2022 - Red Pill Kapital, LLC

Mid-2022 is probably the worst time to buy a home. Median home prices hit an all-time high of $440,000 in July, and mortgage rates are at 5.5%, almost double what they were last year.

While buying a home now may seem a terrible idea, there are ways to bag yourself a good deal. So, these are some tactics you can employ to ensure your purchase doesn’t become a financial nightmare.

1. Do your Research

Before looking for a home, you must understand the market to know what’s within your budget. Sure, most home prices have skyrocketed over the past few months, but there are some places where it’s coming down.

For instance, according to Redfin, Salt Lake City, Boise, and Denver all witnessed at least 50% cuts in asking prices. Seven more cities, including Tampa and Sacramento, saw asking prices slashed by more than 44%.

So yes, you can still bag yourself a deal in the current environment, as long as you are willing to do the legwork and compromise on the places you wish to live in.

2. Build your Credit History

It helps to build your credit history if you’re a first-time homebuyer. A poor credit score makes qualifying for a mortgage loan challenging or attracts high premium rates because financial institutions will view you as a risk.

If you have little or no credit history, you may need to take steps to build up your score. Here are some tips for doing so:

Pay all your bills in full and on time: Even if you don’t have any credit cards or loans yet, you should make sure that any bills you pay regularly (such as rent or utilities) are paid on time and in full. It will help establish your payment history and show lenders that you’re reliable with money.
Don’t open too many credit cards at once: If you decide to apply for a credit card, make sure that you only use one at a time so that it doesn’t hurt your credit score too much if the application gets denied (or approved but with a low limit).
Minimize utilization rate: Your balance-to-limit ratio (utilization rate) is just as important as payment history. It refers to the total balances racked up on all your credit cards divided by the total credit limit of all the credit cards. Aim to keep this figure below 30%.

3. Make a Sizeable Down Payment

Making a sizable down payment toward buying your home is vital. The down payment is typically between 3% and 20% of the home’s purchase price.

You want to make a large down payment because it will lower your monthly mortgage payments, saving money in the long run. Additionally, making a large down payment means avoiding paying private mortgage insurance (PMI).

PMI is an additional fee that many lenders require as part of their mortgage loan package. It protects them if you default on your loan—but it can add hundreds or even thousands of dollars to your monthly mortgage payment.

You can avoid PMI by paying more than 20% of the home’s purchase price as a down payment. Alternatively, you can avoid a down payment by getting a piggyback or 80-10-10 loan, which covers 10% of the deposit while you deposit the other 10% from your savings.

4. Get Pre-approved for a Mortgage

When you’re a first-time homebuyer, getting pre-approved for a mortgage is one of the most important steps to ensure you find the right home.

Getting pre-approved means that a lender has reviewed your finances and determined that you can afford a home at a certain price range. Your agent will know how much house you can afford, so they don’t waste time showing you homes that are beyond your means.

5. Try Out for First-Time Home Buyer Grants and Programs

First-time homebuyers have several financial assistance programs that will soften the sting of the hefty payments needed to purchase a home.

A first-time homebuyer’s grant refers to financial assistance you may receive to purchase your first home. It typically covers a percentage of the down payment and closing costs. Since it’s a grant, you may not have to repay the amount. Examples include:

Downpayment Toward Equity Act
Good Neighbor Next Door program
Bank of America’s Home Grant
Chase Bank Homebuyer Grant

On the other hand, first-time home buyer programs usually come from federal, local, or state governments and take the form of tax credits, forgivable mortgages and closing costs, and down payment assistance.

You may qualify for the Housing Choice Voucher if you face financial challenges due to a low income and receive minimum earnings as stipulated by your local public housing authority. A clever way to use the voucher is to fund a rent-to-own program.

Similarly, you can apply for an FHA loan. These are Federal Housing Administration-insured loans made by private lenders, usually featuring zero-interest loans and deferred payment loans. Moreover, they typically have lower down payments and require lower credit scores than most other mortgage loans.

6. Use a Mortgage Broker and Agent

It pays to consult a mortgage broker in such a tight financial environment. They know the ins and outs of the mortgage industry, so they can find you a mortgage with lower fees, great rates, and financial perks and help you overcome borrowing challenges.

Similarly, procure the services of a real estate agent. Using an agent is one of the best ways to ensure a smooth process and a successful outcome. No wonder 87% of homebuyers used an agent in their home purchase.

Real estate agents or brokers know the market and can help you find your dream home at your price range. Ensure that the agent knows your unique needs so they can find the ideal property that fits your lifestyle.

7. Consider Variable-Rate Mortgage

A variable-rate mortgage can be a good choice at this point. You don’t want to go for a fixed-rate mortgage with fixed interest rate monthly payments throughout its lifespan, as the current mortgage rates are very high.

An adjustable-rate mortgage will have fluctuating mortgage rate payments, so you will pay lower fees when the interest rate is eventually lower. Further, an adjustable rate payment allows you to make higher monthly mortgage payments without penalty. That means there’s a chance you might pay much less than a fixed rate arrangement.

Additionally, variable-rate mortgages typically have lower initial interest rates than fixed-rate mortgages, which means they’re cheaper upfront. That could buy you some time until the interest rates finally dip.

Finally, you could refinance the variable-rate mortgage and exchange it with a fixed-rate mortgage when the interest rates eventually drop to reasonable levels and it makes financial sense to do so.

Final Word

Many potential first-time home buyers are postponing the purchase because of the hostile economic environment that has rendered homebuying virtually impossible.

Home prices have reached historical highs, and mortgage rates are double what they used to be in January 2022, with more hikes in the pipeline as the Fed is threatening more interest rate hikes.

If you must buy a home, try looking for one in states that have lowered their asking prices, utilize a mortgage broker and real estate agent to find deals for houses and mortgage rates, and build your credit history to score favorable loan terms.

Similarly, consider a variable-rate mortgage, make a sizable mortgage down payment to reduce your monthly mortgage payments, and try to secure a first-time home buyer grant or similar program.

By Gurpreet Singh Padda, MD, MBA

Thanks to increasing demand and a recovering economy, the real estate market is on an upward trend for 2022. There is a rise in activity in all the asset classes, with the leaders being industrial and multifamily.

In 2022, this upward trend will continue as investors and tenants alike demand more real estate variety. The mortgage interest rates forecast for 2022 is 3.6%, which could impact the market. That said, this is what to expect from commercial real estate investing in 2022.

1. Brick-and-Mortar Retail Stores

The pandemic brought about a surge in online shopping, while sales in traditional brick-and-mortar stores declined due to social-distancing requirements. However, there has been a rise in the share of eCommerce retail sales from 16% to 19% in 2020 compared to pre-pandemic 2019.

Even though online shopping offers advantages like convenience and saving on time, many consumers still prefer shopping in person. Brick-and-motor shops allow consumers to shop for items that require accurate sizing and a proper fit.

More online business owners will likely push the demand for brick-and-mortar properties. For instance, Amazon recently announced its first-ever physical store for men’s and women’s fashion, Amazon Style. The store is set to offer an elevated shopping experience and will open later in the year.

2. Return-to-office

Even though offices remain the hub for business activities, employees now have flexible work-from-home options. Employees can skip the daily work commute for a few days a week. During the height of the pandemic, millions of employees worked from home.

However, as things slowly return to normal, statistics show that an increasing number of employees prefer the more flexible work-from-home model.

Real estate investors must keep an eye out for days when all the employees are in the office for teamwork, which creates a need for bigger office space. That maybe calls for a rethink of the workspace design, as buildings have to conform to the new reality of preventing communicable diseases.

3. Senior Living

With increased life expectancy, there is a growing demand for senior living homes and skilled nurses. The demand is not just about buildings as investments, but the increasing need for places where the elderly can feel safe, protected, and cared for.

