How to Price a Property When Interest Rates Rise

Interest rates are changing, and buying power is changing with it. Here’s how to price a property.

“We started looking at this property back in early 2022 when the sale price could have been $800,000… But now what do we do?”

A wholesaler who has a property with us called with this question.

This client isn’t the only one stuck in this situation. If you bought a house earlier this year with a certain price in mind… What should you do now that it won’t sell at that price anymore?

Let’s look at how to price a property when buying power changes.

Interest Rates Change Buying Power

Our client purchased a property in early 2022 with the intent to sell it for $800,000. Unfortunately, 8 months later, that price is very unrealistic for the property.

Right now, they have the property listed at $650k. They’re doing showings but are frustrated with zero offers. Does no one want this property? How much farther will they have to drop the price?

Interest rates have affected buyers’ buying power. Let’s look at some of the numbers at play here.

What Is the Current Buying Power?

Back in the spring, someone looking at a house for $800k could have gotten a 4% interest rate, leaving them with a $3,819 monthly payment.

Now, interest rates are up to 7%. That same $800k property just jumped to a $5,322 monthly payment. If rates climb to the expected 8% next year, that becomes $5,870/month.

In the first quarter of this year, people could buy comfortably at a $800k price tag. Now, due to interest rates, those same people probably can’t even qualify for a loan that large.

How to Price a Property Based on Buying Power

You have to look at it this way: The monthly payment for this property increased by about $1,500 in a matter of months. That’s a 39% increase. Next year will be a 54% increase from early 2022’s buying power! This puts a major strain on the DTI of a buyer trying to qualify.

But what does this all mean when it comes to how to price the property?

Let’s keep working with our previous example. We have the same buyer wanting to keep the same down payment, same monthly payments, and same DTI. Here’s how their buying power changes:

At the beginning of this year, they could afford a $800,000 home.

Now, those same people could only qualify for $575,000.

Next year, only $520,000.

This reality of buying power needs to inform your listing price.

Deciding Listing Price

We recommended our client to sell for $575,000 – the current buying power of their target buyers.

If this client still has this property into next year, they may need to drop the price all the way to $520,000, just to find a buyer who can qualify.

Example at a Lower Price

The trouble with buying power isn’t specific to higher-value homes. Let’s look at an example from a lower price point.

A $250,000 house, at the beginning of 2022, would have cost a homeowner $1,193/month. Now, that same house would cost the same person $1,663. That’s a 39% increase. From earlier this year to early next year, the monthly payments will have gone up by 54%, to $1,834/month.

These numbers are still probably cheaper than rent for a comparable property. However, that doesn’t necessarily mean buyers will be able to qualify with lenders.

If someone could buy a $250,000 house at the beginning of 2022, now the same exact person could only afford $180,000. By next year, they can only afford $162,000.

Since 2021, buyers have lost 60% of their available purchasing power. The market isn’t the same as it used to be, and unfortunately, your selling expectations need to be adjusted.

Affordability and Quality Decide a House’s Value

Two main things decide how much you can sell for: affordability and value.

Affordability changes for buyers when interest rates change. People qualify for loans and choose houses based on what they can truly afford. If you have a house on the market, you have to sell it for what people can financially manage.

Quality also impacts price point. People expect a different level of quality from an $800k house than a $500k house. Our client could keep the $800,000 price tag if the quality of the house matched that number. In that case, the property begins appealing to a different tier of buyer, whose purchase power can get them that house.

We’re still seeing some of our clients selling properties at high numbers. But it’s because their quality is outstanding, and they’ve gone above and beyond to add value. A poor to average house or flip means a minimum of a 10-20% price cut in this market.

Selling Options In This Market

If you’re struggling with a property on the market, there are a few things you could do.

  • Price based on buying power. You need to think about payment sensitivity, purchase power, and whether your target buyers could qualify for a loan. Use the numbers we looked at in this article to determine how to price the property.
  • Use a DSCR loan. If you don’t want to sell at a loss, this is a good option for you. Take the property off the market, hold for 3+ years with a DSCR loan, and turn it into a rental in the meantime. Put it back on the market when buying power improves.
  • Buy down the rate. If you pay to bring the rate down, you can attract buyers at a slightly higher listing price. Buying down the rate might cost $10,000, but it could save you from discounting the list price by $50k.

Help for How to Price a Property

Do you want a second opinion on the pricing numbers for your property? Are you curious about what a DSCR loan might look like for your property?

Send us an email at Info@HardMoneyMike.com, and we’d be glad to help.

For other real estate investment information, check out our YouTube channel here.

Happy Investing.

What Is a Transactional Loan?

Many wholesalers need to use transactional funding. Here are the basics – what is a transactional loan?

There are many different types of hard money loans. One less talked about loan is transactional funding.

A transactional loan facilitates funding when someone, usually a wholesaler, is buying a property and selling it the same day.

Here are the basics of transactional funding – what a transactional loan is, when you should use it, and where you can get one.

What Is a Transactional Loan and When Should You Use It?

In the real estate world, transactional funding is a very short-term loan, lasting 1-2 days. Most people who use transactional loans are wholesalers. They have a property under contract, and they need to close on it and sell it to someone else on the same day.

Why Use a Transactional Loan?

Normally in a situation like this, the wholesaler would simply sell the contract. A transactional loan comes in when they can’t easily do that. There are 3 common instances when this might happen.

  1. The contract is not assignable.
  2. Financing for the end buyer does not allow the contract to be transferred.
  3. The wholesaler’s transactional fee is high, and they’d rather not show the end buyer their profit amount.

Example of Transactional Funding

Let’s break down a brief example of a situation that needs a transactional loan.

A wholesaler has a property under contract for $100,000. They have also sold it to someone else for $150,000. They don’t really want their buyer to see that they’re making $50,000. And the person buying might not be happy knowing the wholesaler is making such a steep profit.

The price of the transactional fee can matter to one or both of the parties involved. This is where a transactional loan comes in. Using a loan prevents the buyer from seeing the original price paid for the property.

At the end of the day, both parties ideally make a profit off the property, so the fee amount “shouldn’t” matter. However, everyone has different reactions to money, and using a loan is a safe way to keep the transaction smooth.

What Is a Transactional Loan’s Terminology?

There are a few important terms you’ll hear in the midst of a transaction like this.

The main point of a transactional loan is that it’s used in one day. A lender will fund and be paid back usually within a few hours. In that time, ownership transfers from the original seller to the wholesaler, then from the wholesaler to the end buyer.

With these two transactions happening almost simultaneously, the title company needs a simple way to keep everything straight.

So, they label the person who is originally selling the property the “A” person. The wholesaler is the “B” person. And the “C” person is the end buyer.

Using these labels, a transactional loan has two sides: AB and BC. The AB transaction is the first part, from owner to wholesaler. The BC side is the second half, from wholesaler to buyer.

What Is a Transactional Loan Closing Like?

There are a couple steps that happen on closing day with the typical use of a transactional loan.

First, the lender sends the typical closing documents and the wire on the same day. The lender lets the title company know they won’t fund the loan until the end buyer and their funding is verified. The lender will only approve funding once they’re certain the end buyer will actually complete the process.

A one-day closing requires all three parties to be present and prepared. The AB transaction happens first. Then, a few minutes later, the wholesaler completes the BC transaction with the end buyer.

After everything is signed and completed, the title company does their thing. They complete the paperwork, clear the wires, and send the money back to the transactional loan lender.

By the end of the day, the end buyer owns the property. Plus, the wholesaler made their profit without any potential conflict about the fee.

What Does a Transactional Loan Cost?

Transactional funding costs depend on your LTV, the length of the loan, and your lender.

There are some transactional loans that merge into bridge loan territory and take up to 30 to 60 days. But true transactional funding happens in one day (maximum two). The typical cost is about 1 to 1.5 points for a transactional loan.

