The year started with mortgageg interest rates around 3%. Now, averages are hovering around 7%.
For savvy investors, that means it’s time to get creative.
Brian and Deni break down five outside-the-box ways to finance rental properties while interest rates are high.
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Resources Mentioned in This Podcast & Video:
What short-term fix-and-flip loan options are available nowadays?
How about long-term rental property loans?
We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.
Deni: Hi everyone, and welcome to SparkRental’s weekly podcasts and Facebook Live and Youtube Live.
So last week, Brian interviewed Kenneth G. And they talked about how to vet syndicators, and that was a pretty good show. There was some good interaction questions and whatnot. This week we are going to talk all about five. I told you four, but it’s actually five creative ways to finance rental rentals, even while these rates are ridiculously crazy right now. So with that being said, thanks for tuning in and please let us know in the chat where you’re tuning in from and if you have any questions, comments, just throw them in anytime.
Brian: It’s a dialog, not a monologue, right?
Deni: So with that, Brian, let’s talk about the five creative ways.
Brian: Yeah. So if you look at mortgage interest rates for 30 year loans at the beginning of 2022, they were hovering around 3%. By November, they reached 7%. So I think they dipped down a little bit below 7% as of the last week or so, but still more than double the interest rates, which has really challenged not just homeowners, of course, but also real estate investors. It’s a lot harder to earn positive cash flow and earn a profit on rental properties when you’re paying seven plus percent interest on these. And let’s be honest, that 7% rate, that’s for homebuyers, that’s the homeowner interest rate. Investors pay significantly more than that for portfolio loans or even conventional loans for investment properties for rental properties. So that has a ton of real estate investors wondering, you know, how can I get creative here? How else can I finance rental properties and not pay, you know, eight, nine, 10% interest rates on these loans? So we have a few ideas for you. First of which is serial house hacking. So house hacking, you move into the property yourself, you rent out either other units or bedrooms or garages as storage space or 80 use accessory dwelling units. You can rent out part of the property on Airbnb however you want to do it, but because you move into the property, you qualify for homeowner mortgage rates, for homeowner mortgage loans, which, as we discovered, are significantly lower interest than investor loans and not just lower interest rates, but also lower fees, fewer points, fewer closing costs.
Brian: So that can be a cheaper way to finance these properties. Now you can take out a homeowner residential mortgage or regular mortgage loan for a property with up to four units. So that means you can buy a fourplex, move into one unit and rent out the other three units and ideally live for free. Have those? Yeah, those neighboring units cover your mortgage payment and you can do this once a year. Part of your contract with the mortgage lender is that you will live in the property for at least one year as your primary residence. After that, you can move out and do the whole thing all over again and rinse and repeat to keep adding properties to your portfolio. So serial house hacking, the great way to do this, then you and I actually we emailed a family that financial independence doing this in a very short period of time like five years. A couple of years ago. So this is and this was their only strategy this is all they did was the House Act multifamily properties. Every year they they moved into a new one and they kept the old one as a rental property. And they were they kept that homeowner mortgage on the old properties.
Deni: I mean, it’s definitely a good way to keep building, definitely and keep your costs down.
Brian: Absolutely. And then you actually did something kind of funky house hacking wise for for several years. You house hack with an exchange student.
Deni: I did. I did. And, well, it was a really good experience, you know, I mean, because you have somebody from another area in your house, but it depending on your program, the program I was with paid a pretty substantial stipend. So it paid for three quarters, I think, of my mortgage. So, yeah, that’s another way. There’s so many if you’re creative. There’s a lot of things you can do.
Brian: Absolutely. All right. Number two on the list is the live in BR. So BR is an acronym that stands for buy, renovate, rent. and repeat.
Deni: Brian’s favorite word.
Brian: What was that, Deni?
Deni: Your favorite word?
