Jeff Vasishta › Texas Ally Real Estate Group, LLC

Are Adjustable Rate Mortgages a Lifeline for Lower Rates? Or the Most Dangerous Thing You Could Do?

by Jeff Vasishta | May 6, 2024 | Investing, News Feed

If, like me, you check mortgage interest rates like an expectant parent checks their wife’s contractions, you doubtless will have analyzed every type of loan product in an attempt to inch the currently high rates down.

Famed financial guru Suze Orman recently appeared on CNN extolling the virtues of an adjustable rate mortgage (ARM). But to many American homebuyers, mentioning an ARM is like the Ghost of Christmas Past returning to haunt us once more: Weren’t ARMs partly to blame for the 2008 financial crash?

ARMs were derided in 2008 because many Americans got into financial trouble. Once their interest rates adjusted upward after three, five, or seven years, borrowers could not refinance down to a lower rate and fell into foreclosure. So why is Orman—whose monetary advice tends to be conservative—suggesting we go ice skating on a financial frozen lake?

Live to Fight Another Day

Such has been the accelerated rise in interest rates that many would-be buyers and current investors have found themselves gasping for air to afford a new home, investment, or refinance. This is particularly true if you have a high-interest rate bridge loan and were expecting a refinance to provide you with a soft landing of a new 4% rate. In this instance, an ARM could be the difference between sinking or swimming.

So living to fight another day is better than not fighting at all. Most experts agree that rates will eventually come down, so staying afloat until that happens, in theory, makes sense.

House Prices Always Go Up

“If you can afford to buy, you always buy,” said Orman, shrugging off the news that with higher rates, it’s now cheaper to rent than buy. Her logic? House prices always rise, and getting into the game as soon as possible is always beneficial in the long run.

Orman’s thinking is straightforward for homebuyers looking for a personal residence with no interest in investing. For investors, however, renting a personal residence while buying an investment is the way to go, not purely for the tax benefits (in the current market, cash flow is likely to be compromised), but because when rates do eventually come down, investors will come flooding back, and prices will increase.

“I’ve always been an advocate of ARMs, especially for investors, when the market justifies it,” Caeli Ridge, president of Ridge Lending Group, who specializes in investor financing, told BiggerPockets. “The average shelf life of a mortgage on a rental property is five years. So, I would 100% recommend an investor to take the ARM if it is 0.5% to 1% lower. The chances of the mortgage being refinanced or for a lower rate or a cash-out refinance is high, not to mention the possibility of a 1031 exchange via a sale.”

Ridge stresses caution when considering an ARM for a personal residence, saying that unless you can find a rate markedly lower than a 30-year fixed, it’s not always worth it.

According to CNBC, “The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) increased to 7.29% last week from 7.24% the previous week, with points decreasing to 0.65 from 0.66 (including the origination fee) for loans with a 20% down payment. Meanwhile, the average contract interest rate for 5/1 ARMs fell to 6.60% from 6.64%.” ARMs need to be refinanced

Is Waiting for Rates to Drop Good Advice?

Waiting for interest rates to drop is a gamble. If rates fall and prices increase, investors must calculate how much they can gain by playing the waiting game.

Different parts of the country will not appreciate at the same rate. Areas that have experienced dramatic price increases (Austin, Texas notably being one) and other Sunbelt areas where there has been increased inventory due to new construction have seen prices drop.

Until existing inventory is filled and overheated prices return to normal, it’s unlikely prices will increase much, even with lower rates, so waiting could make more sense—especially for prospective buyers who currently have low rates or whose rent is lower than a mortgage payment would be.

