Mon, 10 April 2023
In this podcast episode, Keith Weinhold discusses the benefits of investing in stable property markets, the risks and benefits of taking out a second mortgage on a property, and the potential impact of remote work on the real estate market.
Weinhold also touches on the performance of stocks and other asset classes in the first quarter of the year, highlighting the drawbacks of savings accounts, CDs, and money market funds, and suggesting that investing in real estate can be a better option.
Overall, Weinhold emphasizes the importance of investing in stable markets with high rent ratios and strong landlord tenant laws.
**Real Estate Prices [00:03:39]**
Discussion of the current and future direction of real estate prices, with a recap of the benefits of investing in real estate.
**Tapping Equity [00:04:50]**
Explanation of the problem with tapping equity and the risks of taking out a second mortgage on a property.
**Second Mortgage [00:05:43]**
Explanation of how to add a second mortgage onto a property and access cash without refinancing the entire loan, with details on the 80% combined loan value ratio.
**Risks of Second Mortgage [00:07:49]**
Discussion of the risks of taking out a second mortgage, including interest rate fluctuations and the potential pitfall of borrowing short to go long.
**Second Mortgage Benefits and Risks [00:09:51]**
Discussion of the benefits and risks of taking out a second mortgage on a property for investment purposes.
**Current Direction of Home Prices [00:12:09]**
Analysis of the current direction of home prices in the resale market, including a survey of resale agents and national existing home prices.
**Regional Real Estate Market Performance [00:18:00]**
Discussion of the stability of regional real estate markets, with a focus on the southeast and midwest, and the importance of stable prices, high rent ratios, and strong landlord tenant laws.
**WFH Trends and Regional Real Estate Markets [00:20:24]**
Analysis of the potential impact of work from home trends on regional real estate markets, including an increase in flexible job postings in major cities.
**Virtual Real Estate Investing [00:25:02]**
Discussion of the recent failures of metaverse projects and the risks of virtual real estate investing.
**Factors Affecting National Home Prices [00:26:15]**
Explanation of the headwinds and tailwinds affecting national home prices in 2021, including bank failures, job loss recession, labor and supply inflation, spring home buyer demand, and the supply crash.
**Mortgage Rates [00:30:20]**
Explanation of the difficulty in predicting mortgage rates and the lack of forecast for their direction.
**Various Asset Classes Performance [00:32:17]**
Discussion of the performance of different asset classes in Q1 of the year, including precious metals, savings accounts, and real estate.
**Benefits of Investing in Real Estate [00:35:14]**
Real estate investing as a way to beat inflation and transfer prosperity from dollars to property, with the added benefit of control and potential for five ways of profit.
**Reasons to Invest in Residential Real Estate [00:36:27]**
Advantages of investing in new or renovated residential real estate, including low maintenance expenses and potential for no capex expenses during ownership.
**Expectations for Real Estate Market [00:37:33]**
Expectations for the real estate market in the next five years, with a caution that the historically high price run-up may not be repeated.
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National median home price (existing & new):
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Welcome to GRE! I’m your host, Keith Weinhold.
Would you rather be age 18 and poor or 80 and wealthy?
Learn about how a second mortgage could benefit you.
Historically, what REGIONS of the nation have the most stable and volatile real estate prices?
Then, there are two ominous threats to FUTURE property prices. All that and more, today, on Episode 444 of Get Rich Education.
Welcome to GRE! From Orange County, Florida to Orange County, CA and across 188 nations worldwide, I’m Keith Weinhold, this is Get Rich Education.
Last week marked 50 years since the first-ever cellphone call was placed. The call from the 2.5-pound brick-sized cellphone was placed in NYC - Manhattan.
That phone could NOT fit inside a standard pocket.
Sheesh! Look, I won’t even use a case on my iPhone today because I’m concerned about the weight and friction and it would add!
I want it light and I want to be able to quickly slide it in & out of my pocket. Ha!
Well, I’ve got a more significant trade-off for you to consider.
Would you rather be age 18 and poor or age 80 and wealthy?
I think you and most everyone would rather be 18 years old and poor rather than 80 years old and wealthy.
I am pretty confident that you & I agree on that.
Well, if you’d rather be 18 and poor, then why would you go to a job to trade your time for dollars?
Because that’s exactly how you move away from 18 and poor straight toward 80 & wealthier but probably 80 & still less than wealthy.
Why would you make that trade?
Even if you love your job - if it’s not the activity you’d MOST want to be doing out of anything else in the wide spectrum of life, move away from 18 & poor?
Well, time is going to pass one way or the other, but you can win back your time & end up wealthy rather than “somewhat less than wealthy”...
