Thomas Harr started investing in real estate in 2018 and has made and lost it ever since. This year, he is adjusting his strategy to account for an expected housing correction. He recommends sticking to cheaper properties and mortgages that don’t have payment penalties.
Thomas Harr has been a real estate investor since 2018.
At the age of 28, he owns 42 properties, many of which are multi-family homes that have numerous rental units within them. Of those properties, he has 50% ownership in 38 of them and full ownership of four.
Getting to that size of portfolio was not easy. In just a few short years, he’s had his fair share of wins and losses.
In 2022, Harr had to quickly exit some deals after rising mortgage rates slowed demand. He estimates losing about $50,000 after selling a couple of properties at a discount.
His goal for this year is to grow his portfolio by another 75 to 80 properties, even as the housing market faces a correction. This time, you are better prepared for the market downturn and know what to expect.
Harr doesn’t think we’ve seen the last of the rate hikes and expects it to continue through the first half of the year. The upside is that home prices will be at a downside, allowing you to get better deals.
Another positive note is that banks are adjusting to the new normal, he said. Six months ago, they dropped deals or offered no loans at all when Harr was trying to refinance some of his properties. Now, they are starting to approve loans once again.
However, the loan-to-value ratio has declined, he noted. At one point, he was able to refinance at 85% of the home’s post-repair value. Lately, 75% of the property’s value has been the maximum refinance amount she has been able to receive. He believes that the adjustment is based on price corrections that banks expect to see in the real estate market.
In addition, the debt service coverage ratio (DSCR), which is used by banks to determine a borrower’s debt repayment capacity based on the net operating income a property generates, is no longer sufficient to guarantee a credit, he said. Harr noted that some banks also require cash reserves equal to the first year’s mortgage payments. For example, if the mortgage payment is $1,000 a month, the borrower would need $12,000 in the bank.
While it’s a tighter market, knowing what to expect ahead of time allows you to fine-tune your deals. Now you can factor in higher interest rates, new bank requirements, and the expected correction in home prices.
For one thing, you plan to invest more and sell rather than hold and rent. This ensures more liquidity during a tight and uncertain market. On the other hand, it will keep multi-family homes because they provide more cash flow under one roof. That’s because when interest rates are high, it’s harder to generate cash flow in single-family homes, he said.
Your Top Tips for 2023 Real Estate Investors
If you want to start investing in real estate this year, Harr says, don’t be discouraged by uncertainty or high interest rates. The key is to plan ahead and take the unknown into account when deciding on a property.
Stick to cheaper properties. If the market is affected by a 10% drop in home prices, a $150,000 home will lose $15,000 in value. This is much less than a $500,000 home losing $50,000. A smaller amount could be recouped more quickly with the property’s monthly cash flow, he said.
Also, since interest rates are higher, a more expensive home means a larger mortgage and more interest paid on the principal, he noted.
Invest in markets that may have better cash flow. This means that if you live in an expensive market like California or Arizona, consider out-of-state property. Taking out an expensive mortgage hampers cash flow. Your monthly payment will be substantially higher, and rents in the area may not have increased enough to match the increased rates.
Negotiate the possible correction of 10% in your offer to adjust it in advance. Part of doing this right involves having a good conversation with the seller. This means explaining that the market has changed and they probably won’t get as many offers as in the previous two years, he said. Also, add that the market is expected to fall further if they wait any longer.
Use any government loan you have access to. For example, a US Federal Housing Administration (FHA) mortgage is an insured mortgage and requires a lower down payment. You can make a down payment of as little as 3.5% without being affected by a higher interest rate. You can also avoid the additional cost of mortgage insurance, which conventional loans require if your down payment is less than 20%.
Invest in a multi-family property instead of a single-family home, like a duplex. There are many advantages to doing this. One is that you can move into one of the units while renting out the other. This could drastically reduce his living expenses and even allow him to live for free, he said. If you get the numbers right, the other unit can cover your mortgage.
Plus, it will qualify you for better loans, including an FHA or 5% conventional loan because it will be your primary property, rather than an investment property.
Don’t lock yourself into a loan that has a high prepayment penalty. This is a fee charged if you want to pay off part or all of your mortgage early or refinance at a lower rate. Since rates are likely to drop in a year or two, you’ll want to give yourself an easy way out to refinance when conditions change, he said.
The terms of your mortgage prepayment penalty are included in the documents you sign at closing. If there are prepayment fees, the lender is legally required to offer an alternative mortgage that does not charge penalties.
Source: news.google.com