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Distressed Properties & Contradictory Data

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By Rick Tobin

The published economic numbers that we see daily or weekly don’t necessarily reflect the reality of what’s going on with the job market, financial markets, and housing sector, especially. Reality can be a bitter pill to swallow, figuratively. Is our economy still booming, starting to soften or flatten, or is it turning negative?

The mainstream media likes to share economic data that’s published by the federal government which seems completely disconnected from reality. While we see articles published weekly about massive layouts from well-known companies like Amazon, Walmart, Disney, PayPal, Zoom, Dell, IBM, Microsoft, Google, Salesforce, Vimeo, Coinbase, and Goldman Sachs, we also see published unemployment data that’s claimed to be near historical lows. These massive layoffs and “near historical low unemployment” numbers seem to be contradictory to one another as they can’t both be true at the same time.

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What about housing? In early 2023, we are still seeing all-time record highs for median rents and median home prices in most regions of the country. Yet, we’ve also seen mortgage rates increase by two or three times above peak lows as last seen in late 2021 and the 1st quarter of 2022.

Generally, the booming or busting housing markets are tied directly to mortgage rate trends and whether or not loan underwriting is easing or tightening. How can property values still be peaking while we’ve also possibly seen the fastest increase with short-term and long-term rates in US history at the exact same time? This is another fine example of a contradictory marketplace with two extreme opposites at the same time.

Bubble Burst and Suppressed Housing Supply

For many of us, the absolute worst housing market bubble burst that we experienced firsthand was back in 2008. In California and many other states, the housing market started to peak in late 2006 or 2007. The catalyst for this peaking housing market bubble burst was directly related to the Federal Reserve’s aggressive rate hike campaign over the period of 24 months between June 2004 and June 2006. The Fed raised rates a total of 4.25% from 1% to 5.25% with 17 separate rate hikes.

Because so many borrowers were in adjustable rate mortgages or home equity lines of credit, the mortgage payments began to double or triple for property owners after these 17 rate hikes. As a result, the number of distressed or foreclosure properties reached several million with a high percentage located in California and other Sun Belt states like Nevada, Arizona, and Florida.

Let’s take a look at the worst bubble burst year ever in US history to better understand how bad the price collapse was in 2008:

● Home prices fell in 35 states.
● California had the biggest price collapse at -29.6%.
● Nevada had the 2nd biggest price drop at -22.8%.
● Arizona fell -19%, Florida dropped -18.2%, and Rhode Island fell -13.7%.

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Even worse, California home prices fell a total of -42% off their previous bubble peak. Nevada’s median price dropped -39% from their peak. Both Arizona and Florida fell -33% from their respective previous market peaks.

Because the number of distressed properties increased so dramatically, a very high number of lenders did not start the foreclosure process even if the borrowers were several years behind on their mortgage payments. If a lender or mortgage loan servicer did initiate the foreclosure and take it all the way to the final auction sale, millions of these properties were not placed up for sale as they became a massive shadow inventory of unoccupied homes.

Many lenders did not want to acknowledge or share how bad their non-performing loan portfolio was at the time with their stockholders, equity partners, or derivatives investors. If the lenders did foreclosure on every delinquent mortgage in their portfolio, it might financially crush the same lender. As a result, it wasn’t unheard of to read about homeowners in Beverly Hills mansions with $5 million loans who hadn’t made one mortgage payment in three years or longer.

The same thing is happening today here in 2023. Lenders aren’t starting the foreclosure process as often as they’re legally entitled to due to borrowers not making payments for months or years. It’s also been claimed by many people that the current number of millions of empty shadow inventory homes that are not currently listed for sale may exceed the total number of all homeless people nationwide. Whether this claim is accurate or not as it would be incredibly challenging to prove, our current listing home supply nationwide is still near historical lows.

For those people who claim that the housing market is busting, home prices nationwide increased by +10.1% year-over-year through October 2022 in spite of mortgage rates doubling or tripling in less than a year, according to CoreLogic. This home price “slowdown” is still almost two or three times higher than historical annual price gains.

Record High Consumer Debt & Rents

Total credit card debt reached a new record high of $930.6 billion in the fourth quarter of 2022, according to data released by TransUnion. At the same time, credit card rates and fees reached all-time record highs with average annual rates exceeded 20% for many consumers.

Consumer credit spending fell by a whopping 65% from November ($33.1 billion) to December 2022 ($11.56 billion) in spite of it being the traditionally peak holiday spending month. This is a potential major warning sign that a high percentage of consumers are tapped out and/or their credit card lenders are starting to drastically reduce the borrowers’ ceiling limit.

Several published economic surveys discovered that most of the polled consumers did not have $500 as cash available to cover any unexpected financial emergencies like with medical bills, rising utilities, or skyrocketing grocery costs. One of the most important pieces of information about the health of the economy is directly related to the typical consumers’ cash reserves. When access to cash is near historical lows and rents and mortgage payments are at historical highs, then something has to give at some point.

How can people qualify and afford these astronomical rents for just a 1-bedroom apartment that are listed below? Please keep in mind that many landlords want to see their tenant applicants have gross monthly income that is at least three times the proposed rent. For places like New York City, this would be equal to $11,370 in gross income to qualify for a typical one bedroom apartment that’s leasing for a median of $3,790 per month.

Top 5 Most Expensive Rent Cities (1-Bedroom Apartment)

1. New York, NY: $3,790
2. Boston, MA: $3,000
3. San Francisco, CA: $3,000
4. Miami, FL: $2,660
5. San Jose, CA: $2,540
Source: Boardroom

In many regions, the monthly rents are higher than the median mortgage payments. This trend is unlikely to continue onward as mortgage rates rise and rents start to flatten or fall.

Rising Rates and Distressed Properties

In some metropolitan regions like Los Angeles, they’ve had two and three year long moratoriums that protect tenants from paying their rents due to the Covid issue. Most landlords are small “Mom and Pop” type landlords who may be fortunate to own just one or two rentals. If their tenants haven’t paid rent in two or three years, then the property owner may default on their own mortgage and lose it to foreclosure, sadly.

Lenders and loan service companies will likely start to accelerate their foreclosure filings later this year. If so, this can be traumatizing for the distressed homeowners who may soon lose all of their equity and their roof over their head. At the same time, it can be an investment opportunity for others who keep their eyes open for bargain deals.

As of February 10, 2023, the Fed Funds Rate is at 4.58%. Some financial analysts think that the Fed may take their core rate up to 6% or higher later this year and keep it there for a relatively long period of time. If so, how will existing homeowners and buyer prospects be able to afford higher payments?

Many savvy real estate investors and licensees are now starting to describe early 2023 as a bit reminiscent of 2008. Yet, many others will say that the “the relatively low available supply home listing inventory” will protect us from any sort of a double-digit price collapse. While this may be very true and the Fed may be forced to suddenly start cutting rates in the near future if the economy really weakens, what happens if the shadow inventory is slowly released to the general public and the tenant and foreclosure moratoriums are lifted?

With any perceived positive, neutral, or negative situation, it’s usually very wise to focus on potential solutions for as many possible housing trends that may or may not happen in the near future. Few of us like to actually address possible negative situations as we remain stuck in the state of denial and cognitive dissonance where two contradictory situations must both be right at the exact same time even though they can’t both be true. What we avoid in life controls us, so we must face our fears head on and stay focused on the opportunities or solutions.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Positive and Negative Housing Trends for 2023

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By Rick Tobin

Pending home sales in November 2022 tumbled down by 4% month-over-month and collapsed by -38.6% year-over-year, the largest annual drop ever recorded. Pending home sales are often looked to as a leading indicator of existing home sales due to the fact that they are properties which go under contract a month or two before the sales contract closes or is completed.

Home sales fell 7.7% on a monthly basis in November 2022 as per the National Association of Realtors.This was the 10th consecutive month of home sales declines. The seasonally adjusted annualized pace was 4.09 million housing units. However, the median national sales price increased 3.5% to $370,700 from the year prior partly due to a low housing supply.

The good news for the real estate data for November 2022 is that the $370,000 median national home price was the highest November price that Realtors have ever recorded. It was also the 129th consecutive month (or almost 11 years) of year-over-year price gains that continue to be an all-time record dating back to the tracking of these numbers starting in 1968.

An estimated 23% of all homes sold in November were above the list price due to the tight housing supply. By the end of November, there were 1.14 million homes for sale, which was reported as a still-low 3.3 month supply. These unsold months’ supply of home listing numbers were still well below historical average selling times that can still reach at least six months with moderate price gains.

US annual home price gains, based on S&P Global’s Case-Shiller data, were reported as having year-over-year home price appreciation of +10.4% year-over-year in October 2022 prior to falling to +8.64% year-over-year price gains one month later in November 2022. By comparison, the year-over-year price gains in July and August 2022 were +15.6 and +13%, respectively, as price gains continue to decelerate. This +8.64% annual home price growth rate is still much better than the historical average near 3% to 5% year-over-year gains over the past 50 years.

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The number of new listings in November fell 28.4% year-over-year, which was the biggest drop on record aside from April 2022 near the start of the global pandemic designation. Ironically, the overall supply of homes for sale rose by 4.6% at the same time due to average home listings taking longer to sell. For example, the typical listed home took 37 days to go under purchase contract as compared with 23 days a year prior.