…when you provide value for society by giving them housing, getting paid 5 ways at the same time, one of which includes a MOSTLY passive income stream, trading relatively little of your life time all the while. That’s why we do here.
That way, you’re not quite going to be 18 & wealthy, but wealthy when you’re young enough to enjoy it.
Over the last three years, property prices are up 30 to 40% in a lot of markets.
We’re going to look at the current & future direction of real estate prices in a moment.
But let’s talk about what you can do with this… what you can do with that dead equity in your properties.
America has near record-high equity levels right now so this is really timely here.
But there’s a bit of a problem with tapping your equity today. Before I get into that, just a recap minute here…
Of course, as any longtime listener knows, since the rate of return from home equity is always zero, you have a chance to harvest your equity.
Having, even an extra $1,000 of equity in any property, including your own home, is like making an extra principal payment of $1,000.
Doing that is like you saying, “Hey, Mr. Banker. Here’s an extra $1,000 principal payment. Don’t pay me any interest on it. If I need it back, I’ll pay you fees, and I’ll try to prove to you that I qualify again.”
That’s the short story on why home equity is unsafe, Illiquid, and its ROI is Zero.
OK, but if you have a mortgage loan that’s set at just 3 or 4% interest, are you really going to refinance that whole loan just to pull some money out - just to convert some equity to cash?
Because if you did, your mortgage rate could go up to 6 or 7%. So accessing equity isn’t as great as it used to be.
Ah, but there’s a way around this.
One your, say, property at, say, Huckleberry Lane, you could keep your existing mortgage in-place at that low 3% or 4% rate, and potentially add a second mortgage onto Huckleberry Lane - and only that second mortgage is at the higher rate.
The first loan stays in place and so does its amortization schedule.
Now, if your Huckleberry Lane property is worth $500K, you can often have 80% of that, or $400K borrowed, that’s that 80% combined-loan-to-value ratio.
That means that the amount of cash that you can get your hands on is $400K minus your mortgage balance.
That’s why a lot of property owners are able to access, often, $100K or more cash, without touching their low first mortgage at all.
Get $100K cash out - or whatever you have access to - it’s not providing you with any rate of return anyway.
Though you can often borrow out up to 80% of your primary residence’s property value, the deal isn’t as good as far as getting second mortgages on your rental property.
Second mortgages on a rental are, sometimes available, sometimes not. When they are, it’s recently been just up to 70% that you can borrow out.
Now, as good as this might sound, it doesn’t mean that you SHOULD do it. What are the risks with taking a second mortgage on your home or rental properties?
Well, some second mortgages take the form of a Home Equity Line of Credit - or HELOC.
The interest rate on your HELOC can fluctuate, so there’s interest rate risk. Most HELOCs have a fixed rate period for the first 5 or more years though.
Before I talk more about the risk of a second mortgage, it’s just amazing - the number of people that I run into out there - most of them aren’t REIs - but homeowners that are elated that they got a low mortgage rate 2, 3 years ago (and they should be - congratulations)... but they want to tap their bloated home equity and don’t know about adding a second mortgage.
Now, a risk with a second mortgage is the potential pitfall of borrowing short to go long, meaning your HELOC rate resets in a little as five years - it could go down when it resets and it goes up, and at that time, you’re not liquid enough to deal with the second mortgages higher payments.
Now, I know, it’s exciting about getting into more income property, using dead equity from your own home or your own rentals - because it’s “Real Estate Pays 5 Ways” stuff.
You might tell yourself, that when you add up a 5 rates of return from investment property - appreciation, cash flow, amortization, tax benefits and inflation-profiting, that you can surely see a total rate of return on your new rentals of 20% or 30% or more.
So if your second mortgage has an interest rate of 7 or 8%, you’d do that deal and pocket the spread.
Yes, it sure might work out that way, in fact, there’s even a probability that it could work out that way.
But the risk is that you’ve got to stay liquid enough to service the debt if your second mortgage rate rises or any other reason.
And you might be just fine. You might have enough cash flow or cash stored that you’re padded, you’re fine… and your underwriter might help you look at that during your second mortgage qualification.
You might ask Ridge Lending Group or your favorite lender about second mortgage options.
So, now you know. A second mortgage can keep up your velocity of money. There are benefits and there are risks.
Utilizing it successfully looks something like this.
You start off with 50% equity in one property, which is 2:1 leverage, you move some of that into a second property.
Now you’ve got 25% equity in both.
You’ve done MORE than double your wealth-amplifying ability here. You’ve virtually 4Xed.
Because rather than having 2:1 leverage in one property, you’ve got 4:1 leverage in two properties.