Things Prospective Buyers Can Do to Lower Rates

You are not entirely beholden to the machinations of the Federal Reserve. There are certain things you do now to help lower your rate if you simply have to buy:

Improve your credit score: A proven track record of being financially responsible is the best way to be assured of increasing your credit score and getting the lowest rate.
Buy down points: Buying down points means paying money upfront to buy down percentage points on your interest rate. Again, you would need to make a calculation based on the time you intend to keep the property and the likelihood interest rates will decrease.
Get an FHA-backed loan: Loans backed by the government, such as Federal Housing Administration (FHA)-backed and Veterans Affairs (VA)-backed loans, tend to have lower rates than conventional or jumbo loans because they come with the federal government’s protection.
Make a larger down payment: If you have assets in the stock market or elsewhere that are not appreciating much, it might be worth liquidating them to put a larger down payment on a home, which will save you money on your monthly mortgage payment.
Take out a shorter-term loan: Shorter-term loans (such as 15-year mortgages) come with lower interest rates but higher monthly payments. However, they can save you thousands in the long term. Alternatively, you can simply make extra payments toward your principal to pay down the loan quicker, giving you the flexibility to switch back to a 30-year loan if necessary.

Final Thoughts

There is a lot of one-size-fits-all information floating around online. While much of it—such as Suze Orman’s advice—makes for good sound bites and clickbait, working out what’s best for you requires a deep dive with a lot of specificity.

Knowing how long you plan to own a home, the cost of refinancing, and all the loan options available to you will help you decide. Adjustable rate mortgages are good in theory for certain situations, but now would not appear to be one of them, especially for personal residences. Talking to a reputable lender that offers a wide variety of loan products to compare and contrast your options, especially if you are an investor, is a good first step.

Join the community

Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Detroit Beat Its Post-Pandemic Downtown Doom Loop—Here’s How Investors Can Benefit

by Jeff Vasishta | May 6, 2024 | Investing, News Feed

A mayor in handcuffs, a bankrupt city mired in poverty, unemployment, and soaring crime: 10 years ago that was Detroit’s legacy. Today, it is a real estate success story.

Early investors—to quote one of Motown’s most famous songs—are dancing in the street. Developers are pouring billions of dollars into its business district, luring the likes of Ford, Quicken Loans, Blue Cross Blue Shield, and more to take up office space. There’s even a Gucci store—the city’s first. The spillover has resulted in booming residential home prices—up 40% since 2020—and revitalized neighborhoods.

Vacant Buildings to Residential Space

Detroit’s tale is one that other cities such as Pittsburgh, Washington D.C., New York, and San Francisco, experiencing the post-pandemic downtown doom loop of empty offices and increased vagrancy, could do well to emulate. A total of 40-plus major construction projects have been completed or are being completed downtown since 2018, and thanks to new construction and repurposed former vacant buildings, there will be 9,567 more residential units in 2024 than in 2021.

Preserving and Repurposing Historic Buildings

In this respect, Detroit has succeeded where other cities have failed, in part because many of the city’s downtown office buildings are almost a century old, with small floors and stylish architecture that convert well into residential buildings—unlike the 1970s and ’80s glassy towers in other cities.

Spearheading this conversion is Dan Gilbert, a Detroit native and the billionaire co-founder of home lender Rocket Mortgage. This pioneer moved his company to downtown from the suburbs in 2010. He told the Wall Street Journal, “We really had three options: Extend the leases, go to some farmland and build a campus—which wasn’t really attractive to us—or come downtown and fill up some of these beautiful old buildings that we really loved.”

Making Downtown a Destination for More Than Work

Gilbert’s companies bought more than 130 properties downtown, spending billions on revitalizing the city and encouraging other companies to take advantage of cheap office space in gorgeous buildings. Ford Motor Company, always synonymous with the city, is spending $900 million to redevelop Michigan Central, the city’s abandoned train station—opening in June—and surrounding properties. Start-ups are streaming in.

However, to make Downtown less office-dependent, casinos, sports venues, and revamped aging theaters have added a vibrant nightlife appeal. Developers have responded to generous tax breaks to build, and the knock-on effect has been increased condo and apartment prices.

“Best Investment in America”

Residential property values in the city climbed an average of 23% last year, marking the seventh straight year of growth. Values rose 31% in 2022 and 8% per neighborhood from 2021 numbers. In total, all 208 of the city’s neighborhoods saw increases.

Mayor Mike Duggan gleefully called the city the “best investment in America.” Some neighborhoods, such as Campau/Banglatown, New Center Commons, DelRay, and Carbon Works, saw their values increase by more than 50%. A strategic plan to keep real estate taxes low has helped.

“Since 2018, Detroit property values have exploded, not your tax rate,” Duggan said in a statement. “It stayed down here, and today, the average Detroiter is being taxed at half their assessed value.”

A Haven for House Flippers

As such, in recent years, Detroit has been a haven for house flippers and new residents. Duggan said about 15,000 homes, as well as parks, streetscapes, and streetlights, saw improvements. He also mentioned the Detroit Land Bank’s declining inventory, which has gone from 45,000 abandoned homes in 2014 to less than 5,000 today.

Today, Detroit remains extremely affordable. According to Realtor.com, the median listing home price is $89,900, and the median sold home price is $79,000. Although the current 4,236 homes for sale cover a wide range of prices—everywhere from $750 for a lot to $8.6 million for a 36,000-square-foot multifamily property—investing and raising a family in a decent Detroit neighborhood is extremely achievable.

Rents have also increased in the city, making it a profitable place for out-of-town landlords to invest. They often buy houses for cash. The same amount of money would only pay for a down payment elsewhere.

“Market sales are 58%, and distress[ed] sales are about 42%,” City Councilman Coleman A. Young II told the Detroit News. “That’s one of the first times that we’ve had more market sales than distress[ed] sales in the city of Detroit.” In 2013, 90% of Detroit’s homes were sold for cash, as borrowers could not obtain a mortgage.

But There Are Still Issues

Despite the massive new development and rising house prices, investing in a Detroit fixer-upper is far from a cakewalk, as this New York Times article reveals. Finding a quality, honest contractor can still be tough, and nefarious characters are around, ready to steal tools and worse. “Welcome to Detroit” is a phrase often used by jaded police officers when out-of-state investors fall victim to crime.

All this means that out-of-town investors still have to pick and choose neighborhoods to buy in carefully, and having the help of knowledgeable real estate investors and property managers in the area is a huge benefit.

Other Cities Like Detroit Where Investment Makes Sense

It’s hard to find cities like Detroit, where house prices are still incredibly low, and yet tremendous development and appreciation have occurred. That’s because Detroit scratched its way up from bankruptcy when the loose change in your pocket could have bought you a home there a decade ago.

Other major cities experiencing downtown problems are still too expensive to invest in, whereas other affordable Midwestern cities, such as Indianapolis, Minneapolis, and Cleveland, have been losing workers in their downtowns, resulting in a loss of residents.

However, several Midwestern cities, such as Canton and Akron, Ohio; Omaha, Nebraska; and Springfield, Missouri, have emulated Detroit, reinventing themselves with new businesses and attracting new residents. These cities are ripe for investment. Beginning the investment journey here means comparing house prices, rental rates, and talking to real estate agents and property managers.

Final Thoughts

As an experienced investor, I have learned that the bodybuilding adage of “no pain, no gain” also holds true for real estate. To achieve the best returns, you have to be prepared to endure a degree of discomfort. Riding an equity/appreciation wave as a city transitions from bad times to good means catching the wave during the dark days and all the ills that come with it.

Early pioneers who invested in Detroit 15 years ago undoubtedly have their war stories but are sitting pretty today. However, the house prices are still low enough that investing here still makes sense.

Looking at the projects planned for a city’s downtown area can often indicate how the surrounding areas will operate: What new businesses are moving in? Are they future-proof? What are the development plans? Are there new coffee shops, art galleries, and artists in the neighborhoods? Are residents arriving rather than leaving?

These are the early signs of any city on the move. Making a downtown livable and a place to congregate safely outside work hours is another strong sign. So far, Detroit seems to have checked all the boxes.

Join the community

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Free Money? Can You Build a Real Estate Portfolio with Zero-Interest Credit Cards?

by Jeff Vasishta | May 1, 2024 | Investing, News Feed

Juggling 0% interest business credit cards is like juggling torches in a hay-covered barn. Drop one, and the whole place goes up in flames. However, if you are disciplined and know what you’re doing, they could be a great asset in helping you kick-start your real estate investing career.

Getting a 0% Business Credit Card

There’s lots of information online regarding 0% APR business credit cards. Most offer 0% interest for 12-18 months. This makes them well-suited for real estate projects that can be refinanced or sold, allowing you to pay back the cards before interest starts to kick in. These cards are relatively easy to get, provided you have good credit and a business entity.

