For years, it’s been widely accepted that owning a home resides at the core of the American Dream, yet studies conducted by the Urban Institute report that 53% of millennials today cannot afford a home as they can’t even afford a standard 20% down payment. Between escalating healthcare costs and burdensome student loans, the average millennial would take up to two decades to save up for a down payment. The dream of owning a home may seem to be crumbling, yet based on these startling numbers, it is clear that the desire for financial stability is as crucial as ever.
While roughly 80% of millennials don’t expect to receive benefits from current Social Security policies, the pursuit of financial security and growth is still very much attainable through home ownership and rentals. Thanks to the magical 30-year fixed loan rate, maximizing savings’ funds can be done through remote control retirement, one of the many innovative strategies to be presented at the ICG Real Estate 1-Day Expo in San Francisco, U.S.
Dealing with the Unstable Concept of Financial Stability for the American Dream
As inflation and increased cost-of-living may pose as threats to buying a home, single-family home rentals revive the financial success “dream” as the most liquid type of real-estate on the market. Join us this September 7th, 2019 at South San Francisco Conference Center to learn how to leverage single-family rentals to your financial benefit while:
Just as technology advances year after year, it’s only natural that real-estate markets evolve with each generation, yet the result of a sound investment is a constant: financial success. Despite the negativity surrounding real-estate, there is still much to be discovered. Luckily, we are devoted to doing just that.
Whether it be through podcasts or interactive conferences, ICG is can help you invest in single-family rentals and guide you through a minimum-risk process designed to fit even the most inexperienced and/or busy rental owner. No matter your age, it’s not too late to start investing in your future. Register today before space runs out and build your own future on your own dream. Learn more with our podcasts and webinars in our Membership area where we outline strategies in more depth.
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 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.
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
At the end of March 2019, it became known that the White House is pressuring the Fed to lower its benchmark federal-funds rate by half a percentage point, according to an article in the Wall Street Journal by Nick Timiraos and Kate Davidson. There has been no movement yet.
We now see homeowner rates for mortgages at the 4.1% range; some of the lowest in history. If the White House succeeds, the benchmark federal-funds will not translate to lower mortgage rates right away, but mortgage rates will inevitably drop. Possibly even lower than at any time during the past decade. It is a waiting game and time will tell over the coming months.
This would likely create more buyers, push prices higher in most markets, and create an upward push in strong economy cities (and even not-so-strong).
Since we are aware of the uniquely special anomaly called the 30-year fixed rate loan, (we are the only country that has this type of loan) where neither the monthly PI (principal and interest) payment (not the loan balance) keep up with inflation and the super low rate will be locked for 30 years, we are fully protected.
If you qualify for the best loan, under the FNMA (Fannie Mae, officially the Federal National Mortgage Association, or FNMA is a government-sponsored enterprise (GSE)—that is, a publicly-traded company which operates under Congressional charter—that serves to stimulate homeownership and expand the liquidity of mortgage money by creating a secondary market.) guidelines this is a great time to buy where the numbers make sense. Taking action is important.
Many are not aware that they can purchase up to 10 homes with this type of loan. Married couples (if they qualify separately) can purchase 20. This is already a great time to lock these rates in with the magical 30-year fixed rate loan. If the White House succeeds in lowering rates, the terms will become more attractive.
In my experience, I have seen people look back and lament over not making use of these great circumstances to build a solid portfolio for their future. I hope you are not one of them.
This summer in our Membership area we will have a couple of podcasts where I will talk about this solo and in interviews with experts. I will also be talking about the 30-year fixed rate loan in detail in my show produced for public television called “Remote Control Retirement Riches with Adiel Gorel” that will be airing over the next several days across the country. Take a look at our website here for details and to check for showtimes in your area.
Here is a recent video on the show currently posted on my YouTube channel: https://youtu.be/8eiUYcsOPiQ
In the period between 2006 and 2008, a large number of interest-only loans were taken. These loans are not really interest-only for all eternity. These are typically loans that were interest-only for 10 years, and then were due to become fully amortized until the end of the loan period. One detail that many borrowers may have missed, is that if the total loan period is 30 years (the most common), and the loan is interest-only for 10 years, then the amortization that follows the 10 interest-only years will be amortization OVER 20 YEARS!