Approximately 78% of recent buyers financed their home purchase in 2022, which was down from 87% in 2021. This was driven by the increased share of repeat buyers who paid all cash that came from the significant equity gains from their previous residence. The typical down payment for first-time buyers was 6% and 17% for repeat buyers as per the NATIONAL ASSOCIATION OF REALTORS®.

Construction, Rate Hikes, & Institutional Investors

Homebuilder sentiment dropped for the 12th consecutive month in December 2022 to the lowest level since 2012, according to the National Association of Home Builders. The builder sentiment score for newly built single-family homes dropped 2 points to 31 on the National Association of Home Builders/Wells Fargo Housing Market Index. Anything below a 50 score is considered negative for builder sentiment.

By comparison, the same builder sentiment index one year prior in December 2021 had an 84 rating which was incredibly positive. Regionally, the building sentiment was the most positive in the Northeast and most negative out West where home prices are well above the national average.

Earlier in 2022, the Federal Reserve’s FOMC (Federal Open Market Committee) began their aggressive rate hike campaign which pushed mortgage rates skyward. In most of the first quarter of 2022, the Fed was still holding the federal funds rate near zero until increasing rates on these FOMC meeting dates the rest of the year:

FOMC Meeting Date

December 14, 2022

November 2, 2022  

September 21, 2022

July 27, 2022         

June 16, 2022

May 5, 2022

March 17, 2022

Rate Change (bps)

+50

+75

+75

+75

+75

+50   

+25

Federal Funds Rate

4.25% to 4.50%

3.75% to 4.00%

3.00% to 3.25%

2.25% to 2.5%

1.5% to 1.75%

0.75% to 1.00%

0.25% to 0.50%

With mortgage rates rising, the number of all-cash buyers for residential properties also increased. An estimated 31.9% of home purchases in the U.S. were paid for with all cash in October. This was a jump from 29.9% one year earlier and the highest percentage of cash buyers since 2014.

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A study conducted by Zelman & Associates found that institutional investors found on Wall Street and elsewhere have set aside upwards of $110 billion to purchase single-family homes in 2023. If so, this is equivalent to the purchase of an additional 400,000 homes.

By the end of 2022, institutional investors like BlackRock, Blackstone, Vanguard, State Street, and others owned 700,000 homes, which represents approximately 3% of the nation’s 20 million single-family homes as per Roofstock. An additional 400,000 new home purchases in 2023 may take the institutional investor ownership of homes up to 1,100,000 or 5.5% of the nation’s total home supply. However, MetLife Investment Management predicts that institutional investors may own as much as 40% of the nation’s single-family home supply by 2030.

Inflation – A Double-Edged Sword

Home construction costs jumped by more than 30% between just the start and end of 2022. Approximately 62% of homebuilders are now offering financial incentives to buyers to boost their home sales by offering seller credits towards mortgage rate buy-downs, paying points and other closing costs for buyers, and reducing home prices. The average home price reduction for new homes in December 2022 was 8%, which was up from 5% and 6% price cuts earlier in the year.

Many food prices have risen at an even larger percentage increase rate than home construction costs. For example, vegetable prices increased by 80% year-over-year by November 2022. Quite surprisingly, vegetable prices absolutely skyrocketed by 38% in just one month between October 2022 to November 2022, as per the U.S. Bureau of Labor Statistics. Yet, these price jumps for veggies were tame by comparison when reviewing egg price changes which rose by a whopping 244% year-over-year increase by November 2022.

A case study conducted by Research Affiliates that’s entitled History Lessons: How “Transitory is Inflation” found that it can take more than 10 years for higher annual inflation periods of more than 8% to later fall back down to 3% or below. After reviewing data from 14 developed nations during the January 1970 to September 2022 time range, they found that nations which reached 8% published inflation rates like seen in the US and most of Europe later kept increasing to 10% inflation rates or higher over 70% of the time.

The published US inflation rates surpassed 6% in 2021 and 8% in 2022. However, the true inflation numbers are probably much higher. Regardless, the Research Affiliates group reported that it generally takes nations with 8% inflation rates or higher a median time of nine to 12 years for inflation to later fall below 3%. In recent times, the Federal Reserve has clearly stated that their goal is to bring published inflation rates down closer to 2% to 3% partly by way of their aggressive rate hike strategies. Based upon historical trends, we may not reach 3% or lower published inflation rates until well after 2030.

The main cause of our record inflation rates today and the declining purchasing power of our dollar is directly caused by the Federal Reserve and US Treasury creating too many dollars within a relatively short period of time. For example, the M1 money supply (cash and cash-like instruments) rose from $4 trillion in March 2020 to $20 trillion in October 2021. The more dollars created, the lower the purchasing power of the same dollars as clearly seen by how empty our grocery carts look after spending $100.

As the purchasing power of the dollar falls and prices for consumer goods, services, and asset prices rise, 63% of Americans are living paycheck-to-paycheck according to a survey conducted by LendingClub. This is why it’s so important to invest in assets that generate consistent monthly income for you like with real estate.

Historically, real estate has proven to be an exceptional hedge against inflation. Generally, home prices rise at or above the annual published inflation rates. As such, few investments in the future may benefit as much as real estate as the dollar continues to weaken and true inflation rates continue onward in the double-digit rate range.

Price Cuts, Buying Opportunities

During significant economic downturns like during The Great Depression (1929 – 1939); The Early 1980s Recession (1980 – 1982) when interest rates hit all-time record highs (21.5% for the Prime Rate in December 1980 and an 18.6% peak high for the 30-year fixed rate mortgage in October 1981) to combat the then record inflation levels, which we actually surpassed here in 2022); The Savings and Loan Bust (late 1980s through mid-1990s); and the ongoing Credit Crisis or Global Financial Crisis that officially started during the summer of 2007 and reached market depths for real estate prices between late 2008 and 2013 especially, the savvy, educated, and fearless investors picked up real estate assets for as little as cents on the dollar while creating generational wealth for their families.

The Global Financial Crisis hasn’t actually ended in spite of many years of Quantitative Easing (QE) that began in November 2008 (QE: Federal Reserve creates money out of thin air to purchase stocks, bonds, and mortgages while boosting asset prices and reducing deflationary risks) and Operation Twist (Federal Reserve simultaneously buys and sells long-term and short-term bonds to artificially suppress mortgage rates down towards historical lows) which helped push real estate prices skyward to all-time record highs just as mortgage rates hit all-time record lows.

While many home prices continue flattening or falling as mortgage rates rise, it’s important to remember these wise words about how new opportunities arise during almost any boom or bust time period:

“To get rich, you have to be making money while you’re asleep.”
“Creative financing creates more opportunities for you.”
“Cash is king.”

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Underwater Homes and Short Sale Solutions

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By Rick Tobin

Many homebuyers who purchased their homes near the peak of the latest 7-year “boom” or positive valuation cycle earlier in 2022 now may have zero or negative equity. This is partly due to the fact that so many owner-occupied home buyers came in with very low to no down payments anywhere between 0% (VA loans) to 3% (Conforming) or 3.5% (FHA). It may cost the average seller 6% to 8% in real estate commission fees, title, escrow, and transfer taxes to sell their homes which actually makes the number of underwater (mortgage debt exceeds current market value) properties higher than what’s reported.

Black Knight’s October 2022 Mortgage Monitor report shared details about how 8% of homes purchased in 2022 were already underwater and that almost 40% of properties had less than 10% equity left in their homes. The hardest hit property owners were first-time home buyers with small down payments such as seen with FHA, Conforming, and VA. Should home values fall 5% to 20%+ next year, then the number of underwater properties will rise like the tides during a peak moon cycle.

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According to Black Knight, more than 20% of the 2022 FHA/VA purchases had negative equity as of October 2022 and a whopping 66% had less than a 10% equity stake. Black Knight also reported that excluding the time near the start of the pandemic the “early-payment default” (EPD) rate, which tracks mortgage delinquencies within the first six months of origination, hit the highest level since 2009. 

The good news is that there’s still some high percentages of equity for homes purchased prior to 2022 due to how fast those homes appreciated nationwide over the past 10+ years. For example, the negative equity rates for all properties nationwide still remains historically low near 0.84% as of the third quarter of 2022. These very low negative equity numbers may change and rapidly increase in 2023 if mortgage rates keep rising and home values flatten or decline.

The #1 reason after the loss of income for why a homeowner is likely to walk away from their home and mortgage payment obligations is when their property is upside-down or underwater with negative equity. While the homeowner may be drowning in debt with a financial anchor that takes their home equity is underwater and figuratively sinking as well. 

Maritime Admiralty Law and Money Terms

You are primarily made up of water. In fact, upwards of 70% of your body and 80% of your brain is derived from water. Iodine is the body’s natural disinfectant, so effectively you’re made up of saltwater somewhat like found in one of the Seven Seas (Atlantic, Pacific, Arctic, and Indian Oceans, the Mediterranean Sea, the Caribbean, and the Gulf of Mexico). If you’re fortunate enough to live near the sea, you probably own a much more valuable home due to the higher demand for coastal properties.

Did you know that the early origins of US law and taxation authority come from Old English Common Law and Maritime Admiralty Law? Common Law is determined by past judicial or courtroom decisions or verdicts in civil and criminal courthouses.

Maritime Admiralty Law is also referred to as the Law of the Sea. It’s a body of private international law that governs relationships between private parties or business entities which also operate ships or vessels. The law of water dominates the entire planet partly since about 71% of the Earth’s surface is covered in water.

