance, repeat. It is a process in which you buy properties with cash or hard money, renovate them and build sizable sweat equity, rent them for market rent, and refinance out your cash invested. In the best of BRRRR’s, you will be able to pull out more capital than you had even invested giving you an immediate and infinite return on your investment since you have none of your own cash in the deal. Although it’ll be difficult to find deals that have cash flow on the backend of these deals because of the expensiveness of money, this is still a great method to build your equity, pay yourself upfront, and build up a large cash flowing portfolio little by little.
No matter how you invest there is always a way to make things happen in any market. Whether the real estate market is hot or not so hot, it doesn’t matter as long as we equip ourselves with the tools we need to succeed. In this post, I’ve barely scratched the surface of how to succeed during the current difficult market. Get out there, get prepared, and take decisive and meaningful action!