Tag: multifamily real estate investing

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Real Estate

7 Real Estate Trends to Watch Out for in 2023

We are just barely into the second half of the year 2022. Much of the economic news is doom and gloom; perhaps it’s best to look into the future if one wants to find an iota of good news. For that, a glimpse of the past could provide near-accurate future predictions.

Six months on, the Russia-Ukraine war is causing a considerable downturn in every sector of the economy, including the real estate market. The ongoing war has triggered fears of a global recession, with the World Bank dropping its growth prediction from 4.1% in January to 2.9%, causing supply chain disruptions, high commodity prices, inflation, and food insecurity.  

While COVID-19 might seem like a thing of the past for most Americans, pandemic lockdowns are still alive and kicking in the “world’s factory,” China. That translates to supply chain issues, which explains why there’s a push to bring some of those jobs back onto American shores. With that background, here are the top trends in real estate to watch out for in 2023.

1. Housing Prices Likely to Remain High

According to Zillow, the typical monthly mortgage payment increased 75% between June 2019 and today. The National Association of Realtors (NAR) also states that home sales dropped 5.4% from May to June, marking the fifth consecutive month of declining sales—but median prices reached a record high in June: $416,000, up 13.4% from a year ago.

Although incomes have risen over the same period, they haven’t kept up with inflation. Wage growth in June was 6.7%, below the 9.1% rise in inflation that month. Moreover, mortgage rates continue to stagnate, and there’s the ever-present threat of further interest rate hikes. The overheated markets of early 2022 will drop precipitously in the later half of 2022 and most of 2023. But that still means, even if home prices were to drop 20-35%, they probably would remain beyond the reach of most first-time homebuyers.

2. Expect an Uptick in Mortgage Defaulters

To fight rampant inflation, the Federal Reserve activated its nuclear option—hefty interest rate hikes. Inevitably, mortgage rates rose as well, with the national average mortgage rate hovering at 5.08% as of August 2022.

Considering the August inflation rate is in the upper 8%, higher than the long-term average of 3.26% and the Fed’s target rate of 2%, it’s inescapable that the Fed will announce further interest rate hikes.

That means higher mortgage rates, and since the wage growth in June was 6.7%, below the inflation rate. As the economy continues to contract, you should expect an uptick in mortgage defaulting that will likely stretch to 2023 and beyond, and more people are likely to choose adjustable-rate mortgages over fixed-interest mortgages.

3. Affordability of Homes Still a Problem

Affordability of homes is still a challenge for many Americans, but it’s not the only one. According to a recent survey by Pew Research Center, 46% of Americans say affordable houses are still a challenge.

That is exacerbated by the rising cost of rent, with New York recording an average of $3,500 in June 2022, an all-time record high. With the raging inflation and considering rent prices hardly drop significantly over time, it’s difficult to see how homes will become more affordable in the near future.

The only hope lies with the Fed cooling down inflation sufficiently, imposing more agreeable interest rates, and the cost of living dropping significantly to lower the price of everything, including real estate.

4. Suburb Living and Higher Prices in the Suburbs

With rental prices in major cities shooting past most people’s capabilities and mortgage prices continuing to lock people out of home buying, there’s a push towards moving to the suburbs to access affordable housing.

More employees are also pushing for more opportunities to work from home to save on the daily commute. That should see the prices of suburban houses rising to meet this new demand, which should persist into 2023.

5. Prevalence of Technology Usage

The trend of increasing use of technology in real estate is nothing new, but it has become more widespread in the last few years. For instance, the NAR states that 97% of all homebuyers used the internet to search for a new home.

That trend will continue, allowing homebuyers to access a broader home listing catalog. The same is true for realtors as it will enable them to advertise to get their listings before more prospects. The apps and websites also come with matching and software to make it easier for buyers to filter homes that fit their descriptions better.

Technology also comes in handy when showcasing a home. Instead of hosting an open day which may force prospects to travel great distances, a real estate agent can conduct virtual home tours. Virtual staging will save the agent a ton of money as they don’t have to spend time and money collecting and setting up furniture that matches a listing.

You’re also likely to see an increase in drone videos and photos to capture stunning overhead footage of properties and the surrounding amenities to enhance the desirability of the listing. Social media sites that use videos and photography, such as YouTube, Instagram, and TikTok, may also prove vital as independent platforms for showcasing real estate.

6. Emphasis on Amenities as a Selling Point of a Home

In the next few years, you will see a substantial shift in how people choose where to live. What was once a matter of location, price, and square footage will soon become a question of amenities.

As more people focus on their health and wellbeing, they’ll look for homes that offer more than just a place to rest their heads. They’ll want easy access to gyms and pools, dog-friendly apartments, and pet-sitting services—and they’ll even want walkable neighborhoods with local stores and restaurants. 

7. Luxury Homes

The need for luxury homes has steadily risen over the past few years. These refer to homes that go for $1 million in the smaller cities. In major cities, that starts at $4 million.

According to luxury home marketing, single-family luxury homes only spent 12 days in the market in 2022, compared to 38 days in 2020. At 41.6%, the growth in luxury home sales in 2021 outpaced other segments of the market, such as affordable homes at 7% and mid-priced homes at 5.9%. This trend will likely continue to 2023 and beyond as the trend for buyers looking for luxury homes seems to be going strong. 

Final Word

We can use historical patterns to chart a course for future trends, and what that teaches us is that housing prices will cool down but will likely remain higher than most people can typically afford. Additionally, we will likely experience in the real estate market are the continued high demand for luxury homes, emphasis on amenities for healthy living, the prevalence of technology usage, and the continued preference for suburban living.

