8 creative ways to buy property when mortgage rates are high

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High interest rates and a nationwide housing shortage make for a tough combination for homebuyers and investors alike.

 

So, what creative financing options do you have while interest rates for investment properties and home loans keep soaring?

 

Higher interest rates put a serious dent in your real estate cash flow. But if you get inventive, you can reduce your monthly payments and interest on investment property loans.

 

Try the following ideas to pay less interest to mortgage lenders and keep more cash flow for yourself. And if you prefer video, we quickly walk through five of these ideas here:

1. Serial House Hacking

It’s no secret: lenders charge lower interest rates to homeowners than they do to real estate investors.

 

And it makes sense. When money gets tight for a landlord, they default on their rental property loan before they default on their home mortgage.

 

Consider house hacking by buying a multifamily property to score a low homeowner interest rate while building your rental portfolio. After living in the property for one year as your primary residence, you can move out and do it all over again with another property. That means you can add up to four units per year to your property portfolio, all with cheap traditional mortgage financing.

 

That includes conventional loans from Fannie Mae or Freddie Mac, FHA loans, or even 0% down USDA loans or VA loans. If you don’t know where to start comparing home loans, try Credible for quotes from several lenders.

 

You can also explore ways to house hack a single-family home, such as adding an accessory dwelling unit or bringing in housemates. My cofounder Deni Supplee has rented out storage space, and even gone so far as to host a foreign exchange student.

 

As you explore alternative paths to homeownership, brainstorm ways to house hack and live for free. Use a house hacking calculator to run the numbers and find the best fit for you.

 

For help with your mortgage, consider working with a fiduciary financial advisor. Find an advisor who serves your area today (Sponsored).

2. Live-In Flips

Like renovating old homes?

 

You could flip houses as an investor, of course. But then you pay high interest rates on hard money loans.

 

Imagine instead that you buy a fixer-upper as a homeowner. You qualify for an FHA 203K loan or some other owner-occupied renovation loan with affordable interest rates. On nights and weekends, you renovate the property, creating equity in it. Then you sell it for a tidy profit and do it all over again.

 

The profit from the sale could well cover your housing costs during the time you owned the property, offering yet another way to save on living expenses. And if you live in the property for at least two years, you qualify for the homeowner exclusion and avoid real estate capital gains taxes on the first $250,000 of profits ($500,000 if you’re married).

3. Live-In BRRRR

No one says you have to sell the property after you finish rehabbing it.

 

The BRRRR method in real estate investing is an acronym that stands for buy, renovate, rent, refinance, repeat. When you refinance, you can pull your down payment back out, freeing you to invest it in another property.

 

But consider a twist on this strategy: You complete the repairs over the course of a year, and then move and rent out the property.

 

While you don’t get your down payment back, you put down far less than you would have as an investor, and you score a low interest rate indefinitely.

 

So yes, there’s one less “R” in the acronym. But because you forced equity with the renovations, you now have plenty of equity to offer lenders who offer lower interest rates for more collateral.

 

For help with your mortgage, consider working with a fiduciary financial advisor. Find an advisor who serves your area today (Sponsored).

4. Offer Additional Collateral

As alluded to above, lenders price their loans based on risk. The lower the risk of your loan, the lower the interest rate and fees you can expect to pay.

So, as you approach lenders to price out investment property loans, ask them if they can reduce the interest rate if you put up another property as additional collateral. Some won’t take you up on it, but private portfolio lenders offer flexibility in addition to speed.

 

Try KiaviPatch Lending, or Visio as fast, flexible portfolio lenders.

5. Rotating Business Credit

Ready to get a little counterintuitive?

 

Real estate investors qualify as business owners, and therefore qualify for unsecured business credit lines and credit cards. Using a business credit concierge service such as Fund&Grow, you can open up to $250,000 or more in rotating business credit, with no liens against property.

 

Sure, these will come with relatively high interest rates. But they often offer 0% introductory APR periods up to 18 months. That means you could borrow the down payment or even cover the cost of a property with business credit and get up to 18 months to pay it off before you start paying interest.