Let’s take a look next at how money, real estate, water, and taxation share many hidden and not-so-hidden meanings or double meanings:

Merchant banker: Merchant banks were the first modern banks which evolved from medieval merchants that traded in various commodities such as cloth merchants. These merchant bankers also helped finance the sales of these goods. “Mer” is also defined as sea as seen with the word Mermaid (woman of the sea).

Flipper: The name of a beloved dolphin in a television show from the 1960s because the dolphin completed amazing flips in the air. A home flipper, on the other hand, is an investor who purchases distressed and discounted fixer-upper properties prior to remodeling and later selling or “flipping” them. A flipper who sells his rental property in less than a year will probably pay much higher tax penalties for his or her short-term gains.

Whale: A very wealthy client or organization with lots of money.

Loan Shark: A third-party lender who typically offers very expensive loans for fairly short periods of time over weeks, months, or a few years to motivated clients who may be short of funds.

Cash flow: Real estate investors strive to find assets that create positive and consistent cash flow or income streams just like they may see at their nearby river where they may fish. For real estate investors who are fortunate enough to have a positive monthly cash flow while letting their money work hard for them instead of vice versa, they will have more time to fish or go boating.

Sink: A poorly managed rental property or significant debt can sink you financially and pull you to the bottom like a falling anchor.

Float: When you’re running out of cash, a bank loan can float you like a lifebuoy so that you keep your head above the water and don’t figuratively “drown” in debt.

Liquid: A person with lots of access to money or capital is described as being liquid or having exceptional liquidity. Conversely, a person with no money is illiquid.

(River)bank: A courtroom judge rules from the bench. In Latin, bench translates as bank. Most courtroom disputes are monetary disputes, so the judge acts somewhat like a merchant banker while trying to balance out the assets and liabilities. Banks also are located on both sides of a river or riverbank.

Docs: Boat or larger ships are tied to docks when not at sea. Clients sign loan docs or documents when purchasing a property with a mortgage.

Current-sea: All nations have their own acceptable currency like the dollar. Seawater also flows via an ever-changing current.

Underwater: A property that has more mortgage debt than the current market value.

Soak: You may be familiar with the “Let’s soak the rich” phrase when some people are demanding that wealthier Americans pay their “fair share” of taxes.

Levy: For taxation purposes, a levy is the government’s right to seize your property if you don’t pay your taxes. For water purposes, a levee protects dry land from water damage that may originate from a nearby river or flood channel.

Sinking Prices and Short Sales

“I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.” – Jimmy Dean

If you think a financial storm is coming on the horizon, you can either do nothing as the figurative waves crash over the front of your boat’s bow until it sinks or you can adjust your sails and head off towards safety, sunshine, and new prosperity. Today, you’re more likely than not to read negative news about real estate and the financial markets as we’re near the low point or trough of the economic wave or cycle.

Kieran Clancy, a senior economist at Pantheon Macroeconomics, published a recent analysis about how he thought that home values may fall 20% from their June 2022 peak wave highs. New home listings fell 19% from the 2017-2019 levels, which was the largest deficit in six years aside from the early pandemic and lockdown months in 2020.

Home delistings reached an all-time record high by November 2022 as more sellers got frustrated with fewer buyer prospects who also weren’t offering high enough purchase price offers for many of the sellers. A record 2% of homes for sale across the nation were delisted as being offered for sale every single week on average for 12 consecutive weeks through November 20 as per Redfin.

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An underwater and a potential short sale deal is a home sales situation where the mortgage debt exceeds the current market value at the time of the sale. The seller and advising real estate and mortgage licensees can assist with persuading the existing lender or mortgage loan servicer to significantly discount their debt concurrently at the payoff of the short sale. This way, the seller doesn’t lose more money, the buyer pays fair market value, and both the listing and buyer’s agents receive their commissions.

Some of our past clients who came to us for financing have worked on several thousand short sale deals, so our team is very experienced with offering solutions for all parties involved. For motivated sellers, you should set realistic home listing prices in the near term to maximize your profits or to minimize your losses. For real estate licensees, you should learn more about how short sales and creative seller-financed sales can help you and clients at a much faster pace while increasing gains or reducing losses at the same time.

What goes up must come down, but it also can build up powerful future momentum like a peaking wave crest as we “surf” or “sail through” the continuous boom and bust wave cycles!!!

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

The Next 7-Year Housing Cycle

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By Rick Tobin

I’ve shared written content in numerous articles, real estate courses, and in college textbooks over the past few decades about how we’re likely to see 7-year boom and bust cycles that especially affect real estate. Almost all boom and bust cycles for housing, stocks, bonds, and the rest of the financial markets are directly tied to the direction of short-term and long-term interest rates.

The Federal Reserve will first flood the markets with “easy money” prior to slamming the figurative brakes by tightening up access to the money supply partly by raising rates. Positive or booming housing market eras usually take place when interest rates were below historical averages and had more flexible mortgage underwriting allowances like experienced during the peak no income qualification and subprime credit mortgage years between the late 1990s and 2006.

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History tends to repeat itself partly since the Federal Reserve, US Treasury, and consumers generally follow the same strategies and steps. First, the Federal Reserve lowers rates to stimulate a sluggish economy which increases demand for housing assets while pushing inflation rates skyward right alongside increased government spending. Then, asset prices, consumer spending, government deficits, and money creation grow too quickly prior to the Fed raising short-term rates while making the housing market and overall economy cool down.

In many ways, the 7-year boom and bust cycle becomes more of a vicious cycle or downward cycle in that these financial actions can overinflate asset bubbles prior to them later popping. Energy price directions are generally a root cause of inflation. Housing prices, inflation, and oil costs are more likely to rise and fall together while the purchasing power of the dollar or petrodollar (“oil for dollars”) goes in the opposite direction in an inverse seesaw-like direction.

“The definition of insanity is doing the same thing over and over and expecting different results.” – Albert Einstein

7-Year Financial Cycle Examples

Let’s take a look at the last 7-year boom and bust cycles over the past 49 years to better understand how the current and future market directions can be more clearly seen or anticipated:

  • 1973 – Oil Shock Crash: This was directly related to the end of Bretton Woods when the “gold standard” was switched to the Petrodollar (“oil for dollars”) system beginning earlier in 1971. Between October 1973 and January 1974, oil prices quadrupled within just a few months due to the ongoing OPEC (Organization of Petroleum and Exporting Countries) Embargo, or the reduction in oil production, increasing U.S. demand, and skyrocketing oil prices for consumers.
  • 1980 – Record High Interest Rates: This is primarily because energy costs started to rise while the purchasing power of the dollar fell. As a result, the Federal Reserve began pushing rates skyward starting in 1978. For example, the Fed increased their Fed Funds Rate from 6.75% in January 1978 to 10.25% in April 1979 and later to 20% in December 1980. The US Prime Rate for the most creditworthy borrowers reached 21.5% in December 1980 and the 30-year fixed mortgage rate peaked at 18.6% in October 1981. Shortly thereafter, seller-financed home sales became more appealing because fewer buyers could qualify for these high double-digit mortgage rates just like they may in 2023 and beyond.

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  • 1987 – Black Monday Stock Market Crash: On October 19, 1987, the Dow Jones index fell by more than 22% in just one day, which is still an all-time record overall percentage loss. For better perspective, a 22%+ price drop for today’s 33,000+ Dow Jones index would equal more than a 7,000 point drop in one day. All of the 23 major world markets at the time experienced huge losses for the October 1987 time period. Eight of these markets declined by 20% to 29%; three fell by 30% to 39% (Malaysia, Mexico, and New Zealand); and three market regions dropped by over 40% (Australia, Hong Kong, and Singapore).
  • 1994 – US Bond Market Crash: In spite of low inflation rates at the time, the Fed thought it would be wise to increase rates from 6.2% in early 1994 up to 7.75% by mid-September. These quick rate hikes eliminated upwards of $600 billion of Treasury bond values in the US and caused international bond losses that were closer to $1.5 trillion.
  • 2001 – Stock Market Crash and 9/11: After the longest shutdown of the stock market since 1933 following the tragic 9/11/01 day, trading resumed on September 17th prior to the Dow tanking 684 points (a 7.1% decline). For this first week back in session, the Dow dropped a total of 1,370 points (or a 14% loss). The S & P 500 index fell 11.6% for the first week back after 9/11. Upwards of $1.4 trillion of stock value vanished for the first five days of trading after 9/11. Shortly thereafter, the Federal Reserve began a series of significant rate cuts which directly boosted stock and real estate values for many years up until the official start of the “Credit Crisis” in August 2007.
  • 2008 – Stock Market Crash: The Dow Jones fell an unlucky -777 points in one day on September 29, 2008, which was then an all-time record point loss. Quantitative Easing that began in November 2008, Operation Twist (Fed simultaneously bought and sold short-term and long-term bonds to drive overall rates downward), and other bailout strategies began shortly thereafter in order to attempt to boost stock and real estate values while artificially suppressing interest rates at later dates to near or at all-time low mortgage rates. The Dow Jones later reached a low of 6,547 on March 9, 2009 before Quantitative Easing kicked in and boosts a stock and real estate boom for many years.
  • 2015 – Currency Wars and Stock Market Pricing Glitches: The currency wars between the BRICS (Brazil, Russia, India, China, and South Africa) start to escalate in this same year with America’s Petrodollar (“oil for dollars”) currency system. As more nations start using BRICS financial instruments, many stock and bond trading platforms begin to experience significant disruptions in their asset prices. As a result, many large investors pull their funds out of stocks and bonds prior to later reinvesting the funds in residential and commercial real estate in the US partly for more pricing stability. Today, more nations are becoming BRICS members and leaving our Petrodollar system which may weaken the dollar further and push inflation rates higher.
  • 2022 – Record Inflation and Fastest Rate Hikes Ever: The published inflation rates, which are much lower than the actual inflation rates partly due to how the inflation measurement guidelines keep changing, reach all-time record highs that exceed the 1979 to 1981 era. The Fed’s rate hike pace in 2022 is potentially as much as the 2004-2006 rate hike era when the Fed increased rates 17 times from 1% to 5.25%. However, the Fed has a much more rapid pace to increase rates as much in just 12 months instead of 24 months between January 2022 and January 2023. The 30-year fixed mortgage rate increases from 3% or below to 6%, 7%, and 8%+ within this same calendar year and home prices start to flatten or decline.