That’s how wealth is BUILT.
Let’s talk about those ERSTWHILE home prices.
There are at least two ominous threats to future home prices. And now that it’s Spring and market activity picks up, what's the CURRENT direction of home prices?
Real estate can move slower than glaciers, so March numbers are still scarce.
Home prices in the resale market - alright, that means existing homes, not new-build - those resale prices have stayed remarkably resilient, even when mortgage rates jumped up back in February.
John Burns REC compiles a chart for the latest survey of resale agents. The question that was asked is: “What direction have resale home prices moved in the last month?”
The national survey respondents can pick that prices are either MOST INCREASING, MOSTLY DECREASING, or MOSTLY FLAT.
This February, for the first time since May of 2022, more said that home prices are "mostly increasing" rather than "mostly decreasing":
Note though, that most of the agents in the latest survey show that prices are merely steady at 51%. 26% said “increasing” and 23% decreasing.
Credit to JBREC. This is a national survey of ~2,600 resale agents.
Now just from this chart and THESE stats, note something interesting. October 2022—appears to be housing’s low point. That was then, six months ago—marking housing's recent low point.
So, that’s a different angle on looking at home prices than usual - asking agents what they’re seeing.
National existing home prices, per the FRED stats, month-over-month are up just a little, from about $361K to $363K. Again, that’s through February.
Seasonally, that could go up more. That typically happens each year when spring transitions to summer.
There’s a good chance that national homes prices will be rising these next few months.
If you think that those prices sound a little low, be mindful, this entire discussion, so far, is about EXISTING homes aka resale homes, which tend to be priced lower than new construction homes.
If you combine both existing & new, same source, $468,000 is the national median home price. That was the same quarter-over-quarter. Same source too.
It’s always important to cite the source when it comes to statistics.
You know, some say the 1990s are when America moved into the Information Age. But, at some point, in the 2010s, did we move into the DisInformation Age?
I don’t know. There’s a lot of both out there - a plethora, a profusion of both information and disinformation.
Some of these niche finance social media pages don’t cite their sources, and more often than not, I don’t follow them or I unfollow them if I find that they regularly don’t cite source.
The other type of story that I unfollow or just stay away from, are article headlines or images with the word “Rumor” in it.
I don’t want to follow Rumors. Now, I guess, in the best case, a rumor could turn out to be true and maybe could give you a heads up on something that actually turns out to come true later.
But, the world is full of real information. I don’t want to spend this one finite life I have on earth catching up on rumors. It’s more sports sites that use that word rather than finance sites.
Rumor is just an annoying word, I guess. It’s a synonym for “gossip”.
Hey, the real estate investing and personal finance world has its own quirks and odd spins on words.
One thing I haven’t been able to figure out is how a guru is bad and an obsession is good.
Some people disparage thought leaders and influencers as gurus.
Guru means an influential teacher or an expert. That sounds like someone worth listening to to me.
How are obsessions good. Some say, to succeed, you’ve go to be obsessed.
No, you don’t. That sounds unhealthy.
The definition of obsess is to preoccupy or fill the mind of someone continually, intrusively, and to a troubling extent.
Don’t fall into the trap of an obsession.
Well, to recap what you’ve learned today on Get Rich Education Episode 444 (ha!) rumors and obsessions are bad, and gurus are good.
Enough digression. Getting back to real estate investing.
Like I said at the beginning of the year, I don’t expect much national HPA or price declines this year.
But regionally, the markets that we focus on here - the ones in the Southeast and Midwest and a little in the Northeast, have all performed well.
Many - even most - in our target markets appreciated in 2018 & 2019 & 2020 & 2021 & 2022 & they’re continuing to do so now.
Many Florida markets are still seeing 10%+ appreciation. We’re talking about those stable markets, avoiding the volatile, largely coastal markets where prices are sinking, especially on the West Coast.
As I've long discussed, one reason that we invest where we do are for their stable prices, even during downturns.
Backed by historical data, American housing's long-term regional price volatility is broken down like this:
The most stable markets are in the Midwest and the Inland Northeast.
The medium volatility markets are in South
And the highly volatile markets, which we avoid are in the West, and the Coastal Northeast - like NYC and Boston.
I’m going to guess that you’ve never heard regional home price VOLATILITY described before.
Now, you might wonder, if the Inland Northeast tends to have more stable, long-term pricing than the South, why don’t we favor it more than the South.
Well, stable prices are important. But having high rent ratios and having strong LL-tenant laws and high in-migration make the Southeast a strong investment area.
Of course, when I describe regions this broad there tend to be some outliers and exceptions.
Now, it’s going to be interesting to see how America’s regional pricing level AND its level of stability changes over time.