But don’t expect to get hundreds of thousands of dollars right away. Once you have used and paid back the initial amounts borrowed, lenders tend to gradually increase the amount they can lend to you. It’s not unusual to get $50,000 to $100,000 with your first round of funding with excellent credit.

Because the 0% APR expires after 12-18 months, it’s not a good idea to keep using the same card beyond the expiry date. Rather, you will have to get a new card to benefit from a new introductory 0% APR. The more borrowing and payback cycles you go through, the more your credit will be extended.

If you’re using a broker to help you apply for multiple cards, as I have, talk to your accountant about writing off the broker’s commission and any fees charged for using the cards as cash to make purchases or pay contractors.

The Painful Pitfalls

If you get several business credit cards at once, I’ve found it difficult to stay on top of each one, especially in the midst of a renovation. Each card needs the principal payment to be paid on time, and if you are a day late, say goodbye to your 0% introductory period. You’ll find yourself paying up to 30% interest. It happened to me, and I could only get some relief when I refinanced the home and paid the card in full.

Using a 0% Credit Card to Build a Real Estate Portfolio

Investor Rick Matos from Lehigh Valley, Pennsylvania, told BiggerPockets how he purchased entire houses in run-down areas of Allentown using credit cards, which he then fixed up and refinanced into conventional loans. Rick’s is a classic case study because the houses he purchased were extremely cheap—often $10,000 to $20,000. However, soon after he refinanced them, the area went through a massive cycle of urban renewal and price appreciation, which rapidly increased his rent, allowing him to pay down his mortgages and increase his net worth.

Detroit investor Ashley Hamilton made a similar move, telling Business Insider (a story that also ran on Yahoo!) how she purchased 35 units across 30 properties over 14 years with 0% balance transfer credit cards.

Hamilton’s blueprint is one all investors can follow: She accessed her money via convenience checks provided by the credit card company and deposited the money directly into her checking account. After fixing up and renting out her properties (as with Matos, some of these houses were as cheap as $10,000), she paid off her balance transfer debt with rental income, cash-out refinancing, or tax refunds. Hamilton’s advice was to open credit cards that offered cash rewards and the 0% balance transfer rate, thus kicking back cash to help her repay the loan or use it on future projects.

Homes Around $100,000 Are Ideal Vehicles to Scale in Today’s Market

Using credit cards to build real estate portfolios sounds like a move from the land that time forgot, i.e., directly after the 2008 financial crash. Back then, low interest rates and burnout from the financial crash left banks looking to offload thousands of homes for pennies on the dollar.

But while this old-school playbook might seem dated with high prices and low inventory, it’s not. There are many cities where you can buy decent homes for just over $100,000. If you have a card with that much available credit, borrowing the rest of the money to renovate and refinance will allow you to pick up many such homes.

Alternatively, you can do the same thing by getting traditional mortgages (assuming the home needs modest renovations), using a zero-balance card to renovate, and pay it back with the cash flow you generate. This requires expertise and market knowledge to ensure the card can be fully paid back within the 0% introductory period. However, if you are unsure of what your house will rent for, this is not a move I recommend.

Using a 0% Credit Card to Flip a Home

House flipping works similarly to buying cheap homes in depressed markets and fixing them up to refinance and pay off through rental income. However, if you are flipping a house in a more expensive market unless you have a large 0% line of credit to purchase an entire home, you’ll have to be selective on how you use your cards.

This is because some lenders might want to know the source of your funds if you attempt to get a mortgage, and they might balk at the idea that you borrowed money to borrow money. A workaround is to deposit the money into your bank account and let it season for three months, but you are always working against the clock, using up your introductory zero-interest period.

The most obvious way to use 0% credit cards for a flip is to get a regular mortgage on a home and then use the zero-balance card to pay for appliances and renovations. If you intend to keep the house after it has been renovated, you’ll need to refinance the property or be confident enough that your cash flow will pay back credit cards before the 0% introductory offer expires. Renovations and budgets usually run over, as does the time to market and lease a property, so consider all this when deciding whether to use a business credit card.