Brian: Yeah. So you. You buy a fixer upper, you renovate it, You you then can refinance it with a homeowner loan like we just talked about for house hacking. And. And then you rent out the other units and you can keep doing this every year. You can do another one of these. So you force equity by buying a fixer upper. Right. And renovating it. But you can not only get a the initial purchase rehab loan as a homeowner loan such as a two or three K, for example. But when you refinance it because you’re moving in, you can also get a homeowner mortgage. So same concept as house acting with the whole renovation piece as part of it. And when you refinance it, you can potentially pull out your down payment. Again, your initial down payment, which lets you recycle the same down payment over and over again with with new properties. So it’s a it’s a variation on the the House acting model.
Deni: And we got to sorry, I just want to we got a comment that says I have searched for creative ways to combat interest rates. So this is going to be great. So I hope that this is helpful to you, Shivon, and that you are getting some tips.
Brian: Right? Absolutely. So number three is another variation on a similar theme live in flips. So same concepts. You find a fixer upper and you move in, you renovate it over the course of a year or two, and then you sell the property and the profit from the equity that you forced by renovating. It theoretically covers your entire cost of living there over the year or two that you owned it. So this tends to work better for properties that are technically habitable where you can get well because you want to be able to ideally do the renovations at your own pace while living in the property. So nights and weekends you can tinker on updating the bathrooms, the kitchen, etc.. Now, if you hold the property for at least one year, then you pay long term capital gains tax instead of regular the regular income tax rates on it. If you hold the property for two years and live in the property for at least two years, it qualifies for the primary residence exclusion. So the first 250 grand, if you’re single, 500 grand if you’re married first, hundreds of thousands of dollars in profits are tax free, which is pretty nice.
Deni: That’s really nice. Yeah.
Brian: So part of the idea here with a live in flip in this model is that in a year or two interest rates may well be down again if we do end up having that recession that everyone keeps anticipating and talking about ad nauseum, then you know, you better believe that the Federal Reserve will lower interest rates again to pull us out of the recession. So, you know, a year down the road, two years down the road, we may not be looking at 7% interest rates on homeowner mortgages. We may be looking at three, four or 5% interest rates again, which is much more doable. So it would be nice flips. Another option on the table.
Brian: Number four is using a rotating business line of credit to cover the costs. Now, these you may be wondering, you know, these have way higher interest rates than homeowner mortgages. And yes, they do. However, many of them offer introductory 0% APR periods from nine months to 18 months. And a lot can happen in 18 months. I mean, again, interest rates may well have come down by then, but you can use this to cover low cost rental properties. If you’re going out there and you are buying rental properties for 50,100 grand, then maybe you can use business credit lines to buy the property. And we do have a partner that we work with called Funding Grow and we’ll include a link in the chat here. But what they do is their business credit concierge service and they help you open between 100,000 and 250,000 in unsecured business credit lines and credit cards.
Deni: They also yeah, they build your credit. When we first were introduced to them, I was like, It was just an odd concept, but it’s really cool.
Brian: Yeah. I mean, so they, they scrub your credit report between each round of fundraising. So that’s a more creative approach to funding these. And again, if you can line up those 0% APR or introductory periods on credit lines, credit cards, then yeah, for the next year and a half, you might have 0% interest on that financing for the property. By then you could either refinance the property at a lower rate. If rates are lower, you’d sell the property as a flip. But yeah, it’s a great way for flex financing, as it were. All right.
Brian: Number five is oldie but goodie, and that is seller financing, also known as owner financing. You know, this is something that you just have to negotiate when you’re working with sellers. And you’d be surprised how many sellers are open to this. You know, most sellers aren’t familiar with the process. So there’s some education required on your part and you need to kind of hold their hand and walk them through exactly how it works and of course, what’s in it for them. That’s important that you that you put yourself in their shoes and really talk through how this can benefit them, not just benefit you, but so if financing is 100% negotiable on interest rate on fees, and sometimes you may end up with a higher interest rate, but no fees, no points, no junk fees. So if you look at the APR on a deal like that, you can still come out ahead even if the interest rate looks high on paper, especially if you’re only planning on holding this for the next year or two, after which you could potentially sell the property or you could refinance it at a lower interest rate at the time. So yeah, it’s 100% negotiable. You just have to pitch it in a way that sellers understand and in a way that is clear. What is in it for them?