Massive Oil Price Swings

Between mid-2014 and early 2016, the global economy faced one of the largest oil price declines in modern history. The 70% price drop during that period was one of the three biggest declines since World War II, and the longest lasting since the supply-driven collapse of 1986. There were seven previous 35% + oil price drops within the time span of between 12 and 18 months going as far back to 1986 up through 2008 which were as follows:

  • 1986 – “Oil Supply Shock” in Saudi Arabia
  • 1988 – Second stage of the 1980’s oil glut
  • 1991 – Gulf War end “Relief Rally”
  • 1993 – Weak worldwide demand and rising OPEC / North Sea production
  • 1998 – Price collapse related to the Asian markets bond and derivatives defaults
  • 2001 – High Tech, Telecommunication, and NASDAQ collapse and 9/11
  • 2008 – The Credit Crisis and the near implosion of world’s financial system

There were three additional 35%+ oil price swings within the same calendar year in 2020, 2021, and 2022 as the energy and financial markets got more volatile or unpredictable. In 2020 after the global coronavirus pandemic was declared on March 11, 2020, oil prices fell from a price peak near $70 per barrel to a negative price of -$37 per barrel. Back then, the price of the barrel was worth more than the oil inside for a short period of time. In 2021, oil prices swung from a high near $85 to a low closer to $47.

For the 2022 year, oil prices went skyward to over $122 per barrel for West Texas Intermediate (WTI) oil in March due to increasing global conflicts like seen with Russia and Ukraine and other factors. Later in the year as the economy started to weaken and demand for consumer goods, services, and assets like real estate started to fall, the WTI oil prices per barrel declined to $77 in early December.

Out of Chaos Comes Opportunity

Whether a market is busting or booming, you can create generational type wealth that can be passed on to your heirs if you’re ahead of your competition by keeping your eyes wide open. The old nursery school rhyme song that goes “the wheels on the bus go ‘round and ‘round, ‘round and ‘round, ‘round and ‘round” is something to keep in mind when watching either the start or end of a 7-year boom or bust cycle. Or, you should study the past to better understand the present and future potential financial trends.

Another warning sign to pay close attention to is the ongoing inverse yield curve situation where short-term bond yields are higher than long-term bond yields when they’re supposed to be the other way around. For example, the spread between a relatively short 2-year Treasury yield of 4.36% reached an all-time record spread difference of more than .82% higher than a 10-year Treasury yield which reached 3.54%. Historically, inverse yield curves are a signal that the financial markets are about to significantly weaken.

Whether the economy is becoming stronger or weaker, there’s opportunity for you as a buyer, seller, investment advisor, or as real estate licensee. For investors and first-time buyers, you might find a motivated seller who will sell their home at a discounted price and carry some equity as a new 1st, 2nd, or as a wraparound (land contract/contract for deed or all-inclusive trust deed or AITD). For real estate licensees, you might want to start learning more about how short sales work and how you can help bail out your clients with forbearance, loan modification, “subject-to mortgage” purchases, foreclosures, “cash for keys” deals, or bankruptcy situations.

Stay focused on your goals and targets in life rather than on any temporary obstacles. If and when the economy starts to really weaken and home prices flatten or fall, the Fed may then be inspired to start cutting rates as fast as possible prior to reigniting the next 7-year boom cycle.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Simplifying and Automating Commercial Mortgages

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By Rick Tobin

Why can’t commercial lending be as flexible as residential lending? Residential mortgage lending for one-to-four unit properties has become more automated and streamlined for investors as we move forward here in the 21st century. More homeowners and investors are seeking out experienced independent mortgage brokers who may have relationships with numerous financial institutions, nonbank lenders, or private money sources. With a few clicks of a button, the mortgage professional can quickly find the best financial solutions available for their clients and get approvals within minutes, hours, or days.

Commercial property lending, on the other hand, still seems stuck in the 20th century for many commercial applicants. It can be perceived as a “good ol’ boy/girl network” in that the commercial loan applicant needs to have some sort of a long-established personal relationship with their local community banker dating back to high school, college, or as fellow members at the local golf club before their loan requests are approved. If so, will they be types of friendly handshake approvals or not-so-friendly “take it or leave it” approvals?

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If the commercial loan applicant is fortunate to find a banker who may consider their deal, this same banker may request that the borrower move their deposits from other financial institutions to their bank before considering the applicant’s loan request. Should the loan be rejected either quickly or months later after a rather brutal loan underwriting process that may include a footlong stack of paperwork, the disheartened customer may give up hope and not know where to turn for another lending option.

Today, non-owner occupied residential properties (one-to-four units) offered as short-term or long-term rentals, multifamily apartments (5+ units), mixed-use, office, industrial, retail, and special purpose (auto repair shops, etc.) can all be viewed as a “commercial loan” by certain nonbank lenders that don’t collect customer deposits like traditional banks. With lower loan-to-value (LTV) ranges for certain asset-based loan products, the risk of default is lower for the nonbank lenders.

Wealth Creation from Commercial Property Ownership

Let’s take a look at commercial property trends and how much wealth was created for those fortunate owners who learned that it’s much better to let their money work hard for them than vice versa:

  • The estimated total dollar value of commercial real estate was $20.7 trillion as of Q2 2021. (Nareit and CoStar)
  • By 2050, commercial building floor space is expected to reach 124.3 billion square feet, a 33% increase from 2020. (Center for Sustainable Systems, University of Michigan)
  • 72% of commercial buildings in the US are 10,000 square feet or smaller. (National Association of Realtors)
  • The typical length of a building lease in the US is three to 10 years. (DLA Piper)
  • Commercial property prices rose by 20% between May 2021 and May 2022. (Green Street)
  • An estimated one-third of industrial space in the US is more than 50 years old. (NMRK)
  • For every $1 billion of growth in the e-commerce sector, it requires an extra 1.2 million square feet of new warehouse space. (Prologis)
  • Self-storage commercial unit REITs produced a 70% market return in 2021 (REIT)
  • Approximately 69% of all commercial buyers in the US need financing to purchase properties. (National Association of Realtors)
  • Sales of multifamily apartment buildings increased by 22.4% year-on-year in 2022 (Colliers)
  • Prior to the March 2020 pandemic designation, the industrial real estate sector had grown for 40 consecutive quarters or over 10 years. (NMRK)
  • Industrial vacancy rates nationwide fell below 3.7% at the end of 2021. (Cushman & Wakefield)
  • The Inland Empire (Riverside and San Bernardino counties) in California averaged an incredibly low 1.2% vacancy rate for industrial space. (Commercial Edge)
  • California had 27 of the 50 highest office rental prices in 2021. (Commercial Search)
  • The average annual return for commercial real estate investors is approximately 9.5%. (Mashvisor)
  • For every retail unit that closes, five new stores open up. (NRF)

Technological Advances for Commercial Loans

What if the commercial lending process could be digitized, sped up, and completed on a secure online loan application with just one point of contact? Your odds of success for getting a commercial property loan approved for a multifamily apartment building, mini-storage site, or small retail center will be much higher if your financial contact person is very experienced with commercial lending and has access to numerous lenders.

Commercial loans are somewhat like giant jigsaw puzzles. While the applicant’s loan package may not fit the guidelines required at one, two, or 10 different lenders, there are other lenders that have more flexible guidelines which allow lower positive, break-even, or even negative DSCR (Debt Service Coverage Ratio) with or without income verification.

Properties with lower positive cash flow or even negative cash flow estimates will likely not qualify at a local community bank or credit union. Yet, they may qualify with other nonbank lenders that do allow break-even or negative cash flow. Some of our lending partners are asset-based lenders that don’t review the applicant’s tax returns as well as provide financing for property improvements. These types of incredibly flexible lending guidelines can make the commercial loan application process much easier for the borrower.