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Real Estate

How to Be a Successful, First-Time Homebuyer in 2022

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

 

Categories
Real Estate

10 Reasons Why You Should Invest in Large Multifamily Property

Miniature people: family standing on coins stacks with house model on the top stack. concepts. Concept for property ladder, mortgage,real estate investment, money, love and Valentine's day.

Now is one of the best times to become a multifamily landlord because apartment vacancies and interest rates remain low compared to a few years back. Private equity investors can also access a pool of lucrative debt capital.

What’s more, the White House notes that there’s a thirst for decent housing coupled with a chronic undersupply, leading to skyrocketing housing prices, as seen in the table below:

Statistics show that investors should expect a 6% net increase in their income for the coming year. All this signals that multifamily properties are a lucrative investment ripe for purchasing.

Suppose you are new to Commercial Property Investment and do not understand why you should invest in multifamily property. In that case, these are the reasons why this kind of property must be a part of your investment portfolio.

1. Increased Cash Flow

A higher cash flow is one of the biggest reasons to invest in multifamily property. Such properties are always in demand by rookies and seasoned investors alike.

You can expect a high occupancy rate if your property is in a strategic location. With time, this leads to increased monthly revenue.

One way to ensure you rake in good profits is to invest in different geographical locations. Doing so allows you to have multiple income streams from the same type of investment.

2. Easy to Manage

Managing 12 units in one multifamily property is more manageable than 12 single-family units spread out across the city. With the former, you can manage it or hire a property manager instead.

It is impractical and costly to hire 12 managers to manage single-family units. On the other hand, hiring a manager for a multifamily property makes sense because of the number of tenants you are dealing with under one roof.

3. Enjoy Tax Breaks

A multifamily property makes you eligible to enjoy tax breaks as a reward from the government for providing housing for city residents. The kind of tax breaks you enjoy depends on the property classification.

That’s because you can write off expenses from taxable income. In short, you can deduct repair, maintenance, and management expenses from the taxable income produced by the multifamily property.

4. Lower Investment Risk

This is not to say that multifamily properties do not come with risks–they carry some risks like any other investment. The only difference is that the risks associated with this kind of property are lower than single-family units, as the table below illustrates:

One of the risks you may encounter is the vacancy rate. Because you are dealing with several tenants at a time, the possibility of 0% occupancy is slim to none.

Suppose you have a well-maintained property with fair rental rates. In that case, a low occupancy is something you will rarely worry about.

Also, ensure you research the property beforehand, choose a good location, and market it well. Doing this will guarantee you a high occupancy rate.

5. Short-Term Leases are Advantageous

Five years and more is the standard term for most commercial and retail leases. If the market changes, you are stuck with properties whose rent you cannot increase. With multifamily properties, the leases are shorter, typically lasting a year.

This means that you can raise rents quickly depending on market conditions and inflation. Shorter leases ensure your property stays lucrative in the long run.

6. Quickly Build an Investment Portfolio

If you want to delve into real estate full-time, this is one of the best ways to boost a portfolio quickly. Multifamily properties offer the chance to invest in multiple units without the hassle of managing several separate housing units.

Think about all the research, planning, permits, and cost it takes to invest in one property. Now multiply that by several units, and you know why a multifamily property is the best option.

Moreover, you’ll find it easier to purchase a multifamily property than buying a single-family unit.

7. Strong Rental Demand from Millennials

Data from the U.S Census Bureau shows that renting is the most common form of housing for millennials. Currently, the millennial generation is the largest in the U.S.

One reason why they find leasing a favourable option is the increasing cost of median home prices. This places homeownership out of reach for many. Also, millennials value flexibility and mobility over owning property.

Combined, all these reasons make millennials more likely to rent than own, spelling good news for multifamily property investors.

8. High Appreciation Rate/Value Retention

Multifamily properties continue to hold value even if you do not get immediate cash flow. The general rule for real estate is that it appreciates over time. With multifamily property, the appreciation rate is higher.

Sure, this is not set in stone. But the best way to ensure the property retains its value is to maintain and repair it often. Check for broken or damaged areas, mold, and more issues between tenants, and it will hold its value with time.

9. Better Financing Options

Data shows that multifamily investments have better funding terms overall than other real estate types. Understand that this investment type costs more initially, but it is easier to maintain than other property types.

Expect lower interest rates if you opt for a mortgage loan for a multifamily property. This is a relatively risk-free investment for first-time investors. Because of the high occupancy rates, financing institutes view multifamily properties as having lower risk.

10. Insurance Simplicity

Buying insurance for a multifamily property is relatively easy. Like financing, getting insurance is a simple process compared to other real estate types. Several factors affect how much a policy will cost.

However, the number of units in the building, amenities like a pool or rooftop terrace will raise the insurance cost. This is because tenants or visitors are more likely to injure themselves on the property. It would help if you also understood that insurance premiums for multifamily homes are rising.

Despite this, most insurance companies know how to cover multifamily properties in a way that favors you. Further, if you have several such properties, some insurance companies will grant you a “blanket” cover, insuring all the properties under one provider.

Final Word

Investing in a multifamily property is one of the best decisions you can make today. You can look forward to better cash flow, lowered risk, tax breaks, easier management, and a higher appreciation rate. Taking help of a property investment company can prove to be of greater help in terms of huge capital gains to fill up your pockets. Despite stiff competition and an initial high investment cost, a multifamily property is still an excellent investment opportunity.