The 30-year fixed-rate loan does not usually get its due as an amazing financial tool that should be utilized by any savvy investor who can get it. For many foreigners, it’s incomprehensible that in the U.S. we can get a loan that will never keep up with the cost of living for 30 years. During that period, essentially everything else DOES keep up with the cost of living, including rents. Only the mortgage payment and balance (which also gets chipped down by amortization) do not keep up with inflation.
You can talk to many borrowers who have taken 30-year fixed-rate loans and after, say, 16 years, realized that although there are 14 years remaining to pay off the loan, the loan balance AND the payment seem very low relative to the marketplace rents and prices. The remaining 14 years is almost meaningless since in many cases (statistically and historically) the loan balance will be a small fraction of the home price and not very “meaningful.” Just to get some perspective, most other countries on earth have loans that constantly adjust based on inflation. Both the payment and the balance track inflation all the time, usually with no yearly and lifetime caps as adjustable loans have in the U.S.
The power and positive effect on one’s financial future get magnified when you consider that in 2016 we are still in a period in which interest rates are very low. While investors cannot get the same favorable loans as homeowners, it is nevertheless quite common nowadays to see investors getting a rate of between 4.25% and 4.75% on Single Family Homes (SFHs) investment properties.
From a historical perspective, these are extremely low rates. Most experts think that in the future, mortgage rates will rise; from a historical perspective, even 7% is considered a low rate. Thus, these days, you can “turbo boost” the great power of the never-changing-30-year fixed-rate loan by also locking in these amazing rates which will never change. If in the following year’s interest rates indeed go up, you will feel quite good about having locked under-5% rates forever.
Many investors think that if a 30-year fixed-rate loan is good, then a 15-year loan must be better. I actually beg to differ. You can always pay a 30-year loan in 15 years (or 14 or 20 or 10 or 8) if you wish – just add some extra to the principal payment. However, you cannot pay a 15-year loan off in 30-years. Thus the 15-year loan FORCES you to make the higher payment while the 30-year loan gives you the important flexibility of keeping your payments low OR making them high based on your financial situation and other considerations.
Some would say that the 15-year loan is also better since it has a better rate. True, the 15-year rate maybe 0.25% or even 0.5% better than the 30-year rate. However, in my opinion, this is not enough to justify the enormous loss in flexibility. In addition, having the loan for a longer time allows inflation to “erode” the loan even further. This last consideration greatly minimizes the argument some investors make that “…with a 30-year loan I pay hundreds of thousands of dollars more over the life of the loan.”
One factor missing here is that they neglect the TIME VALUE OF MONEY! These extra dollars paid in year 20, 22, 28, etc., are in fact extremely “cheap” dollars in the sense that their buying power is greatly lowered over time. If the value of these future dollars were to be calculated based on the PRESENT buying power of the dollar, some of the later payments may be worth mere pennies on the dollar.
In summary, I recommend getting a 30-year loan and then choose how long to take to pay it (anywhere between zero and thirty years – you choose!).
We will discuss this topic, as well as many other crucial topics for investors, at our Quarterly 1-Day Expo on Saturday, May 21st near SFO. We will have market teams present, including a new exciting market… We have also invited top-notch experts to lecture. We will have experts on Property Management, 1031 Exchanges and Proper Insurance – the first and most important barrier in protecting your assets, including nationwide umbrellas.
Everyone mentioning this blog is invited to attend for free, with associates. Just email us at firstname.lastname@example.org to register, and in the subject line write, ‘Read your blog!’ Then give us your contact information. We will respond with a confirmation for your free entry. AND that is all. We hate spam as much as you do. See you there.
As far as markets, there may not be large appreciation swings in most markets during 2016. In a funny way, the ever-solid Texas is appreciating decently now, but people have some questions about its overall economy.
Oklahoma City with brand-new homes (under 50% of the property tax bite of Texas; it is poised to provide better cash flow on similar rents and home prices – which it has) is a very serious candidate for solid investments.
Jacksonville, Florida is the market least appreciated in the state so far and carries the best appreciation potential. Also in 2016, the Panama Canal project is slated to be finished, potentially generating major large-ship traffic into the Jacksonville port. Will they finish this gargantuan project on time? Will it drift over to 2017? Regardless, it is a dominant event.
Happy New Year!: