A few times a week I talk to investors planning on putting a large down payment on the purchase of a single-family rental home. The goal is to have a better “cash flow”. It may sound logical – the greater the down payment, the smaller the loan, and hence the monthly payments. However, the foundational piece of buying rental homes in the United States is the “gift” called “the 30-year fixed rate loan”. This loan sounds like a miracle to most foreigners, since neither the monthly payment nor the mortgage balance EVER keeps up with the cost of living around the world, while everything else does.
The magical 30-year fixed rate loan
The 30-year fixed-rate loan is at the heart of life transformation for investors when the homes are held for 10 years or more (preferably over 15). The loan keeps getting eroded by inflation (or CPI– the cost of living), while the home, rent, and everything else keeps requiring more dollars to buy (hence in dollars, their value goes up – even without intrinsic appreciation). The 30-year fixed rate loan starts looking quite puny after 12, 14, 16 years. It may be years before it is paid off, but since it never keeps up with the cost of living, inflation hammers the real value of the loan.
These loans are a great financial gift, with future-changing potential. Why, then, would you want to make the gift smaller? Especially at today’s low rates? The answer is, you don’t. A larger down payment will mean the magical loan will be smaller.
May be wise not to exceed 20% down payment
This is not fully utilizing the power of the fixed-rate loan, and it means the borrower has expended more of their scarcest resource: cash! Even very wealthy people, who can afford to put down a large down payment or buy for cash, choose to put down less money. They do this to leverage their cash with the 30-year fixed-rate loan.
I think that in normal cases, a 20% down payment should not be exceeded. The small additional cash flow due to having a smaller loan is insignificant at the present time. Right now, your main “cash flow” should come from your own earnings (salary). It is later in life during retirement that the rental homes can replace your income.
In cases of big 1031 exchanges, with not enough properties to identify, or in cases of not being able to get the FNMA loan anymore, then larger down payments are merited and that is a different blog post. I still think the down payments should be less, rather than more, in any circumstance. Currently, in our Membership area on our website, we have podcasts and a webinar that discuss loans and cash flow in depth. You can learn more about it at icgre.com/members
Our ICG 1-Day REAL ESTATE Expo took place on Saturday, March 9th. It was a huge success; thank you to everyone who joined us. Throughout the day, we had 750+ attendees, with over 550 people in the main room at the same time. Great energy! Some of the attendees were KQED donors, who purchased the Remote Control Retirement Riches with Adiel Gorel Master Package. The donors received two tickets as part of their donation to KQED. It was an honor to have KQED members at the event, and what a thrill to explore our tried and true method with so many new folks. There was a good mix of investors: brand new investors, very experienced investors, and everything in between.
Market teams, property managers and expert guest speakers
The questions from the audience at the ICG Real Estate 1-Day Expo were excellent and I enjoyed answering all of them. I had the main market teams present, and some of the property managers within our national infrastructure there as well. Scott Webster from All Western Mortgage described regular FNMA (Fannie Mae) 30-year fixed-rate loans (some at just under 5%, which, for investors, is a low rate). He also described loans available to people who can’t get the FNMA loans, by virtue of owning more than the FNMA limit. He also outlined loans available to foreign investors. The attendees enjoyed the three expert guest speakers: CPA Joshua Cooper talked about the Opportunity Zone and other tax issues. Joyce Feldman talked about using insurance as the first and probably most important line of defense, and Lucian Ioja talked about optimizing real estate investing in the larger context of financial planning.
New offering on our website
Many new investors joined our QUICK LIST, to whom we send property sheets when we get them from the various markets. Those who joined the list will also receive event invitations and updates, throughout the year. (You can also join us, by texting QUICKLIST to 57838, or by emailing email@example.com and request to be added.)
I also introduced the NEW Members Area on our website. The Members Area will be an exciting treasure trove of information, offered in two tiers. It will be fully populated with podcasts, FAQ’s, and other useful information. It is a work in progress right now that we are truly excited about. There will also be webinars on specific subjects offered, as well as special one-on-one “Connect for Success” meetings with Adiel Gorel. We enabled people to join the membership area at a special discounted rate, as an “early member” which is good until April 10th only.