Deni: Right.
Brian: Now, it’s worth mentioning that seller financing typically comes with a balloon, so you get the first… It’s usually amortized over 30 years with a three year, five year balloon. So you have to pay it off in full by the end of that balloon period. But in the meantime, you have those regular 30 year interest payments.
Deni: What are some things you have to, you know, as a buyer just make sure like you still would need title insurance, I believe, or something like that, just to make sure that there’s no gray marks on the lead or anything like that that are going to come to bite you later.
Brian: Yeah. You’d be surprised how many homeowners and investors don’t buy title insurance for themselves. Title insurance is required by the lender. You have to pay for a policy on their behalf, which you do not have to do when you negotiate seller financing. So that saves you some money right there. But like you said, then you may still want it for yourself just to protect yourself from clouds on the title or any kind of especially if there’s a break in the chain of title somewhere in the title history. So you still want to hire a title company, usually to do the title research on the property just to protect yourself and make sure that the person who’s signing on the dotted line with you actually has the legal rights to sell you that property. And then you and I ran into a situation with that not long ago on a land deal.
Deni: Oh, right. That’s right. Yeah.
Brian: Careful, Florida state attorney to solve the problem for us and ended up being och right. But but it’s a pain in the ass. I mean.
Deni: So to be honest when I, I purchased the mixed use property I had that had the tavern in it and we had an issue as well, you know, later when we went to sell it, not when we went to buy it because we did it as a, you know, just between us deal. There was no realtor or nothing like that. And then later on we found out there was an issue. We were able to get it taken care of, but we had to get an attorney and the whole nine yards. So you really want to make sure. That you’re getting a clear title.
Brian: Absolutely. And by the way, we’ll also put a link to the comments here for a lender who can do both investment property loans and homeowner loans for house. So check them out. They’re called credible. And Shivon says, I believe interest rates will go down in a year to two years, but never be lower than 5% again. We’ll see. You know, my crystal ball is no clearer than yours. It just depends on what’s going on in the broader economy. But if we do have a recession, you know, the Federal Reserve, what do they do to spur economic growth? They lower interest rates. So we’ll see how that all unfolds. So a quick recap here on the five creative ways to finance rental properties. While interest rates are so high. One is serial house hacking. You’re getting homeowner mortgages to move into a multi-family property. Second is a live in bird deal where you buy a fixer upper to house with live in flips is number three, where you move in and you renovate the property at your own pace and then sell it after a year or two. Number four is rotating business lines of credit, unsecured business lines of credit. And we think to fund and grow to help you with that. And number five is seller financing. Oldie but goodie, but always relevant, and especially so in today’s environment of high interest rates. Then if you have any anything you want to add before we call this episode complete?
Deni: No, I don’t think so. I mean, I just think that again, use your creativity. Maybe if you have a room that has an ensuite with a bath in it, maybe Airbnb it or a garage space, I’ve done that where you rent out garage space. I mean, there’s so many creative things you can do to cut down your mortgage and help it.
Brian: Yeah. Basement apartments with a separate entrance. Me Right, exactly. Get creative with it. That’s it. All right. Happy Thanksgiving.
Deni: Yes.
Brian: Have a wonderful Thanksgiving. Deni, I am thankful for you.
Deni: Oh, Brian, you’re going to make me cry. I’m thankful for you, too. More than you know.
Brian: And. Have a wonderful, long weekend, you guys, and we will see you next week.
Deni: Absolutely. Have a great weekend. Bye bye.
Brian: Bye now.
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