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An Imploding Financial System and Increasing Bank Restrictions

In 2008, the Credit Crisis (aka Financial Crisis, Subprime Mortgage Crisis, or Global Financial Crisis) default risks became more readily apparent as these prominent financial institutions or government entities collapsed and/or were bailed out:

  • Bear Stearns: The fifth largest investment firm in the world that was heavily invested in mortgage-backed securities, collateralized debt obligations (CDOs), and other complex securities or derivatives instruments.
  • Lehman Brothers: The biggest bankruptcy ever involving over $600 billion in assets.
  • Washington Mutual (WAMU): Largest bank implosion in US history with almost $328 billion in assets.
  • FDIC (Federal Deposit Insurance Corporation): They only held $40 billion in cash reserves at the time of WAMU’s collapse, so the government had to silently bail them out to prevent bank runs.
  • Countrywide Mortgage: Once America’s #1 residential mortgage lender that almost imploded prior to being bailed out by Bank of America.
  • American International Group (AIG): They were the world’s largest insurance company and were bailed out by the US government starting with $85 billion while growing to more than $182 billion several years later.
  • Merrill Lynch: The world’s largest stock brokerage firm at the time with $2.2 trillion under management and 15,000 brokers that was taken over by Bank of America.

A derivative is a complex hybrid financial and insurance instrument which “derives” value from underlying assets or benchmarks like interest rate direction trends. Some financial analysts have stated that the total value of all global derivatives may be somewhere within the $1,500 to $3,000 trillion dollar region. If so, these derivatives dwarf all combined global assets by a significant multitude.

Because so many banks, investment firms, and insurance companies are heavily invested in one another partly by way of derivatives, this was why the Federal Reserve, the Bank of England, and other central banks around the world had to step in and bail out these multi-billion or multi-trillion dollar financial or insurance entities, directly or indirectly through others like Bank of America. If not, the global financial system would have fallen like a dominoes chain reaction.

Later, the LIBOR (London Interbank Offered Rate) Scandal, which came to light publicly in 2012, gave us a glimpse of the sheer magnitude of the derivatives market. This financial scandal was about how certain financial institutions invested or bet on the future direction of interest rates tied to LIBOR (the benchmark interest rate at which major global banks lend to one another) while being claimed to be rigged or known ahead of time so that the derivatives bets had a better chance of success.

Several publications like Rolling Stones Magazine wrote articles about the LIBOR Scandal potentially being the largest financial scandal in world history that affected upwards of $500 to $700 trillion in global assets. The named financial institutions in various publications or lawsuits which were alleged to have benefited, directly or indirectly, in the LIBOR Scandal included Deutsche Bank, HSBC, Barclays, Citigroup, JP Morgan Chase, and the Royal Bank of Scotland.

What’s important to understand is that many of the best known banks in the world may only have a few trillion of depositor assets in their checking and savings accounts today. However, they may have exposure to upwards of $50 + trillion in derivatives. As a result of their financial exposure to derivatives, these banks may be unwilling or unable to make investment property loans to even their most creditworthy clients partly due to tighter lending restrictions that came from the passage of the Dodd-Frank Act back in 2010.

This is why mortgage brokers and their non-bank lending partners became the better funding solution for investors while “handshake deals” at local banks don’t matter as much because so many banks may be technically insolvent.

Ironically, it was claimed that delinquent subprime mortgages represented less than 1% of all financial losses related to the Credit Crisis or Financial Crisis. Rather, the complex derivatives investments that were leveraged 50+ times the original amount of investments such as interest-rate options were the root cause. Sadly, mortgage professionals and stated income subprime loans still continue to be primary scapegoats. As a result, fewer banks are willing to offer more flexible residential or commercial property loans that don’t verify income.

Value Analysis for Commercial Properties

How lenders analyze income and expenses for commercial properties can be quite complex and overwhelming. Properties that do not meet most or all of these stringent underwriting guidelines may be prime candidates for asset-based loans.

Let’s try to review and simplify some key valuation terms that lenders may consider before approving or denying a borrower’s request:

Loan-to-value (LTV): The proposed loan amount as a percentage of the estimated property value. Many lenders prefer a loan-to-value range somewhere within the 50% to 75% LTV range. For purchase deals, these same lenders prefer that their clients put upwards of 25% to 50% of the purchase price as a cash down payment, depending upon the creditworthiness of the borrower and the property type.

Net Operating Income (NOI): The NOI for a commercial property can be summed up as follows: Gross Income – Operating Expenses = NOI

The property’s operating expenses include insurance, property management, utilities, and other day-to-day costs related to maintaining the property. However, the mortgage payments are not included within the NOI calculation.

Cap or Capitalization Rate: It’s a mathematical formula used to calculate the real or projected future rate of return on a property based on the net operating income that the property generates. The lower the cap rate, the better the property. Higher cap rates, in turn, are viewed as riskier investments. Cap Rate = NOI / Current Market Value

Property values and cap rates are inverse to one another like a seesaw. Decreasing cap rates as seen with prime downtown properties that are fully occupied leads to increasing property values. Conversely, rising cap rates for older rundown commercial properties usually correspond with falling property values.

Value Estimate: The property’s value estimate can be determined by way of the following formula: NOI / Cap Rate

For example, let’s look at two multifamily apartment buildings located in different cities with the exact same NOI but cap rates that are not nearly the same:

Building 1: $160,000 NOI divided by an 8% cap rate ($160,000 / .08%) = $2,000,000 value

Building 2: $160,000 NOI divided by a 4.5% cap rate ($160,000 / .045%) = $3,555,556 value

Generally, multifamily apartment rates have the lowest cap rates for income-producing properties that aren’t considered to be residential (one-to-four unit) properties. As per an analysis for the 2nd quarter of 2022 by Real Capital Analytics and the NAR, here are their numbers:

Property Type
Apartments
Industrial
Office
Retail

Cap Rate
4.5%
5.7%
6.3%
6.3%

DSCR: The easiest way to remember the debt service coverage ratio (DSCR) is that it’s used to determine whether or not a property has positive (1.25x), neutral or break-even (1.0x), or negative cash flow (0.75x). The DSCR is the ratio of operating income that’s available on a monthly or annual basis to service or cover the monthly mortgage payment (principal, interest, property taxes, insurance, etc.). As a mathematical formula, the DSCR can be visualized as follows: NOI / Debt Service

A small retail center that generates $10,000 per month in operating income and has a projected $8,000 per month in total mortgage payments would be calculated at 1.25x DSCR because the monthly or annual cash flow is 25% higher than the debt service ($10,000 / $8,000 = 1.25x). The net difference between $10,000 inflow and $8,000 debt service outflow is $2,000. This can also be calculated as $2,000 divided by the $8,000 in debt service ($2,000 / $8,000) which equals 25% more net cash flow to arrive at 1.25x DSCR.

Debt Yield: The commercial property’s NOI as a percentage of their total loan amount. The mathematical formula is as follows: NOI / Loan Amount = Debt Yield

For example, a small industrial building owner collects $100,000 NOI each year. His existing mortgage loan balance is $1 million, so his annual debt yield is 10% ($100,000 NOI / $1 million mortgage balance).

Multiple Underwriting Approval Solutions

As you better learn how lenders analyze properties, you will clearly understand that you have more than one loan program available. Some properties and owners will easily qualify after sharing tax returns, liquid assets, profit-and-loss statements, and a detailed income and expense history for their property. Other investors, however, know that their property’s cash flow is break-even or negative, but the future upside for these properties can be tremendous after occupancy rates are pushed higher.

Many commercial property owners experienced unusually high vacancy rates in recent years due to the combination of the pandemic, skyrocketing inflation, rising tenant payment delinquencies, and increasing rates for consumer debt. If so, the income and expense numbers for these commercial properties will probably not qualify at a traditional bank.

Commercial borrowers are more likely to qualify with asset-based nonbank lenders that may not closely review the income and expense numbers for the property. The verifying of income for asset-based, nonbank lenders isn’t necessary because these loans are based more on the appraised value of the subject property and its future income potential. At a later date when the income and occupancy rates are higher while the operating expenses decline, the owner can refinance into a much longer loan term at a lower rate and monthly payment.

Remember, it’s much better to have multiple lending options available for your property purchases or ballooning loan or cash-out refinance needs than just one local bank. The more efficient and flexible the mortgage broker’s technological systems and nonbank lending sources, the more likely you will close your loan and create significant income and increased wealth.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Converting Home Equity to Cash

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By Rick Tobin

The average American homeowner has the bulk of the household’s net worth tied up in the equity in their primary home where they reside. As noted in my past Equity Rich, Cash Poor article, the average US homeowner at retirement age has 83% of their overall net worth tied up in home equity (or the difference between current market value and any mortgage debt if not free and clear with no liens). As a result, the typical homeowner only has about 17% of their overall net worth available for monthly expenses.

Real estate isn’t as liquid, or the ability to quickly convert to cash, as a checking account. We can’t just go to our local grocery store and ask the cashier to deduct the full grocery cart from our debit account tied to our home’s promissory note or deed of trust. Yet, we all have to eat, so what are some ways to gain more access to cash that originate from the equity in our primary home or investment properties?

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Let’s take a closer look at ways to convert equity in real estate into spendable cash:

● Sell your primary home or rental properties: If so, where will you live? Are rents nearby lower or higher than your current mortgage payments if you need to move? Are there any potential unforeseen tax consequences or benefits? Will you miss the monthly rental income from your investment properties?

● Sale-and-leaseback: You find an investor willing to purchase your primary home while allowing you to stay there for months or years as a tenant.

● Cash-out 1st mortgage: Pay off some or all forms of consumer debt (credit cards, auto loans, school loans, business loans, tax liens, etc.) with a larger mortgage while possibly lowering your overall monthly expenses significantly with or without any verified income.

● Reverse mortgage: A combination of a mortgage and life insurance hybrid contract that gets you cash out as a lump sum and/or with monthly income payments to you while not requiring you to make any monthly mortgage payments. Lower FICO scores are usually allowed and minimal sourced monthly income like from Social Security may be sufficient to qualify.

● Business-purpose loan as a 1st or 2nd: A type of loan that may be tied to an owner-occupied or non-owner-occupied property for so long as the funds are used for business or investment purposes such as assisting your self-employed business or buying more rental properties. These types of loans have much less paperwork and disclosure requirements and can be funded within a few weeks with or without income or asset verification.

Declining Dollars and Rising Expenses

Although U.S. wage earnings rose 5.1% nationwide between the 2nd quarter of 2021 and 2022, the published Consumer Price Index (CPI) inflation rate reached 9.1% in June 2022 which was the highest inflation rate pace in over 40 years. As a result, the purchasing power of our dollars continues to decline while consumer goods and service prices rise too quickly.

In July 2022, credit card rates and overall consumer debt balances across the nation reached all-time record highs. This was partly due to more Americans relying upon their credit cards to cover basic living expenses to offset inflated prices.

Simultaneously, the Federal Reserve increased short-term rates a few times so far this year while making consumer debt balances more expensive. At the June and July meetings for the Federal Reserve, they increased short-term rates 0.75% at each meeting. This was the largest back-to-back or consecutive rate hike for the Federal Reserve in their entire history.

To bridge the gap between expenses and income, total credit card debt balances surpassed $890 billion in the second quarter of 2022. The increase in overall credit card debt rose 13% in the second quarter of 2022, which was the largest year-over-year increase in more than 20 years. Near the start of 2022, the average American had close to $6,200 in unpaid credit card balances as per the Federal Reserve and Bankrate.

An additional 233 million new credit cards were opened in the second quarter. This was the largest new credit card account increase in one quarter since 2008 (or near the start of the Credit Crisis). A consumer who pays just the minimum balance for a credit card with a few thousand dollar balance may need more than 30 years to pay off the entire debt partly due to the horrific annual rates and fees that are generally much higher than 30-year mortgage rates.

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Short-Term Cash Supplies

It would take 64.4 days for a Californian to run out of cash if they had average American savings amounts of $9,647 based upon a recent study from ConsumerAffairs.

Here’s the top 10 most expensive regions in the nation and the estimated time that it would take to run out of cash:
Hawaii (62.5)
California (64.4)
Washington, D.C. (72.1 days)
Massachusetts (73.6 days)
New Jersey (74.8 days)
Connecticut (76.3 days)
Maryland (77.9 days)
Washington (79 days)
New York (79.9 days)
Colorado (80.8 days)

Living Wages, Debt, and Wealth Creation

Another survey conducted by GOBankingRates that was published in July 2022 found that the median annual living wage, which is defined as the minimum income amount needed to cover expenses while saving for retirement, is $61,617 per U.S. household. However, the Top 14 most expensive states required much higher annual household income or living wages as listed below:

1. Hawaii: $132,912
2. New York: $101,995
3. California: $94,778
4. Massachusetts: $86,480
5. Alaska: $85,083
6. Oregon: $82,926
7. Maryland: $82,475
8. Vermont: $78,561
9. Connecticut: $76,014
10. Washington: $73,465
11. Maine: $73,200
12. New Jersey: $72,773
13. New Hampshire: $72,235
14. Rhode Island: $71,334

Nationally, the lowest required living wage income for households was $51,754 in Mississippi.

These Top 14 expensive living wage regions also share something in common in that they have some of the highest median-price home values in the nation, especially Hawaii, New York, and California. While the monthly living wages may be highest in these regions, the net worths for homeowners is probably much higher due to so many properties valued well over $1 million dollars.

Ideally, we should all focus on keeping our monthly expenses as low as possible while investing in prime real estate to boost our overall net worth. If so, you’re more likely to retire sooner rather than later while your money works hard for you (or rapidly increasing annual home value equity gains) instead of you working too hard for your money.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Inflation, Tappable Equity, and Home Value Trends

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Image from Pixabay

By Rick Tobin

Historically, rising inflation trends have benefited real estate better than almost any other asset class because property values are usually an exceptional hedge against inflation. This is partly due to the fact that annual home prices tend to rise in value at least as high as the annual published Consumer Price Index (CPI) numbers.

However, inflation rates that are much higher than more typical annual inflation rates near 2% to 3% can cause concern for the financial markets and Federal Reserve. As we’re seeing now, the Fed plans to keep raising interest rates to combat or neutralize inflation rates that are well above historical norms.

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The true inflation rates in 2022 are at or above the published inflation rates back in 1981 when the Fed pushed the US Prime Rate up to 21.5% for the most creditworthy borrowers and the average 30-year fixed mortgage rate was in the 16% and 17% rate range. Back in the late 1970s and early 1980s, rising energy costs were the root cause of inflation just like $5 to $7+ gasoline prices per gallon in 2022.

All-Time Record High Tappable Equity

Image from Pixabay

In the first quarter of 2022, the collective amount of equity money that homeowners with mortgages on their properties could pull out of their homes while still retaining at least 20% equity rose by a staggering $1.2 trillion, according to Black Knight, a mortgage software and analytics company.

Mortgage holders’ tappable equity was up 34% in just one year between April 2021 and April 2022, which was a whopping $2.8 trillion in new equity gains.

Nationally, the tappable equity that homeowners could access for cash reached a record high amount of $11 trillion. By comparison, this $11 trillion dollar amount was two times as large as the previous peak high back in 2006 shortly before the last major housing market bubble burst that became more readily apparent in late 2007 and 2008.

This amount of tappable equity for property owners reached an average amount of $207,000 in tappable equity per homeowner. If and when mortgage rates increase to an average closer to 7% or 8% plus in the near future, then home values may start declining and the tappable equity amounts available to homeowners for cash-out mortgages or reverse mortgages will decline as well.

All-Time Record High Consumer Debts

The March 2022 consumer credit report issued by the Federal Reserve reached a record high $52.435 billion dollars for monthly consumer debt spending. This $52 billion plus number was more than double the expected $25 billion dollar spending amount expectation and the biggest surge in revolving credit on record. In April 2022, the consumer spending numbers surpassed $38 billion, which was the #2 all-time monthly high.

Image from Pixabay

For just credit card spending alone, March 2022 were the highest credit card spending numbers ever at $25.6 billion. The following month in April, credit card debt figures exceeded $17.8 billion, which was the 2nd highest credit card charge month in US history.

While many people are complaining about mortgage rates reaching 5% and 6% in the first half of 2022, these rates are still relatively cheap when compared with 25% to 35% credit card rates and mortgage rates from past decades that had 30-year fixed rate averages as follows:

● 1980s: 12.7% average 30-year fixed mortgage rates
● 1990s: 8.12%
● 2000s: 6.29%

In the 2nd half of 2022, it’s more likely that many borrowers will fondly look back at 5% and 6% fixed rates as “relatively cheap” if the Federal Reserve does follow through with their threats to increase rates upwards of 10 times over the next year in order to “contain inflation” while punishing consumers at the same time who struggle with record consumer debt (mortgages, student loans, credit cards, automobile loans, etc.).

Financially Insolvent Government Entitlement Programs

There are published reports by the Trustees of both Social Security and Medicare about how the two programs are potentially on pace towards financial insolvency in the not-too-distant future. The Social Security Trustees claim that their retirement program may not be able to fully guarantee all benefits as soon as 13 years from now in 2035. Over the next decade, Social Security is calculated based upon current income and expense numbers to run budget deficits of almost $2.5 trillion dollars.

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As per the Trustee’s published report linked below, it’s claimed that the Social Security Disability Insurance (SSDI) trust fund may deplete its reserves as early as 2034.
Social Security report link: https://www.ssa.gov/OACT/TR/2022/tr2022.pdf

If and when the Social Security trust fund starts operating with cash-flow deficits, all beneficiaries, or Americans who receive the Social Security benefits, may be faced with an across-the-board benefits cut of 20% as suggested by the Trustees. For many Americans who struggle to get by on 100% of their Social Security benefits, the threat of a possible future reduction in amounts of 20% or more can be quite scary to think about.

The average Social Security benefit paid out nationwide in 2022 is estimated to be $1,657 per month or $19,884 per year. A 20% reduction in monthly benefits without using future inflation adjustments would be equivalent to a reduction of $331.40 per month in benefits and a new lower monthly payment amount of $1,325.60.

The Medicare Hospital Insurance (HI) trust fund is also on track to exhaust its cash reserves over the next six years by 2028, as predicted by the Medicare Trustees in their own gloomy report that’s linked here: https://www.cms.gov/files/document/2022-medicare-trustees-report.pdf

Let Your Money Work For You

Image from Pixabay

As noted in my past published articles, the bulk of a homeowner family’s overall net worth comes from the equity in their primary residence. The average US homeowner at retirement age has approximately 83% of their overall net worth tied up in the equity in their home and pays monthly expenses from just the remaining 17% of overall net worth that is held in checking, savings, or pension accounts.

While inflation usually is beneficial to pushing up real estate values at a rapid annual pace, inflation is also devastating to the value of the dollar in your pocket as purchasing powers decline. Inflation for real estate does have a ceiling level at which it becomes detrimental to housing values if the Fed starts doubling or tripling mortgage rates to slow down the inflation rates.

