1. Lease Option
Lease options are my favorite way to make money in a high-rate environment. I’ve found them to be especially effective for newer investors. This option involves signing a lease with a current owner of a property, with the option to buy that property at a set price. These are normally long-term arrangements of five or more years, giving you, the investor, plenty of time to build equity and close on the house. The lease rate can typically be negotiated, just like all the terms in the agreement, but are often based on the needs of the seller.
Many sellers have locked in low interest rates in recent years, so investors can take advantage of that by locking in monthly payments based on rates that are much lower than they are today. One of the biggest advantages of these contracts is the option—not obligation—to buy. Investors can choose to purchase or not within the allotted time, so if the market shifts and goes down in value, you are not stuck. If the value of the property goes up, which is more likely over a longer term, you can close and have instant equity, you can flip the house or you can sell the contract. The contract alone is marketable. While you are leasing the property from the owner, you will likely sublease to a tenant for more than your payments, so you can make money each month as well.
Although you can limit your risk with lease options, they can be tricky to close when you sell. After all, how do you sell a home you don’t yet own? In order to sell the house, you may need to close on your option and take ownership, meaning you will need to come up with the money to get the deal done. There are ways to accomplish this without a loan, but in most cases, you will get a loan to purchase the home. If your buyer does not close with you, you could be stuck with the loan at a high interest rate.
2. Subject-To Offers
I love the lease option to get started because they are so easy to negotiate and understand, and they are pretty safe for everyone involved. With that said, as you get more experience, you will likely want to start purchasing properties subject to the existing financing. This is rather simple to understand as an investor but can be very confusing and intimidating to an owner. The owner needs to trust you and be extremely motivated for them to consider this option.
When you purchase a property subject-to, you are taking ownership of the house with a deed, but you are not paying off the loan. The owner literally deeds the house to the investor. In this case, you will need to take over the mortgage payments and keep those current. The advantage here, like the lease option, is that you will be taking on a loan at a lower interest rate than you can get today. Many times, these loans are 30-year fixed-rate loans and are several years into the term. This means that more of each payment is going to reduce the principal. That and the fact that you have complete control as the owner is what makes this such a powerful strategy.
That said, this option does come with risks. Sometimes I get asked if the subject-to offer is legal. The answer is that there is a decent chance that you will be violating a term in the loan documents, but that does not make it illegal. It’s important to know that there could be a loan default, and the lender would have the right to enforce its remedies. I have never seen a loan called due for this, but it is something you will want to be aware of. Having a backup plan to either return the home to the owner and structure a lease or pay off the loan in full should be considered.
3. Private Lending
With rates increasing, it is becoming more expensive to borrow money. If you think about this, it makes sense to be the one lending the money. Investors can take advantage of higher loan rates by investing in loans. Non-bank loan rates were easily 8% to 12% before rates began to rise. Now I’ve noticed 12% is the starting point, and borrowers will pay more than that depending on factors such as the deal, the region, the quality of the guarantor and loan sizes.
Although rare, I’ve found the biggest risk to private lending is a default. Although you can mitigate this by securing the loans with real estate at a low loan-to value, your cash flow would stop while you work through the problem.
A savvy investor can make money in any market. The fact that rates are going up will not deter smart investors. In fact, smart investors will invest in strategies and assets that will perform well with the current conditions and take advantage of the increasing rate environment.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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