If you were not able to attend the ICG Real Estate 1-Day Expo you can still take advantage of our early member discount. Just use the code MARCHEXPO at checkout to receive 20% off, only available until April 10th. Also, for our early members (at either level), you will be able to attend two LIVE webinars that I will be recording before the “official” May 1st launch.
Everyone’s “membership clock” will only begin to tick on May 1st. Thus, by taking advantage of this discount you are getting a “backstage pass” as we get all our content loaded, and your payment will cover the time starting May 1, 2019. We are excited to have you join us, and will be working diligently to provide useful content to help you secure a strong financial future.
Next Expo May 18th
Many of the attendees from the March 9th Expo registered for the next 1-Day Expo, on Saturday, May 18th. We will have a new market available, three expert guest speakers, and of course loads of Q & A. You can register now for the May Expo here.
In a Wall Street Journal article from March 27, 2017, by Laura Kusisto, as well as in a few blog entries on WSJ, the point is made that homeownership in the US is at a historic low. At 63.7% homeownership, it is the lowest such number for the past 48 years!
The reasons given for it include more strict lending practices following the recession. Perhaps another issue is that the recession is still fresh enough to have taken the belief away that your home will “always appreciate “ in value and will serve not only as a residence but as a major lifelong investment. Some people may no longer think so.
Add to that the natural desire of people to be free to move at will, and we have only 63.7% of homeowners in the US as of the 4th quarter of 2016.
As investors, of course, we are quite familiar with the powerful financial effect owning houses can have on our future, especially if we finance them with the incomprehensible 30-year fixed loans still available, and at still super low rates.
Having 63.7% homeownership percentage means, of course, that a full 36.3% of the population are renters! That is about 117,000,000 people!
Those of us who know the value and power of investing in houses and holding them as rentals can only look at this statistic as a positive – obviously, these renters need a place to rent and we will have a larger renter pool available for our homes. Sure some single people may want to rent an apartment, but families usually prefer renting a single-family home.
Coupling this data regarding the highest number of renters available to us in nearly 50 years, with the still-low interest rates available on 30-year fixed rate loans, means this is an excellent time to stock up on single-family homes as investments.
Interest rates are on the way up. The fed keeps reminding us they will continue to raise rates. Having a period of such low rates (despite the small “Trump Bump” we experienced recently), makes it a special time to buy and hold.
If you are under the FNMA allotted 10 loans per person (20 per married couple if they buy separately), it is high time for you to go out there and purchase brand-new single-family homes in good areas, finance them using these great 30-year fixed rate loans, which will never ever keep up with inflation (thus they will get eroded by inflation as to their real dollar value). The homes will be managed by local property managers we use ourselves in the various cities in which we invest.
We will discuss this as well as many other important topics for investors, at our quarterly ICG 1-Day Expo near the San Francisco Airport on Saturday, May 20th. We will have experts lecturing on important topics, lenders, market teams from the best markets in the U.S., and lots of Q&A, networking, and learning. Just send us an email at firstname.lastname@example.org. Just put in in the subject line, “Saw your blog on homeownership” and list your name and those of your guests. We will confirm! See you on May 20th.
There are lenders seizing an opportunity by operating outside of the restrictive FNMA guidelines. In the past year, we have seen loans improving for foreigners. It started with 50% LTV (loan-to-value) loans and now loans are up to 65% LTV for foreigners. The minimum loan amount is $100,000. Interest rates are not far off from the excellent rates American investors can get – mostly in the five percentile. Sometimes with a long fixed-rate period, perhaps just passing the six percentile.
Loans can be fixed for 5, 7 or 10 years (the latter ones touch a bit over 6% but the two former ones are well within 5%+). Americans can now also get 65% LTV loans with similar terms for properties between 10 and 20 (!). As we know, FNMA caps the number at 10, a restrictive barrier not enabling markets to fully engage investors. Will Bill Gates also be limited at 10 residential loans? Apparently yes, according to the FNMA guidelines.
In any case, having the ability to borrow at 65% LTV can enable a good contingent of veteran experienced investors, to continue investing and take advantage of the great rates prevailing in today’s markets. As someone who has seen rates be well in the teens, I can appreciate what it means to borrow on property number 16 at a rate that is a bit above 5%.
I am impressed with these advances. As a result, I have invited the lender to speak at our quarterly ICG 1-Day Expo on Saturday, May 30th. There will also be solid conventional lenders and loans featured prominently at the event.
In addition, there will be experts to teach us critical issues for investors: Scott Gerlis Founder and CEO of SAG Credit Consultants will speak about credit repair and enhancement and how to maximize everyone’s credit and avoid the pitfalls. Lucian Ioja, Financial Designer with Integrity Wealth Management, a respected financial planner, will teach us the overall way to look at arranging and optimizing our finances, not just via real estate, to secure a powerful retirement and other goal accomplishment. Joyce Feldman, Founder, and CEO of Joyce Feldman Insurance Company (Farmers Insurance) will teach us about how to use insurance correctly as the first and possibly the most important line in protecting our assets, common mistakes and how to avoid them, and a comprehensive look at our protection.
Needless to say, teams from the best markets in the United States will be there to update us on their marketplace, interact with us, and tell us about special deals in their markets. We have been holding these events for about 25 years now and I keep learning a lot during each and every event. Mention this blog post and you can attend free – just email us at email@example.com or call 415-927-7504.
Investors who have been buying older homes from bank foreclosures during the recession are now realizing some of the benefits of buying new homes built this year, in 2015 direct from developers (or minimally a massive renovation – like new). The lower future incidence of repairs, the warranties, the potential developer giveaways–possible only in new home purchases (a builder can give the buyer a covered patio which may be a $6,000 option, but only costs the builder $2,000 to build) and the modern amenities and floor plans are starting to attract more investors.
Since buying homes is in its core a long term investment, starting with new homes is a great send-off with many extra years of performance available. Getting loans on new homes is usually one of the easiest procedures, and with today’s low rates, locking in a 30-year fixed rate loan on a brand-new home is an excellent “stake in the ground” for anyone’s future. Of course, investors should not just blindly buy brand-new homes. The locations have to have the numbers – the right rents for the right prices.
There are some excellent markets providing very good numbers and cash flows in good areas.
For more information, you are invited to attend our quarterly ICG Real Estate 1-Day Expo this Saturday. You will not only meet teams from the most relevant markets and see the possibilities for yourself, but there will be expert speakers on important topics such as the new twists in Asset Protection (you must know about this), buying real estate from your Self-Directed IRA, and getting real estate financing for purchases from within your IRA.
There will be information for new investors and established investors on how to move forward powerfully. There will also be lenders to update us as to the ever-improving loan possibilities for investors (domestic and foreign), and lots of great Q&A and networking. The event is near the San Francisco Airport this Saturday, March 7th, from 10 AM to 6:30 PM. You may also register by emailing us at firstname.lastname@example.org or call us at 415-927-7504.
In a Wall Street Journal article from a couple of weeks ago by Kris Hudson, it is indicated that construction loans posted the largest gain in the second quarter of 2014 since its recovery began about a year ago. According to Hudson, outstanding construction loans for both residential and commercial projects increased to $223.2 billion in the 2nd quarter, up 4% from the first.
The overall lending environment, not only for construction loans but also for individual investor loans and even foreign investor loans, is getting more open and the willingness on the part of banks to lend is increasing.
As for the construction loans, what it means for us as individual Single Family Home investors is that our new-build markets are expanding and will continue to do so.
We are already buying brand-new builder-built homes in the Oklahoma City metro area. Local lenders are extending loans to FOREIGN buyers (!) as well as to American investors with up to 15 outstanding home loans (5 more than the FNMA limit).
Not only will we discuss this at our 1-Day real Estate Expo this Saturday (near SFO – details at www.icgre.com/events), but due to the massive changes in the lending landscape, we will have a special session just for a lenders panel to discuss residential, commercial, hard-money and foreigner loans.
Anyone citing this blog post can attend for free with up to two free guests – just email us at email@example.com and show up for an amazing day of information, learning and networking.
ICG uses single-family home investments, bought in advantageous locations and the best U.S. markets. We enable you to enjoy the clout that comes from purchasing a multitude of houses, even if you only buy one.
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