Equity in properties isn’t so easy to access to buy food, gas, clothing, or to pay your utilities as having cash on hand. If and when future government entitlement benefits decrease and inheritance and property taxes may increase, then being self-sufficient while earning monthly income from tenants in your rental properties or by pulling cash out of your properties near peak highs may go a long way towards allowing you to maintain the same standard of living that you’ve been accustomed to over the years.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Equity Rich, Cash Poor

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Image from Pixabay

By Rick Tobin

As of February 2022, there was an estimated $10 trillion dollars’ worth of tappable equity in residential properties that owners can access by way of cash-out loans, home equity lines of credit, and/or reverse mortgages with no required monthly payments. The average US homeowner who retires has approximately 83% of their net worth tied up in home equity and pays their monthly expenses from just 17% of their overall net worth found in savings, checking, and/ or pension accounts.

The typical homeowner has the bulk of their individual or family net worth tied up in the equity in their primary residence where they live. It’s estimated that close to 37% of all US households live in residential properties (one-to-four units) that are free and clear with no mortgage debt. This number is approximately 5.5% higher than 10 years ago.

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For those Americans who are fortunate to own their own home, the massive equity gains over the past several years have likely more than offset their rising monthly living expenses. This is especially true in states like California where the median price home statewide reached close to $850,000 in March 2022. Many homeowners gained more than $120,000 in new equity gains in 12 months or less.

Rising Inflation

Inflation severely damages the purchasing power of the dollar as we’ve all seen firsthand in recent years. Many consumer product prices have risen as much as 10% to 50% over the past year alone, sadly.

Image from Pixabay

Historically, real estate has proven to be an exceptional hedge against inflation as property values tend to rise right alongside or above published inflation rate numbers like a buoy with a rising tide. In March 2022, the published annual inflation rate reached 8.5%. This was the highest inflation rate in more than 40 years dating back to December 1981.

Between December 1980 and December 1981, the Federal Reserve raised the US Prime Rate to as high as 21.5% for the most creditworthy borrowers and 30-year fixed mortgage rates hovered in the 16% to 17%+ range in order to combat or quash those high inflation rates. Here in 2022, the Federal Reserve will likely raise rates significantly yet again like back in the early 1980s in order to slow down these incredibly high inflation rates that are actually much higher than the published rates.

Falling Cash Supply

Some financial planners or wealth advisors suggest that their clients maintain at least a three month supply of “emergency” cash reserves for their clients. More than half of Americans (or 51%) surveyed had less than a three months’ worth of expense supply, according to Bankrate’s July 2021 Emergency Savings Survey. This total included 1 in 4 respondents (or 25%) who said that they had no emergency cash fund supply at all.

Image from Pixabay

A more recent January 2022 survey conducted by Bankrate found that some 56% of Americans did not have $1,000 in cash savings available to access for emergency expenses. As a result of minimal cash reserves available for many people, they are likely to use credit cards, take out personal or mortgage loans, or borrow funds from family or friends to cover their daily expenses.

Lower cash reserves also adversely affect people who are planning to lease a home. For tenants, they may need enough cash to cover moving expenses and to put up the first and last months’ rent and/or security deposit money.

For home buyer prospects, they may need at least 3% to 5%+ of the proposed purchase price to qualify for the conforming or FHA loans. With the median home nationwide priced near $400,000 in the 1st quarter of 2022, many buyers will need somewhere between $12,000 and $20,000 for the down payment and additional funds for closing costs unless the seller or other family members are gifting them some of the funds.

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With mortgage rates continuing to rise in recent times, the bigger challenge for many home buyer prospects is coming up with enough of a cash down payment rather than qualifying for a monthly mortgage payment that’s a few hundred dollars more per month today than several months ago.

Homeownership Trends

Let’s review some eye-opening numbers associated with housing trends across the nation as per the US Census Bureau and Statista:

  • The national homeownership rate is 64.8%.
  • There are over 79 million owner-occupied homes in the US as per Statista.
  • Approximately 65% of homes are owner-occupied and 35% are rented or vacant.
  • Real estate prices have increased at least 73% nationwide since 2000.
  • An estimated one-third (33%) of all home buyers are first-time buyers.

Mortgage Debt vs. Unsecured Debt

Debt can be like an anchor holding us back. Yet, some debt is better than others like seen with mortgage debt secured by an appreciating property. Other forms of debt such as unsecured credit cards with annual rates and fees that may be within the 20% to 30%+ range can be especially bad. The higher the rate for the debt, the longer it will take to pay it off unless the borrower later files for bankruptcy protection.

Image from Pixabay

The average American has close to $6,200 in outstanding or unpaid credit card balances, according to data released by the Federal Reserve and Bankrate. Many borrowers pay the minimum monthly payment. If so, it may take them on average more than 30 years to pay off the credit card balance in full.

With a 30-year fixed rate mortgage that may be priced near 3% to 7% (or 20%+ lower than some credit cards), the mortgage principal or loan amount decreases as the years go by and the property value is more likely than not to rise as much as the annual published inflation rate. If so, the home value may increase $50,000, $100,000, $200,000, or $300,000+ per year, depending upon the region and latest economic trends.

If inflation rates continue at a sky-high rate, then real estate investments may still be your best option as the purchasing power of the dollar rapidly falls. The future equity gains from real estate will then allow you to pay off consumer debts like credit cards, school loans, and car loans at a faster pace while your net worth compounds and grows.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Short-Term Rentals and DSCR Loans

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Image from Pexels

By Rick Tobin

Over the past several years, most short-term and long-term rental property owners created the bulk of their wealth from the annual equity gains related to buying and holding their properties as values increased anywhere between 10% to 40% per year. In California alone back in 2021, it was reported that the average home statewide increased in value $11,000 per month or $132,000 for the entire year. If so, I doubt that many Airbnb or VRBO hosts collected more than $132,000 in gross or net rent profits.

Image from Pixabay

Did you know that San Diego, California was ranked as the #1 for having the highest gross revenues of any Airbnb region in the world in 2021? Please see the complete Top 10 list of the highest grossing rentals in the world later in this article.

Let’s look next at just some of the short-term rental listing companies which assist vacation rental property owners with the leasing of their properties:

  • Airbnb
  • VRBO (Vacation Rental By Owner)
  • Booking.com
  • TripAdvisor
  • Expedia
  • HomeToGo
  • Tripping
  • Homestay.com
  • Atraveo
  • OneFineStay

The prominent travel booking company named Expedia purchased VRBO back in December 2015. As a result, Expedia continues to be one of the most dominant short-term rental companies in the world.

As per published Airbnb data, here are the Top 10 states for average annual host or property owners earnings for 2021:

  1. Hawaii: $73,247
  2. Tennessee: $67,510
  3. Arizona: $60,448
  4. Colorado: $58,108
  5. California: $54,461
  6. Florida: $53,209
  7. South Carolina: $49,641
  8. Utah: $48,568
  9. Oregon: $42,964
  10. Alabama: $41,937

Image from Pixabay

If a rental property owner confides in you that he or she collected $50,000+ in gross income from Airbnb last year, this number may only represent a small percentage of their overall total revenue collected from both short-term and long-term tenants (30 days+) because they may have multiple income stream options by way of VRBO, Booking.com, or other companies that help supply them with consistent tenants. This is especially true when the property is located in a populous metropolitan region or a prime vacation getaway area like those found in San Diego, Santa Barbara, or Miami.

No Income Verification Loans for Rentals

Most real estate investors usually need third-party mortgage financing to purchase one or more rental properties even if they are very wealthy themselves. Many years ago, it was quite challenging to qualify for a rental property because you were asked to provide two years’ worth of tax returns, a detailed profit-and-loss statement, and the mortgage underwriters would only give you credit for 75% of your gross monthly rents when attempting to qualify or deny your loan request. This 75% number was due to the fact that lenders assumed that you had property management fees, vacancy rates above 0% throughout the year, and operating expenses for repairs.

As a result, that $2,000 gross rent turned into just $1,500 (75%) and many investors were later denied because few lenders wanted to lend on a rental property with negative monthly cash flow if the proposed monthly mortgage payment (principal, interest, property taxes, insurance, and homeowners association fees, if applicable) was $1,501 or higher.

Image from Pexels

Today, many investors are qualifying to purchase short-term and long-term rentals by way of non-QM or DSCR (Debt Service Coverage Ratio) programs which don’t require borrower applicants’ tax returns, W-2s, or other formal income documents to qualify. Now, some lending programs take the closest look at the subject property before determining if the rental property can at least break-even at a 1.0 DSCR number where 100% of the gross monthly rents are at least equal to the proposed mortgage payment. In these underwriting scenarios, 100% of the gross rents are used to qualify instead of just 75% like was more the norm in years past.

For a DSCR loan, it allows borrower applicants to use the market rent (actual or future, in some cases) of the property to qualify rather than the borrower’s business income. This is especially beneficial for self-employed business owners or investors who have a lot of tax write-offs and minimal net income shown on their tax returns.

Some of these DSCR program highlights include:

  • 640+ FICO
  • Up to 80% LTV
  • Available on investment properties only
  • Finance up to 20 properties
  • Loan amounts up to $2M per property

Some of my other lender programs allow negative cash-flow for rental properties up to 70% LTV for cash-out or purchase transactions while not requiring any additional income from the borrower applicant.

Airbnb Statistic

Image from Pexels

Because Airbnb is the biggest name in the short-term rental business sector, let’s review some of these shocking numbers that confirm how successful this investment property model has been for Airbnb corporate and for individual hosts or property owners.

Airbnb History

  • An average of six guests every single second check into an Airbnb listing.
  • Airbnb listings represent 19% of the total demand for lodging in the US.
  • Over 150 million people have booked over one billion nightly stays.
  • The average US Airbnb occupancy rate is 48%.
  • The average stay is 4.3 nights.

2021 Data

  • The global Average Daily Rate (ADR) was $137 per night in 2021 as compared to $110/night in 2020.
  • California properties had a much higher nightly average of $258 per night.
  • In December 2021, there were 12.7 million listings worldwide.
  • There were 2,249,434 listings in the US in 2021.
  • 356.9 million nights were booked on Airbnb in 2021.

Highest Gross Revenues Worldwide for Airbnb Properties

Image from Pixabay

Surprisingly, these populous metropolitan regions such as Los Angeles, San Francisco, New York City, Paris, London, or Hong Kong weren’t ranked #1 for being the most profitable Airbnb region in the world with the highest gross revenues. No, the honor for the most profitable Airbnb region in the world in 2021 was San Diego, California.

In 2020, seven of the Top 10 highest gross revenues for Airbnb properties were all in the US. One region that stands out is Big Bear, California, which is the best-known mountain resort community in Southern California. Listed below are the 2020 gross revenue numbers for the Top 10 regions in the world:

Compounding Wealth With Equity Gains

There are many individual or family investors across the nation who have acquired 5, 10, 15, or 20+ short-term rental properties. The bulk of their family’s net worth doesn’t usually come from the net annual rental income. No, the family’s net worth is compounding each year with double-digit appreciation rates like we’ve all seen for several years now.

To better understand how the acquisition of multiple rental properties is more likely to create the bulk of your net worth, let’s take a look at a fictional California property owner who saw each of his rental homes appreciate $11,000 per month or $132,000 for the entire year in 2021:

Investors can apply any excess net rental income each year to paying off their mortgage faster. With consistent annual rents, a 30-year mortgage or a shorter-term 5-year or 7-year interest-only mortgage with much lower monthly payments than the best 30-year fully amortizing rates can be paid off much faster as more principal is paid off with extra payments.

The sooner that your homes are free and clear, the earlier you can retire and live off of the monthly cash flow while not touching your equity gains. A fairly consistent plan of buying and holding short-term and/or long-term rental properties is a prime example of letting your money work hard for you instead of the other way around.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

The Non-Owner, No Income (NONI) Loan Solution

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Image from Pexels

By Rick Tobin

Are all loans second to NONI (Non-Owner, No Income) for cash flow purposes? Does your investment property give you a positive annual cash flow with or without significant vacancy rates, repairs, nonpayment of rents due to tenant moratoriums or other reasons, and costly management expenses? How many investment property owners are stuck with high 7% to 10%+ private money or an expensive 30-year fixed mortgage that creates negative monthly cash flow? The NONI interest-only loan or fully amortizing loan with 7, 10, 30, and 40-year fixed terms is an exceptional financial choice.

NONI Interest-Only Loans

First off, can you afford your monthly mortgage payment? Without positive cash flow and the ability to pay your mortgage payments on time, your investment properties may be at risk for future forbearance, loan modification, or distressed sale situations where you could later lose your positive equity in a future foreclosure. The combination of positive cash flow and compounding equity gains should be the primary goal for investors instead of having unaffordable mortgage payments.

Here’s some eye-opening NONI loan products highlights that keep customers coming back for more NONI products, especially if the investor owns 2, 5, 10, or 20+ rental properties:

  • Starting interest-only rates as low as 3.875%*
  • Designed for business purpose 1-4 unit residential loans in most states
  • No income or employment collected on the loan application
  • Loan amounts to $3.5 million for non-owner properties
  • No 4506-T, tax returns, W-2s or pay stubs
  • Qualification is based on property cash-flow, NOT borrower income
  • First time investors allowed
  • Multipurpose LLC allowed
  • Unlimited cash-out up to 75% LTV
  • As little as 0 months reserves (use cash out for reserve qualifications)
  • NONI doesn’t care how many properties a borrower owns
  • The lower I/O payment (when I/O option is chosen) is used when calculating DSCR and cash reserves
  • 85% LTV available for purchase and rate/term transactions (680+ FICO)
  • Rental income is taken from an existing lease or the rent survey from the appraisal and compared to the mortgage payment to determine debt coverage ratio. (all program guidelines and rates subject to change and qualification)

For traditional loan programs, many lenders will take 75% of your gross rents to qualify for a new mortgage loan because the lender assumes that you have vacancies, repairs, and property management fees. For easy math, a rental property with $1,000 per month in gross income is underwritten as if it were $750 per month and another pricier property with $10,000 per month in rental income is analyzed as if it were $7,500 per month.

Image from Pixabay

For NONI, on the other hand, you can qualify at 1.0 DSCR (Debt Service Coverage Ratio) or break-even levels. For example, your rental home averages $2,000 per month, so your newly proposed mortgage payment (including property taxes, insurance, and homeowners association fees, if applicable) must be equal or lower to that same gross rental income. As a result, it’s much easier to qualify for a NONI loan product than any other residential mortgage loan that I know of today.

30-Year Fixed vs. 10-Year Interest-Only

A 30-year mortgage payment doesn’t usually begin to pay down any significant amount of loan principal until after the 7th year. The average mortgage borrower keeps their loan for nearly 7 years, so an interest-only loan product can be a much more solid choice today for many borrowers.

Let’s compare the fully amortizing 30-year fixed payment with a 10-year interest-only payment with cash-out options to see the difference for the same 3.875%* rate:

Loan amount: $250,000
30-year fixed rate payment: $1,175.59/mo. (principal and interest)
10-year fixed interest-only: $807.29/mo.

Loan amount: $500,000
30-year fixed rate payment: $2,351.19/mo. (principal and interest)
10-year fixed interest-only: $1,614.58/mo.

Loan amount: $750,000
30-year fixed rate payment: $3,526.78/mo. (principal and interest)
10-year fixed interest-only: $2,421.88/mo.

Loan amount: $1,000,000
30-year fixed rate payment: $4,702.37/mo. (principal and interest)
10-year fixed interest-only: $3,229.17/mo.

Loan amount: $2,000,000
30-year fixed rate payment: $9,404.74/mo. (principal and interest)
10-year fixed interest-only: $6,458.33/mo.

Loan amount: $3,000,000
30-year fixed rate payment: $14,107.11/mo. (principal and interest)
10-year fixed interest-only: $9,687.50/mo.

*APRs from 4.79%: The 10-year fixed loan converts to an adjustable for the remaining 20 or 30 years with 30-year and possible 40-year loan term options. There are also 30-year and 40-year fixed interest-only loan programs at higher rates (all rates and programs subject to change)

Increasing Inflation and Rates, Decreasing Dollar Value

The more money that is created together between the US Treasury and Federal Reserve, the lower the purchasing power. Inflation can severely damage the purchasing power of the dollar while generally benefiting real estate assets.

US M1 Money Supply (February 2020): $4 trillion
US M1 Money Supply (March 2020 – October 2021): From $4 to $20 trillion

Image from Pixabay

Or, 80% of today’s M1 Money Supply, or an additional $16 trillion dollars in circulation, was created within just 22 months (March 2020 to October 2021).

Most Americans create the bulk of their family’s net worth from the ownership of real estate, not hiding cash under their mattress or holding stocks or bonds. Inflation is also a hidden form of taxation. One of the best ways to offset weaker dollars is to buy and hold real estate as a hedge against rising inflation while also generating monthly cash flow.

Today’s younger investors may not remember 10% to 20% fixed mortgage rates from years past. If your rental properties are losing money at a 3% or 4% fixed rate today, then any future properties purchased with higher rates will lose even more money unless you select a much more affordable interest-only loan product.

Let’s take a look next the average published 30-year fixed rate for owner-occupants who qualify with full income and asset documentation by decade:

● 12.7% in the 1980s
● 8.12% in the 1990s
● 6.29% in the 2000s
● 4.09% in the 2010s

The common link between each of these decades was that perceived inflation risks were usually a core reason why the Federal Reserve increased interest rates in order to quash inflation. Today’s published inflation rates are at 40-year highs. Yet, they are still underreported and are actually much higher as partly noted by annual used car prices rising almost 48% in just 12 months near the end of 2021.

Doubling Asset Values

If you keep the old Rule of 72 (how long it takes to double an asset value by the annual gain or interest return projections) in mind with rising inflation trends continuing to boost housing prices, you will clearly see the potential to boost your net worth. For example, a home doubles in value based upon the gains such as a 7.2% annual increase that will take 10 years for the home to double in value (72 / 7.2% = 10 years).

Image from Pixabay

Between November 2020 and November 2021, it was reported that the average home price, including distressed properties, increased more than 18%. If that home price gain trend continued at the same annual pace, the average home price could double in value every 4 years (72 / 18 = 4 years). In many pricey coastal regions, homes have appreciated 30% to 35%+ per year over the past few years. As a result, many investors have seen their home values double in just two or three years.

As rates are more likely to increase than decrease in the future, the interest-only loan products that can be fixed for 7, 10, 30, or 40 years make more sense from a cash flow and peace of mind standpoint.

While NONI keeps your payments low, your net worth may be boosted sky high as the soaring inflation trends continue and properties may double or triple in value!

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.