 

You could pile every spare dollar into paying off the lines of credit before that time, and avoid interest altogether. Or you could refinance the property before then and cross your fingers that interest rates go down between now and then.

6. Negotiate Owner Financing

Some sellers don’t mind holding a note to cover some or even all of your purchase. They get to collect interest between now and when you pay off the loan in full, providing passive income for them and flexible financing for you.

 

The down payment, interest rate, fees, and loan term are all negotiable. In fact, it doesn’t even occur to many sellers offering owner financing to charge you points or fees at closing. That can save you thousands of dollars in financing costs immediately.

 

Most owner financing notes come with a balloon payment, requiring you to pay them off in full within three to five years. By that point, hopefully interest rates have dropped and you can refinance at a lower rate.

 

7. Negotiate an Interest Rate Buydown with the Seller

Everything in life is negotiable. A motivated seller may be willing to put a little money toward helping you buy down your interest rate.

Mortgage rate buydowns vary, but typically you pay an upfront fee to reduce the interest rate, either permanently or for the first couple of years. For example, a 2/1 buydown drops your interest rate by two percentage points in the first year and one point in the second year. Again, it gives mortgage rates some time to drop down, rents to go up, or ideally both.

 

When you make offers, bounce the idea off of sellers to see how they react. It offers one more way of seeing who wants to sell urgently.

8. Combine an ARM with Quick Payoff

Adjustable-rate mortgages (ARMs) come with the lowest rates of any loan type — at least until the initial interest rate period expires in three, five, or seven years. Then it switches over from a fixed-rate mortgage to adjusting to market rates.

 

That gives you a lower monthly mortgage payment for a few years at least. After the introductory period ends, the federal funds rate or other rate benchmark may have dropped, leaving you with an acceptable loan rate.

 

Or not, of course. To hedge against rate increases, you could funnel money toward paying off the loan early. Bear in mind how loan amortization works: you pay the highest interest early in the loan schedule. By the time the introductory rate ends and the adjustable-rate loan kicks in, you could have skipped far ahead in the amortization schedule, avoiding high interest in each monthly payment even if the loan rate technically ticks upward.

 

As an added bonus to paying down the loan quickly and skipping the worst of the interest, you can also ditch private mortgage insurance (PMI) if you’re using a conventional mortgage.

 

For help with your mortgage, consider working with a fiduciary financial advisor. Find an advisor who serves your area today (Sponsored).

Final Thoughts on Financing Properties While Rates Are High

High interest rates won’t last forever. But refinancing is expensive, and you have no way to predict when rates will fall. Think twice before counting on a refinance within the next few years.

 

Instead, consider using the debt snowball method to knock out your mortgages quickly. With each loan that you knock out, you supercharge your cash flow, letting you funnel more money into the next mortgage loan — or into new investments.

 

Lastly, working building your credit score in the meantime. Higher credit scores mean lower mortgage rates and closing costs for future loans, both as a homeowner and a real estate investor. It may not be sexy, but it does deliver a lower mortgage interest rate.

 

This article originally appeared on SparkRental.com and was syndicated by MediaFeed.org.

More mortgage tips

If you’re looking for a mortgage, make sure you review all your options, such as a reverse mortgage. Doing your research can help ensure you’re making the best choice for your financial situation and avoid a worst-case scenario, such as a foreclosure.

 

Additionally, a financial advisor can help you navigate your mortgage options. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now. (Sponsored)

More from MediaFeed:

The 8 hidden costs of owning your home

 

Making the transition from renter to homeowner is a dream come true for many people — browsing Zillow is a practically modern American pastime. But when planning to make the dream of buying a house a reality, you need to plan for more than just the cost of the house and your potential monthly mortgage payment.

There are regular costs that you’ll have to account for, including property taxes and basic upkeep, plus unexpected expenses to save for, including emergency maintence and surprise assessments.

Here are some of the costs you need to add to your budget spreadsheet when figuring out how much house you can afford and how much you need to save.

 

Rawpixel / istockphoto

 

When you buy a home, you have to pay property taxes on the value of the home. Rates vary across counties, but the average is less than 1.5% of your property’s value.