If a wholesaler needs a loan for $100,000, then the loan fee would be between $1,000 and $1,500. In the example we used earlier, this would allow the wholesaler to safely charge their $50,000 fee and get around $49,000 of profit.

However, a transactional loan is much less helpful when the wholesaler fee is smaller. If they buy the house for $100,000 and sell for $105,000, then the fee would leave them with a total profit of $3,500 to $4,000. In that case, it’s more worthwhile to sell the contract rather than do a transactional loan.

Transactional deals are for:

  • When the margins are good on a deal.
  • When financing for the end buyer requires it.
  • In a special case where a contract is non-assignable.

Who Does Transactional Funding?

You can get a transactional loan from a hard money lender.

Large lenders typically only loan 80-85% of the original purchase price. Smaller lenders, like Hard Money Mike, typically loan 100%.

We’ve been doing transactional loans for over 20 years. We expect to start doing even more as the economy changes.

If you have a deal, send us an email. We’re happy to look at it, price it out, and see if it’s something we can do. At the very least, we can help walk you through the process. Reach out to us at Info@HardMoneyMike.com.

Happy Investing.

Text: "Best Real Estate Investments in 2022"

4 Real Estate Basics to Make Money in 2022

The best real estate investments are the evergreen basics. Here are 4 consistent ways of creating cashflow — if you do it right based on your market.

1) Flips

Buying, fixing, and then selling properties is a common investment strategy. But to make fix-and-flips your best real estate investment in 2022, you’ll have to focus carefully on the numbers. Flips make money in one lump sum, not in a steady cash flow over time. So in tougher markets, it’s important to make that large sum count.

This year especially, we recommend staying in the medium to lower price range for your flips. We’re still seeing people selling well in the medium price range. Larger properties, however, are feeling a lot of pressure in this market.

For flips, focus on the numbers and stick to medium price ranges.

2) BRRRR Investments

Buying and fixing up rental properties is another of the best real estate investments. But BRRRR is taking a bit of a hit right now due to interest rates. Interest rates have more than doubled since the beginning of 2022, which will seriously impact your cash flow.

You can still make money from BRRRR properties this year, but you’ll have to be extra careful with numbers. Know your credit score, know your interest rates, and know the rent prices for your area.

3) Subject Tos

A “subject to” is when you buy someone’s property, take over their mortgage, and make all payments, but you don’t assume the loan. The property is in your name and you have ownership, but it stays financed by the seller.

Subject tos will be great opportunities in 2022. You can walk into a property where the rate on the mortgage is still 2.5% – 3%, potentially with renters in place. This will bring a much higher cash flow than if you started from scratch on the open market, where interest rates are almost double that.

Using subject tos is a great way to grow a big portfolio using someone else’s financing.

4) Notes

Another great tactic for real estate investors this year is to use your money in deeds of trust or other private lending.

Rates have gone up, but banks still haven’t really raised CD rates. If you have some money sitting in an account, notes are a good way to get a higher return. You can lend to other investors through gap funding or a more long-term agreement. Notes are becoming big in real estate again, especially with the market in 2022.

For More on the Best Real Estate Investments in 2022

Read the full article here.

Watch the full video here:

Hand holding house keys. Text:"How to Start with a BRRRR Real Estate Investment"

Where to Start with a BRRRR Real Estate Investment

The first step in a BRRRR real estate investment happens before you even look at a property. It’s important to sit down and think about what you want out of your real estate investing experience.

Answer questions like:

  • Where am I in life now? Where do I want to be?
  • Why do I want to invest in real estate?
  • Where do I want to invest?
  • Is the BRRRR method the best path for my goals?
  • How many properties do I want?
  • How much cash flow do I want to generate from BRRRR?

Before you take any action, find your answers to all of these questions. This will show you where to start, how to go about it, and when to stop. You’ll get much more out of your BRRRR real estate investment when you know where you’re going and why.

Launch into the BRRRR Method

Buy, Rehab, Rent, Refinance, Repeat. That’s the BRRRR method in a nutshell.

Many investors use this method to generate monthly cash flow and build a real estate empire. Following BRRRR is one of the best ways to build a rental portfolio with little to no money out-of-pocket.

Once you understand your real estate goals, you can follow the BRRRR map to reach financial freedom.

How do you find that map?

Read the full article here.

Watch the full video here:

Text: "Making Money in Real Estate in 2022." Mike Bonn with dollar bills in the background.

How to Make Money Real Estate Investing in 2022

You’re here to make money. How do you make money real estate investing in 2022?

The real estate market has changed. The economy has changed. The money side of flipping has changed. If you’re a newer real estate investor, you might be feeling hesitant right now.

We’ve been through over twenty years of markets. We’ve seen many markets that look similar to ours in 2022.

Take our word for it: here’s what will make you money this year in your real estate investment career.

4 Real Estate Basics That Can Make You Money in 2022

The best real estate investments are the evergreen basics. Here are 4 consistent ways of creating cashflow — if you do it right based on your market.

1) Flips

Buying, fixing, and then selling properties is a common investment strategy. But to make money on fix-and-flips in 2022, you’ll have to focus carefully on the numbers. Flips make money in one lump sum, not in a steady cash flow over time. So in tougher markets, it’s important to make that large sum count.

This year especially, we recommend staying in the medium to lower price range for your flips. We’re still seeing people selling well in the medium price range. Larger properties, however, are feeling a lot of pressure in this market.

For flips, focus on the numbers and stick to medium price ranges. (More on this later in the article).

2) BRRRR

Buying and fixing up rental properties is another of the best real estate investments. But BRRRR is taking a bit of a hit right now due to interest rates. Interest rates have more than doubled since the beginning of 2022, which will seriously impact your cash flow.

You can still make money from BRRRR properties this year, but you’ll have to be extra careful with numbers. Know your credit score, know your interest rates, and know the rent prices for your area.

3) Subject Tos

A “subject to” is when you buy someone’s property, take over their mortgage, and make all payments, but you don’t assume the loan. The property is in your name and you have ownership, but it stays financed by the seller. 

Subject tos will be great opportunities in 2022. You can walk into a property where the rate on the mortgage is still 2.5% – 3%, potentially with renters in place. This will bring a much higher cash flow than if you started from scratch on the open market, where interest rates are almost double that.

Using subject tos is a great way to grow a big portfolio using someone else’s financing. (You’ll see more about subject tos in 2022 later in the article).

4) Notes

Another great tactic for real estate investors this year is to use your money in deeds of trust or other private lending.

Rates have gone up, but banks still haven’t really raised CD rates. If you have some money sitting in an account, notes are a good way to get a higher return. You can lend to other investors through gap funding or a more long-term agreement. Notes are becoming big in real estate again, especially with the market in 2022.

Passive Ways to Make Money in Real Estate in 2022

Maybe you feel like you want to use 2022 as an opportunity to tap out of the active flipping game. But, you also don’t want to lose the chance for real estate cash flow. We’ve got three good passive real estate investing options for you.

1) Subject Tos with Rentals

Subject to rentals will be a pretty safe bet for passive real estate income this year. With a subject to, the loan is still under the original financier’s name. You’re just making payments, so the mortgage won’t cloud up your credit.

It’s relatively easy to add 5 – 10 properties to your rental portfolio without adding more debt to your name. If you put these rentals in with a property management company, you can still make a good amount of passive cash flow.

2) Private Notes

Deeds of trust or private lending is a reliable, secured, passive way to put money to work in real estate. With notes, you lend your money to friends or other people in the markets who are looking for funding – and you don’t have to worry about doing any of the work on the property.

Instead of making 1-2% with a bank’s CD rate, you could double or triple that by lending privately. We’ve helped thousands of people successfully lend this way, so contact us for more information.

3) REITs (Real Estate Investment Trusts)

Real Estate Investment Trusts work a bit like a mutual fund. You pool your money with a bunch of other people, and the company uses that money to buy real estate. You’re just one of many investors, and everyone earns a return on the properties. 