0% Credit Cards and Short-Term Rentals: A Match Made in Heaven

Zero-APR credit cards are the perfect vehicle for a short-term rental business. If you have an existing property or are arbitraging one, fixing up the home to make it appeal to vacationers requires expenditures for TVs, beds, and decor. It can amount to a lot of money. However, the rental reward can be huge—over three times as much as a regular rental, depending on location—allowing you to pay off your card quickly and reap high profits.

This is a technique I’ve used myself, and it’s relatively safe if you are sure you can get the rent you need. In my case, I had a lease signed with an arbitrage tenant—we agreed to split the cost of the furnishings—before I spent a penny on the card.

Also worth looking into is installing an accessory dwelling unit (ADU) next to your STR or primary residence for additional income. These tend to range from $60,000 to $225,000. Using cards to buy or renovate and pay back with rent or via refinancing can increase your long-term cash flow.

A new wave of striking new tiny homes—ideal for short-term rentals—have recently come on to the market, starting at $20,000. This makes them well suited for credit card purchases, as banks won’t touch such small loans.

Final Thoughts

If you don’t have the security of a W-2 job or savings as a backup, you are walking a precarious financial tightrope when using zero-interest credit cards. In real estate investing, one thing generally holds: Things never go as planned.

However, with a monetary cushion and the understanding of how to best deploy zero-interest credit cards, they can be a tremendous asset, allowing you to bypass hard money lenders and build a foundation for financial freedom.

Be warned, though: These instruments come wrapped in yellow caution tape. Indeed, 0% interest credit cards are not recommended if you’re an unorganized person or do not have someone working alongside you who is organized. Neither would I recommend them if you didn’t have a fail-safe bailout strategy such as a HELOC or emergency funds should you find yourself in over your head.

Join the community

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

These U.S. Cities Are Overflowing with Affordable Single-Family Homes Under $300k

by Jeff Vasishta | Apr 29, 2024 | Investing, News Feed

With median house prices in the U.S. inching towards half a million dollars and mortgage rates back over 7%, homebuyers and investors alike are getting choked out of the market. Although there are several cities in the Midwest and South where you can still buy homes for $100,000, they tend to be the exception rather than the norm.

Despite the shortage of houses, according to Realtor.com, there are several markets where you can buy a quality home in a good neighborhood for under $300,000.

The seven cities identified are:

Birmingham, Alabama
Buffalo, New York
Cleveland, Ohio
Detroit, Michigan
Pittsburgh, Pennsylvania
Rochester, New York
St. Louis, Missouri

With rents increasing and mortgage approvals tightening, these moderately priced homes might still struggle to break even at current interest rates—even with a conventional down payment of 20%—so they would need to be purchased for cash or with a sizable down payment and then refinanced when rates drop.

However, buying now—and catching an upward price cycle—would put you ahead of the buying frenzy when rates eventually come down. Also worth considering is buying a primary residence in these affordable cities to keep your debt-to-income ratio down while investing here for the long term.

Here’s a look at three of the identified markets.

Birmingham, Alabama

Median house prices in Birmingham rose by 4% annually to $290,000 in March 2024. The good news for buyers and investors is that listing inventory rose 27.6% year over year.

A completely remodeled, detached 1,700-square-foot single-family ranch home with three bedrooms, two bathrooms, and a garage currently costs $290,000 in Birmingham.

The University of Alabama anchors the city, which employs 23,000 people. It also has a robust car manufacturing industry (Honda and Mercedes have plants here) and finance and healthcare industries that traditionally tend to stay. There is also a burgeoning short-term rental market, with the number of listings doubling over the last 12 months, according to AirDNA.

“I realized that Birmingham has one of the best real estate markets in the nation, from a returns perspective as well as from a barrier-to-entry perspective,” investor Stephen Yin told Business Insider in 2022. “In a lot of neighborhoods, you can get a three-bedroom, one-bathroom for under $100,000.”