It’s expected life expectancy will rise to 85.6 by 2060. Baby boomers are growing old and will need skilled nursing and more senior living homes.

Covid-19 caused a decline in the move-ins, leading to a drop in occupancy rates. Even though there is a growing demand for senior homes now, percentages are still lower than what they were pre-pandemic.

4. Housing Markets

Post-pandemic, consumers are looking for affordable rents and home prices, which in turn will limit home price appreciation and rent growth. Millennials aged 26 to 35 are in the prime first-time homebuyer age and need affordable housing despite the slight increase in mortgage rates to 2.9%. Rising rents, as high as 7.1%, will further drive millennials to purchase homes.

The markets for home purchases and apartment rentals are usually polar opposites of each other. When the rental market is strong, the housing market is soft, and vice versa. The pandemic created a desire for more space, as more people adopted a work-from-home model. This directly affects the rental and housing market, driving them to record highs.

5. The Federal Reserve and Interest Rates

Inflation is expected to continue above the trend and will likely decrease as the year progresses. The majority of the Federal Reserve members predict three interest rate hikes in 2022. They also expect that the increased interest rates will help fight inflation.

Long-term real estate interests will remain low, providing attractive financing conditions for investors. The consumer price index rose to an all-time high in 30 years. However, this does not account for the unpredictable swings during the pandemic’s short period.

The bottlenecks in the supply chain are still present and will continue to be for some time. The shortages in key commodities and goods are likely to continue and fuel high prices in the middle of the year. However, things are likely to cool down towards the end of the year.

6. Self-storage

Self-storage outperformed expectations during the pandemic with an average profit margin of 41%, higher than other real estate niches. The increased strength in the apartment and housing markets positively affects self-storage.

Due to the pandemic, more and more people needed to move stuff out to create space for study and work-at-home situations. Further, millennials are starting families, meaning an increasing number of people will look into self-storage. The same goes for college graduates living in cities where living space is at a premium. Thus, before getting into real estate one might want to get complete understanding of several tax benefits like 1031 exchange process to further save money on the profits and investments.

7. Conventions and Business Travels

During the height of the pandemic, business-related travel halted, with most meetings and conventions moving online. Hotels, entertainment, and restaurants catering to business meetings can expect a recovery in 2022.

Selling a new product or closing a major deal is always best done in a face-to-face meeting, thus increasing the need for hotels, meeting spaces, and entertainment spots.

8. A Rise in Mixed-use Developments

An overarching trend is the migration of urban user to decongested areas, leaving vast office spaces unused. To utilize the available urban spaces and provide better value, commercial real estate investors will likely turn to mixed-use developments.

That way, commercial developers can stem the tide towards residential properties by having all amenities, such as retail, commercial, and residential properties all under one roof. Mixed-use developments sound the best way to attract a new market.

9. Digital Real Estate

Digital communications surged during the pandemic since people relied on them for work, e-commerce, and entertainment. Even as the economy opens, people continue to rely on digital communications because of the conveniences they offer.

This leads to a demand for cell towers, data centers, and logistics facilities, which counts as growth in commercial real estate.

10. Smaller is Better

What the market has reaffirmed is that nothing stays static forever, so there is some wisdom in moving with the times. Currently, companies are hesitant to commit to long-term leases, hence the shift towards shorter-term leases.

Further, as employees seem to prefer the hybrid working model, it makes sense to opt for small working areas, or even smaller ones situated closer to workers’ residential areas. So investors are likely to target smaller suburban offices.

Final Word

While interest rates are set to rise during the year, it doesn’t create much of a worry for commercial real estate players as they expect a commensurate rise in the economy. Also, a few top commercial real estate management companies smoothen the process for investors to get through the hustles involved. That said, some of the trends you should expect from the commercial real estate market include a rise in hospitality spaces, workspaces, and brick-and-mortar retail spaces.