There are public REITs and private REITs. With public, you can trade on the open market. With private, you have a little more restriction; once you get in, you stay in.

REITs are a great option if you want to invest in real estate but want someone else to manage it. If you’re looking for passive real estate income, research REITs in your area.

Commercial Real Estate Investing in 2022

2022 may be the year you want to venture into commercial real estate. Apartments buildings with over five units, retail space, office buildings, and industrial areas all fall under commercial real estate.

How do you invest in commercial real estate?

One option for commercial real estate investing is to hold or flip just as you would any single-family home. We’ve also seen a lot of people find success with another option recently: buying bigger industrial properties, flipping them, and splitting them up into separate properties to sell.

Cap Rates in Commercial Real Estate

An important number to consider in commercial real estate is the cap rate. All commercial properties come with a cap rate, which is the return you can expect on your investment. 

For example, if you put $100,000 into a property with a 4% cap rate, you can expect a return of $4,000; this is probably an area that pays lower rent. But a $100,000 investment on an 8% cap rate will have an $8,000 return, so the property will have higher cash flow.

Generally, the higher the cap rate, the lower the value because it may be considered a riskier investment. The lower the cap rate, the higher the value because more people are more willing to put more money in. 

People take lower cap rates over higher ones because they believe a lower cap rate market is more stable. It’s like when you put money into a CD – the appeal is the stability, despite the lower rate. People who look for higher cap rates prioritize return over long-term growth or stability.

Cap rates differ city-to-city and within cities. If you’re interested in commercial properties, you can talk to a commercial broker in your area to understand local cap rates.

Two Biggest Opportunities for Real Estate Investing in 2022: Fix-and-Flips and Subject Tos

How you’ll choose to make money in 2022 will depend on you, your market, and your current financial situation. 

But we expect that the two best real estate investment methods this year will be flipping and subject tos. Here’s how you can make money using these investment strategies:

How to Flip for Profit

At the beginning of 2022, flipped homes would sell in a matter of hours, rather than weeks or months. The fix-and-flip experience will be a little different in the remainder of 2022. But flipping is still a great opportunity to make a profit in real estate.

What Properties Will Flip for Profit?

Your best bet for income in real estate flipping will be sticking to medium price point properties.

Some areas – for example, City center of Denver — are still doing great in higher price ranges. People are still selling $1 – 2 million dollar properties with no issues. But in smaller communities, there are fewer people who can afford $600,000 – $900,000 properties.

With rising interest rates, people who were looking in those higher price ranges now need to look a little lower. Medium property prices are also always competing with rent.

Even though interest rates have gone up 5 – 6%, a $150,000 – $250,000 house will still be in a competitive market with rent. As long as they can afford it, people will always steer toward buying a home rather than renting. 

Rent prices aren’t going anywhere but up. We may see changes in the renting sphere as congress discusses hedge funds and other big investors driving rent prices up. But for you now, rising rents could push more people to consider home ownership in the low-to-mid price range.

Flipping Expectations for 2022

When you look at your market, know that 3-bedroom, 2-bath, and garage homes will always be reliable as a seller. People will always be searching for those types of properties for their families.

You’ll find buyers in this range, but be sure to adjust your expectations. In the last market, buyers would make offers within hours or days. The reality of this upcoming market is it might take one or two months to find a buyer. Be patient, take your time, look at your area, and keep an eye out for upcoming foreclosures and other opportunities.

Subject To Real Estate Investing

A “subject to” is when you buy someone’s property subject to them leaving the mortgage on the property. You become the owner, you receive the deed or title, and you take over the loan. But it’s still the same loan, in the original owner’s name. You’re not assuming, or refinancing. They keep the loan on the property, and you just make the payments.

Should You Do a Subject To?

How is a subject to beneficial for you? The property’s existing mortgage will likely have rates close to 2.5-3% – rather than the 6% rate you’d get on a new loan. Also, in a subject to, you assume no additional debt.

