Rates Increasing At Record Speed
Rates have more than doubled in less than a year. The last time rates have increased this fast was in 1980 and 1981 and the starting point before that massive increase was already in the double digits. Rates have never increased at this pace as a percentage of the starting point! That is scary when you think about it.
As savvy real estate investors we can make money in any market. Because we are in a high mortgage rate environment, we need to focus on ways to make money with high and rising rates. Here are three ways you can make money in today’s environment.
1. Lease Option
Lease options are my favorite way to make money in a high-rate environment. This is especially true for newer investors. A lease option is a lease with a current owner of a property with the option to buy that property at a set price. These are normally long-term arrangements of five or more years, giving you, the investor, plenty of time to build equity and close on the house. The lease rate can be negotiated, just like all the terms in the agreement, but are often based on the needs of the seller. Many sellers have locked in low interest rates in recent years so we can take advantage of that by locking in monthly payments based on rates that are much lower than they are today. One of the biggest advantages of these contracts is the option and not obligation to buy. You can choose to purchase or not within the allotted time so if the market shifts and goes down in value, you are not stuck. If the value of the property goes up, which is more likely over a longer term, you can close and have instant equity, you can flip the house, or you can sell the contract. The right to buy a house at a discount has value so the contract alone is marketable. While you are leasing the property from the owner you will likely sublease to a tenant for more than your payments so you can make money each month as well.
2. Subject To
I love the lease option to get started because they are so easy to negotiate and understand and they are pretty safe for everyone involved. With that said, as you get more experience you will likely want to start purchasing properties subject to the existing financing. This is rather simple to understand as an investor but can be very confusing and intimidating to an owner. The owner needs to trust you and be extremely motivated for them to consider this option. When you purchase a property subject to, you are taking ownership of the house with a deed, but you are not paying off the loan. They literally deed the house to you. In this case, you will need to take over their mortgage payments and keep those current. The advantage here, like the lease option, is that you will be taking on a loan at a much lower interest rate than you can get today. That is a huge advantage. Many times, these loans are 30-year fixed rate loans and are several years into the term. This means that more of each payment is going to reducing the principal. That and the fact that you have complete control as the owner is what makes this such a powerful strategy.
Oftentimes I get asked if the subject-to is legal. The answer is that there is a decent chance that you will be violating a term in the loan documents but that does not make it illegal. That just means there could be a loan default and the lender would have the right to enforce its remedies. I have never seen a loan called due to this, but it is something you will want to be aware of. Having a backup plan to either return the home to the owner and structure a lease or pay off the loan in full should be considered.
3. Private Lending
With rates increasing, it is becoming more expensive to borrow money. If you think about this, it makes sense to be the one lending the money. Take advantage of higher loan rates by investing in loans. Non-bank loan rates were easily 8% to 12% before rates began to rise. Now 12% is the starting point and borrowers will pay more than that depending on factors such as the deal, the region, the quality of the guarantor, and loan sizes. If you are nervous about lending your money and making mistakes you can work with a non-bank lender or broker to help you find and qualify deals. Many will also service the loans for you for a fee.
Know Your Purchasing Options
At Pine Financial, we speak with hundreds of investors each month in
markets across the United States. If you every want to share your
thoughts and pick our brains, any one of us here would be happy to chat
with you.