The Next 60 Days and Your Financial Freedom

The perfect time to buy a rental property? Really?!?

Yes, I know…we’re constantly bombarded with “the perfect time” to do this or that. “There will NEVER be an opportunity like this again!!” Riiiiiight.

Most of the time it’s a gimmick, which is why I hesitate to start an article like this. However, in my investing career I’ve learned to pay attention when a confluence of factors creates unique buying or selling opportunities. I believe right now is that time for Single Family Rental Homes.                            

By the way, I’m writing this specifically for my friends, people I care about, who are in similar financial situations as I am. If this note reaches you beyond my sphere of influence, great! I hope there is something you can take away from it. Understand that I am both practicing what I am preaching, and attempting to directly influence the financial decisions of those in my network—especially those that share my risk tolerance and need to create their own financial security.

Before I explain why I feel so strongly about this opportunity, here’s a quick background for those that don’t know me well. I’m not satisfied with making a living—I strive for financial independence. I also believe in helping others realize this same goal. I have the unique opportunity to dig into people’s financial lives on a daily basis and help them come up with financial solutions; my friend and I manage a residential home loan (mortgage) company in Kirkwood, MO. I’ve been in the mortgage industry for 12 years and started my real estate investing career when I was only 24 years old. Coincidentally, my wife bought her first home around that same time. Over the years we’ve bought and sold about a dozen properties. There are people who actively buy, flip, and sell real estate for a living. I am not one of those people (yet) and this article is not for them….they don’t need this advice. They live this.

This article is for you if you or your family, clients, or friends believe what I believe: the best (and perhaps only) way most of us will achieve financial independence is to build assets and passive cash flow. Pensions are mostly extinct unless you’re in the military or work for the government. Social Security is insufficient, and 401Ks give people false hope—they’re better than nothing, but likely not enough on their own. I believe investing in cash-flow real estate is an important way to build wealth, and for some of us it may be the best way. 

My main focus is growing our mortgage business and real estate investing has always been more of the side passion project. So, I’m not someone that is out in the field every day buying and selling real estate; I picked my spots to varying degrees of success. Most importantly, I’ve learned a lot that I can share because of that experience, but there are many experts more qualified than me at the same time. Currently, my wife and I have a goal of acquiring one new cash flow rental property each year and doing one or two light rehabs. Again, for us, this is more about the slow accumulation of passive income over time to speed up our arrival at the utopian destination of financial independence. So, it’s from that perspective that I share these thoughts.

So why do I think right now is the time for you to pursue this strategy?

Factor 1: Supply, Demand, and the Cold of Winter

My wife and I purchased our last rental property in October. We’ve struggled to acquire a tenant the last six weeks, and this will mark the first time that we’ve made a mortgage payment without first having collected a deposit and rent payment. Our strategy has been to close in the first week of the month, which delays the first loan payment for seven weeks and gives us plenty of time to earn payments before we make them…but this time it hasn’t happened.

Bad investment? No, we’ll get it rented--and frankly we expected this. We’ve noticed the number of renters looking for homes in late fall/winter is far fewer than those looking in the spring, summer and even early fall. The school year is the prime culprit; our homes tend to appeal to families with young children and renters time the school year. The number of real estate transactions (i.e. people moving) is always higher during spring and summer months as parents relocate into desired school districts in time for fall classes. As we all know however, sometimes life happens and people are forced to move during the school year (job relocations, divorces, marriages, new babies, etc.). So it’s not impossible to rent a home “off-season”--just not ideal. It’s much easier to rent a property in the spring and summer.

With that in mind, it recently occurred to me that right now, from early mid-December to mid-January, might just be the perfect time to actually acquire a rental property. You might think “wouldn’t that put me in the same situation?” Well, here’s the deal. The same factors that push the rental market in spring and summer also push the purchase market. The higher demand for houses drives up prices. The cost to buy real estate goes down in the winter months because the demand goes down.

Granted, inventory is typically lower too—people don’t want to list their house when there are fewer buyers. But some sellers don’t have the luxury of waiting, so the supply doesn’t decline at the same rate as the demand. This shift in the supply/demand ratio drives down prices.

I believe this phenomenon will be even more exaggerated this winter. Sellers enjoyed a relative lack of competition from other listings as the number of homes for sale was lower than in years past, causing prices to rise more than normal. It was fairly common for a seller to list a home and within 24 hours have multiple offers above the asking price. That created a difficult situation for homebuyers struggling with affordability as interest rates rose at the same time. But as buyers leave the market during the winter, I believe home prices will fall more sharply than normal. Sellers, aware that homes were moving fast in the summer, may get nervous when offers aren’t flowing in—and reduce prices.

And buyers have definitely left the market. On the mortgage side we’ve had many pre-approved* buyers get frustrated as weeks and months of multiple offers went to no avail while interest rates rose. With fewer houses available, and offers being outbid over asking price, many who didn’t have to move or were looking to buy investment properties exited the purchase market altogether.

Anytime somebody claims that right now is the perfect time to do anything, they better be able to demonstrate a perfect storm of multiple market factors moving at the same time. Hopefully, you can start to see this storm building as I paint the picture for you.

If you’re looking to make the most return on your money in real estate investing, most people know that you do so by finding undervalued properties. A couple of ways to do that are to target properties that have either been on the market for a long time, or need a little work or even both. I believe we will see a high number of properties on the market for an extended period this winter. The typical seasonality of home prices coupled with unique market forces this summer is creating the perfect storm of opportunity to buy investment properties. You can find better deals on homes now than any other time this year. 

Experts tell us you make your money when you buy, not when you sell, so a savvy investor will maximize returns by buying properties right – right now in the cold of winter.

Factor 2: A Lull in Rising Interest Rates

It may come as no surprise that I’m asked daily: “Which way are interest rates headed?” What may surprise you however is that on any given day I have no idea. There are as many valid arguments to suggest rates are going up as there are saying rates are going down over the course of a day or a week or even a month. Most changes over those time periods are marginal anyway.

Rates have definitely risen this year**, but that rise has stalled over the last few months. There is little debate that, at some point, rates will continue to rise well above today’s levels. The argument tends to be more about when than if. To put it another way, there’s a lot of argument about where rates are headed in the next 90 days or so, but little disagreement about their heading up eventually – and perhaps drastically.

(Sidebar: If anyone tells you they know for sure what rates are going to do in the coming weeks or months, ask them how many put or call options they’ve purchased on securities that simulate bond prices or MBS prices. If they know what you’re asking and have actually bet heavily on it, you may want to listen. Otherwise, you’re better off talking about politics or religion.)

That being said, I can certainly show where interest rates have been, are now, and how they’re trending. After a sharp rise this year they’ve relaxed over the last two months. We know they’ve been higher recently, and we’re confident they’re going up eventually—which suggests we are in a valley right now. I can’t say we’re on the floor of that valley…but we’re in it. Now would be a great time to lock in an interest rate on an investment property before we start heading back up the peak. 

It should be no surprise to even the least-experienced investor that a higher interest rate will negatively impact your return on investment. This lull in rising rates is a perfect opportunity to strike.

Factor 3: Market Cycle Timing and Planning for the NEXT Phase

Here’s the difference between right now and when my wife and I closed on our last rental: cycle timing. If you started shopping for home right now, with year-end activities, holiday parties (I’m accepting invitations BTW), etc. you may not find the right home before the end of the year. You’ll need to budget a little time to find that perfect opportunity – and of course you’ll want to have an agent helping you (and I can introduce you to some fantastic agents that have THIS very specialty to assist in tracking down the right home). 

So if you are starting now, you should expect to close possibly in either January or February. If you see where I’m going with this, you may have just realized that this means your first payment on the new home wouldn’t be due until either March or April… which happens to be an outstanding time to find a renter (see Factor 1)! I see it year after year on the mortgage side, and this year was no different: In 2018, February was our worst closing month while March was our best month of the year. Just one month separated the lowest and the highest demand for new homes. The same is true for rentals.

By starting now, you will take full advantage of cycle timing to start making money before you have to start making payments!

See? Right Now IS Perfect!

So, that’s it. That’s my perfect storm that makes the next 30-60 days an ideal time to call a Realtor and ask them to find you a nice rental home. Simple economics tells you that if you were going to be a buyer out there, it’s best to do that when you don’t have as much competition bidding against you. More complex economics tells you that if you’re going to lock in a rate on new money, now is probably a good time to do that. Finally, a moderate understanding of the ebbs and flows of the real estate market indicates that the next 30 to 60 days may just be the ideal sweet spot between lower real estate prices and still being able to experience demand for your rental at the right time.

I may even go so far as to call this strategy “market timing arbitrage”—and when it comes to making good financial decisions, “arbitrage” is one of the sweetest words you can hear. Good luck out there!

Bonus Thoughts

1) Many don’t realize that qualified buyers can purchase an investment property with as little as 15% down (Conventional)—and if you buy a multi-family with the intention of moving into one of the units, you might be able to get in with as little as 3.5% down with a FHA Primary Residence mortgage.

2) USE A LICENSED REALTOR! They can do in 24 hours what might take weeks for you to accomplish, see angles you wouldn’t on your own, and help make you money. Again, I know some rock stars that live and breathe this every day.

3) Don’t let properties that need a little work scare you away. We have some incredible loan products that finance renovation costs, and good contractor contacts to get that done for you. Using these products wisely can help you jump on a good opportunity. For example, if you can buy a home for 20% less than if it were move-in ready, then put 5% into it making it ready, you’ve just gained 15% equity and created positive cash flow.

If you liked, enjoyed, appreciated or respected this article then please share it with that person that you were thinking of as you read it, or that person I just subliminally made you think about now, or all 5 of them. 

If you didn’t like this article, well, technically Siri wrote most of it! :-)

Contact Information and Disclaimers:

If you're considering looking into purchasing a rental property--maybe even your first one--I would encourage you to reach out directly so we can discuss it. However, if you'd like to explore this more passively, I do have a mobile app that allows you to:

* Search for Homes

*Run Payment Scenarios on a Mortgage Calculator

*Apply Now to Submit a Client Questionnaire for Preapproval

On your mobile device, click this link to download: https://swaleh.loans

You can see all of this on my profile, but just to be sure you know who you are talking to: I am licensed MLO #739145, and I work for Fairway IMC, NMLS #2289, and our branch is located at 12213 Big Bend Blvd, Kirkwood MO 63122. I am not a licensed Financial Advisor, although I used to be. You should talk to a Financial Advisor to compare different types of investments, a licensed Realtor to compare different potential Real Estate Investments, a CPA to discuss the tax implications of whatever you decide to do, and talk to me anytime you need mortgage advice. My NMLS listed office line is 314-300-0256, but you can reach me faster on my cell phone: 314-478-3699. Rates change daily, and so do home prices, stock prices and the weather. For the record, I don't cause any of that. Finally, the Siri thing was a joke...if you hated this, blame me, not her.

*Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation which has not been reviewed by Underwriting. Final loan approval is subject to a full Underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, and income information, and a satisfactory appraisal.

**https://www.housingwire.com/articles/47645-rising-interest-rates-not-holding-back-millennial-homebuyers

Note: These are the remarks of Mike Swaleh solely and do not reflect the thoughts and opinions of Fairway Independent Mortgage Corporation.

Copyright?2018 Fairway Independent Mortgage Corporation. NMLS#2289.4750 S. Biltmore Lane, Madison, WI 53718, 1-866-912-4800. All rights reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Lender.  Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act, License No 41DBO-78367. Licensed by the Department of Business Oversight under the California Finance Lenders Law, NMLS #2289. Loans made or arranged pursuant to a California Residential Mortgage Lending Act License. Georgia Residential Mortgage Licensee #21158. MA Mortgage Broker and Lender License #MC2289. MA Loan Originator License # MLO739145. Licensed Nevada Mortgage Lender. Licensed by the NJ Department of Banking and Insurance. TX Location: 1800 Golden Trail, Carrollton, TX 75010. Fairway Independent Mortgage Corporation NMLS Entity ID #2289 (https://nmlsconsumeraccess.org/EntityDetails.aspx/company/2289).