Since then, Birmingham has been one of the fastest-appreciating cities in the South. In March 2024, the median listing home price was $179.900, up 20% year over year. The median home sold price was $225,000, according to Realtor.com. The city has a low unemployment rate of 3.1% as of February 2024 compared to 3.8% nationally, with 54% of the city being renter-occupied, according to RentCafe, so there’s a large tenant pool.

In recent years, Alabama has been one of the sleeping giants of the South from a real estate investment perspective. However, with relatively low purchase prices, it’s a great place to invest once all other metrics are considered.

Buffalo, New York

Buffalo has been the poster child for an economic turnaround. The snowy industrial city in Western New York, bordering Canada, has benefitted from a decade of city initiatives that have poured billions into parks, public art projects, and apartment complexes. The 2020 census figures showed the population increasing for the first time in 70 years.

The city’s metro median list price of $270,000 is up almost 10% in the last year, with inventory increasing by 4.2%. For that price, you can purchase a fully renovated 1,444-square-foot single-family home with three bedrooms and 1.5 baths, with a two-car garage. Healthcare, banking, manufacturing for car parts, and retail groceries are some of the biggest employers in the area, while Buffalo (SUNY) University employs almost 6,000 people.

There have been double digital rental increases in the last few years, with some tenants experiencing 30% rent hikes. RentCafe cites Buffalo as one of the country’s top 20 most competitive small rental markets. With 57% of the households in Buffalo renter-occupied, according to RentCafe, it remains a great place to invest despite competition for homes.

Cleveland, Ohio

Cleveland was recently put in the global—or at least the U.S.—spotlight. The women’s NCAA Final Four was on Sunday, April 7; the following day, the city was a prime viewing location for the solar eclipse. No wonder mayor Justin Bibb enthused, “I see dollar signs, dollar signs, dollar signs everywhere,” as out-of-towners converged on the city.

Those two events represented a fitting fulcrum to Cleveland’s economic turnaround. Greater Cleveland (the Cleveland-Akron combined statistical area) has 3.7 million people and a $220 billion economy. It is the largest region in Ohio, the third largest in the Midwest, and in the top 20 in the U.S.

The area has over 110,000 college students and sees $3.7 billion in annual research. Medicine is one of the city’s leading employers through research, biotech, med tech, and healthcare, spearheaded by the Cleveland Clinic. Other industries include advanced manufacturing, law, aerospace, banking, insurance, technology, education, and polymers and materials.

The metro median list price is a very affordable $227,000, up 8.4% annually. That price will buy you a fully renovated three-bedroom, 2.5-bathroom, 1,628-square-foot house with a two-car garage.

Rents have risen dramatically in recent years—increasing 6.5% between March 2023 and 2024 in the Greater Cleveland area and 9.4% in the metro area for single-family homes in the same period, meaning rent has outstripped inflation. According to RentCafe data, 59% of households rent in Cleveland, making it another prime rental market.

Final Thoughts

The four remaining markets have one thing in common: They are formerly depressed industrial cities that successfully reinvented themselves through tech, medicine, finance, energy, and food and beverage. They are all relatively small cities with a decades-long history of low-priced homes.

Government incentives and investment have transformed these cities. The 2022 CHIPS Act sees around $280 billion poured into the U.S. economy through grants, tax breaks, and research incentives to bring essential technologies such as semiconductors to U.S. soil. Many of the beneficiaries of this money are located in the Midwest, in small cities that have the land to create technology parks.

“One advantage of having big companies return to the Midwest is that it helps take seriously some of the crises around geopolitical tensions, climate change, or potential disruption to our supply chains,” Brookings Institution fellow Annelies Goger told The Guardian. “It would help us have more capacity domestically to overcome those types of shocks in the future.”

The Midwest has been regenerating into tech towns for the best part of a decade. Indeed, 18,000 start-ups, backed by venture capital and talent, have landed in the region, settling into the heartland, sparking a population increase for the first time in years.

The lesson for real estate investors is to follow the tech and med dollars—see where labs and fabs are being built and where future-proof businesses are sprouting. When this coincides with former down-on-their-heels industrial cities, you’ll likely meet a perfect storm for investing: low housing costs, good local infrastructure backed by universities and hospitals, and large-scale stimulus packages attracting new residents.

Join the community

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Next Entries »