Most subject tos are made for rentals, lease options, or contract for deeds. A subject to property is not a great place to flip. When people are willing to do a subject to, the reason they’re not selling the property is they can’t get the price that they want at the speed they want. So they have to get rid of the property this way to avoid wrecking their credit for future loans.

The Money Side of Subject Tos

We’ve seen clients with 50 – 200 subject to properties. Subject tos are a great way to build a portfolio without using your credit, and without maxing out your loan opportunities with lenders.

Sometimes with subject tos, you’ll have to give the owner of the mortgage some money to give over the property. There are also occasional fix-up costs, depending on the condition of the property. 

Why some people don’t want to jump into a subject to is because they don’t have the $5,000 – $15,000 start-up costs to get into it. We recommend looking into OPM as a way to cover these costs and take advantage of subject tos. 

You’re getting the cheapest possible financing on a property, so it doesn’t matter much if the loan is still at 100%. Making monthly payments continually brings the loan down. And you’re free from many other financing and closing costs.

If you get a long-term renter, or someone who wants to do a lease option and put some money down, subject tos can become a great source of cash flow.

Subject tos are going to be hot as foreclosures pick up, selling times slow, and people can’t afford to fix up their properties. They are one of the best ways to take advantage of a down market and build a large real estate portfolio.

What To Do Next?

The real estate market at the end of 2022 will look very different than it did in the beginning. But there are always options for making money in real estate – in any market.

We have plenty of experience in markets like the one we’re now entering. If you need more guidance as you navigate your real estate investment career this year, let us help.

Download our free real estate investment resources here.

Check out the information on our YouTube channel here.

And always feel free to reach out to us at hardmoneymike.com.

 

Happy Investing.

Text "What is a credit score?"

How Is My Credit Score Calculated?

Real estate investing gets a whole lot easier when you understand your credit score.

There are a couple different types of credit scores, but the numbers we’ll use here reflect FICO scores (the most widely used credit score for most lenders).

Credit scores range between 0 and 850. More than 740 is great, and a score of less than 700 begins to limit your options.

This number is calculated by looking at five main pieces of information:

  • Credit mix
  • New Credit
  • Credit History
  • Payment history
  • Amounts owed

Credit Mix

Close to 10% of your score is based on the mix of credit you already have.

Do you have seven credit cards?

Or zero?

Do you have a car payment, a mortgage, student loans, personal loans?

Typically, the more diverse your lines of credit are, the better it is for your score.

New Credit

Around 10% is based on “new credit,” or how often you get credit inquiries or open a new line of credit.

New credit can temporarily lower your score. So for example, if you buy a new car, you’ll probably have trouble securing a loan for a property right away.

Length of Credit History

About 15% of your score is calculated based on how long you’ve had your lines of credit.

If you opened your first line of credit less than 5 years ago, you’ll have a lower score than someone whose credit is 40 years old.

Amounts Owed

These last two categories are the most important. They make up two-thirds of your credit score.

About 30% of your score is determined by something called amounts owed. Amounts owed is about your debt. More specifically, it’s about how much of your available credit you’re using.

For example, let’s say your credit card has a max of $1,000. You buy a new set of tires and brakes, so now you owe $1,000 on your card. You’re using 100% of your $1,000 limit – you’re maxed out.

The story creditors see when they look at you is that you’re not managing your credit well. They’ll assume you won’t manage other loans well either, so you get a lower score.

But let’s look at another situation.

Say you got a different credit card with a max of $5,000. That same borrowed $1,000 has a way different effect on your credit score. You’re only using 20% of your credit line, and you’re leaving 80% at your disposal. Creditors like that story. So you get a higher score.

Payment History

The biggest amount of your score, up to 35%, is based on your payment history.

Payment history is exactly what it sounds like:

  • How are you paying your bills?
  • Do you always pay on time?
  • Have you had any bankruptcies?

Financial institutions can see this information, and it’s the top factor they consider. At the end of the day, lenders want to know: Will you pay them back? On time?

Read the full article here >>

the full video here >>