Many lenders will require that you pay property taxes through an escrow fund set up by your bank.

Read about what to do if your property taxes go up.

 

DepositPhotos.com

 

Homeowners insurance is essential to protect your investment in your home, and if you purchase your home via financing, it’s a requirement from the bank. Like with property taxes, lenders often require that you pay homeowners insurance through an escrow fund.

The average cost of homeowners insurance in the U.S. is $1,100 per year, but the amount varies widely by area and individual home.

 

Ridofranz / istockphoto

 

If you are putting less than 20% down when you purchase your home, your lender will require you to purchase private mortgage insurance, which would protect the lender if you stopped making payments. (Learn more here.)

The cost of PMI is usually anywhere from 0.3% to 1.2% of the principal balance of your loan. These payments, like homeowners insurance and property taxes, are generally paid by escrow.

The good news: once you have 20% equity in your home, private mortgage insurance (PMI) generally no longer a requirement.

 

sturti

 

Mortgage protection insurance and term life insurance can both be used to protect your family and keep them in your home in the event of your death.

If you’re buying a home with a partner, one of these insurance types can ensure that if one of you dies, the other will be able to continue living in the house. Mortgage protection insurance does this by paying the death benefit directly to the bank to pay off the mortgage; term life pays the benefit to your beneficiary, so they can use it for mortgage payments, other living expenses or whatever they need to.

Term life insurance is generally cheaper and a better option for most people.

Read more about mortgage protection insurance and term life insurance.

 

DepositPhotos.com

 

Your home is made up of various assets, including equipment, appliances, fixtures and finishes, said John Bodrozic, co-founder of HomeZada, a home management app.

“All of these assets require some recurring preventative maintenance to keep each asset working properly and efficiently,” said Bodrozic. And that maintenance comes with a cost.

Bodrozic says these costs can range from small consumable items, like the cost of buying new air filters three or four times a year, to significant service costs like appliance replacement or repair.

On average, there are about 30 to 40 preventative maintenance tasks to complete over the course of a year, said Bodrozic. It’s important for homeowners to plan for those tasks and make room for them in their budget.

 

Depositphotos

 

When unexpected maintenance issues happen in a rental, your landlord is only a phone call away. But when you’re a homeowner, you’re the landlord.

“Whether it’s a leaky faucet or a problem with your air conditioner, maintenance and repair issues may come up more often than you think,” said Sacha Ferrandi, founder of Source Capital, which provides hard money loans in Texas, California, Arizona and Minnesota. “It’s just one extra responsibility you have to take on and always be prepared for as a homeowner.”

 

Rawpixel / istockphoto

 

For many people buying homes with yards, there’s often little knowledge of the true cost of landscaping, said Alison Bernstein of Suburban Jungle, a real estate group that caters to urbanites moving to the suburbs.

“Plants die and need to be replaced, weeds happen, lawns must be mowed and treated, hedges need to be cut back,” said Bernstein. “Some years will be more costly than others, but this can become a significant expense.”

Read our tips on how to save money on landscaping.

 

KatarzynaBialasiewicz / istockphoto

 

For people buying homes in co-op buildings or other planned developments, homeowners association dues are another expense to plan for.

These dues, which can cover things like maintenance and security, can range from as little as $50 per month to more than $500, said Gill Chowdhury, of Warburg Realty in New York City.

But HOAs can also do periodic assessments, during which they collect additional fees for expenses not explicitly covered by monthly fees, like capital improvements.

“If you’re part of a community, the board could decide certain capital improvements are necessary,” said Chowdhury. “You may not agree with these improvements, and they may not even be executed in the most efficient manner, but you’re still liable for the assessment.”

In addition to possible assessment fees, you should know that your regular monthly HOA fees can increase, too.

Read about the lessons one first-time homebuyer learned when buying a home.

This article originally appeared on Policygenius and was syndicated by MediaFeed.org.

 

Volodymyr Kyrylyuk / istockphoto

 

Featured Image Credit: diego_cervo/istockphoto.

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