That is set up to change at a faster pace, and you might know why that is - why these geographic regions could see, really more of an amalgamation of characteristics and that is due to… you MIGHT know what I’m going to say. WFH.
That actually is not an initialism or acronym for some kind of thinly veiled profanity. It is work-from-home.
The rise in Work From Home Trends could really start to blur these lines over time. Now, it would be a trend that moves slowly.
But consider, that, in January of 2023 six times more work was happening remotely than it was in January of 2019, that’s according to a company called WFH Research.
In fact, in major cities like New York and Chicago there are now more job postings for flexible arrangements than at any point during the last three years, according to the NBER & Bloomberg.
Now, that’s of less concern to you, the residential property investor. It might just be an interesting trend and create more demand for your product - HOMES!
But it could very well put downward pressure price pressure on higher-priced areas like Manhattan, Brooklyn, and San Jose… and more upward price pressure on those lower cost areas where you & I tend to buy property.
But with more Americans working from their homes, it is bad, bad, bad for downtown commercial landlords and some central business district companies who survived the 2020 lockdowns… but STILL haven’t fully bounced back three years later. Gosh!
GetRichEducation.com is where you can learn more about how to invest in real estate the right way, the profitable way - with articles that I write myself, and our videos and more. It is all free.
If you would like to contact us, with a question about the show, you can do so at GetRichEducation.com/Contact
More straight head, including two ominous signs for the future of the housing market. I’m Keith Weinhold. You’re listening to Episode 444 of Get Rich Education.
Welcome back to Get Rich Education. I’m your host, Keith Weinhold.
We are keepin' it real here at GRE. Building real wealth in the real world with real estate.
See the, uh, emphasis on the world “real”. Back in December, on Episode 427, you’ll remember that we did a show devoted to Metaverse Real Estate Investing… and the consensus of the guest & I were that it is risky and in most cases, ill-advised to get involved.
Well, it was recently announced that both Disney and Microsoft have shuttered their metaverse projects.
Popular virtual worlds have seen steep drops in interest, with the median sale price of real estate in Decentraland plummeting 90% YoY.
You know, with the real thing, even if your real estate lost value, which isn’t common, it can’t go down too far. You’ve still got the value of the land underneath it and the value of all the materials that your property is built with.
What about national home prices for the rest of this year? Of course, it’s always a little odd to discuss national home prices with the tens of thousands of US markets.
It’s kind of like coming up with a national weather average.
Here are the MAIN factors governing national home price direction this year.
The headwinds to price growth - the threats are #1:
1 - We had banks fail early this spring. More regional bank fallout could contribute to tightening lending standards. Tightening lending standards would mean that fewer borrowers could qualify, and that could reduce demand. Reduced home demand is NOT good for prices. So that’s ominous housing threat number #1.
But even if that happens, regional banks are often making COMMERCIAL real loans.
The government-backed loans you’re getting for residential are more desirable - we’re talking VA, FHA, rural housing mortgage, and conforming loans that are sold to Fannie Mae and Freddie Mac - which are often those types that you’re getting for 1-4 unit income properties at GRE Marketplace.
All government-guaranteed stuff.
The second substantial threat to some good home price appreciation this year is that there is a small chance of a big "job loss" recession.
With it being over a year since the Fed started raising rates, there is a lag effect and we should some at least a few more job losses as we head toward a likely recession.
They are the two ominous threats.
The tailwinds to price growth - these are the strengths for rising home prices, there are 3.
The first one is that labor & supply inflation remains elevated, and well, that obviously keeps upward pressure on home prices.
The second positive, or strength for home prices is - like I touched on earlier - increasing spring homebuyer demand hasn’t been factored into the numbers yet - and that always boosts prices.
And then the third strength and underlying factor to boost home prices this year is really, what I’ve called “the crash” which has caught some people off guard.
Yes, this generation’s housing crash ALREADY happened. It is that SUPPLY CRASH of about 60% in available American homes to buy.
We have such a low housing supply, like we’ve discussed in-depth elsewhere on the show so I won’t elaborate on that, but that changes nearly everything and it is one reason that home prices are still so resilient today. Still more demand than supply.
National home prices have begun heading up a little, and there are a few more opportunities than there are threats that prices should keep rising, but I don’t expect any huge gain, like no 10% gain nationally this year. I don’t see how that can happen at all.
Now, you’ll notice that, mortgage rates, - I didn’t put them into either category - either the upcoming housing threats or strength and that’s simply because we don’t know where mortgage rates are headed.
They’re so hard to predict so that’s why I’m not forecasting where I think that mortgage rates will go.
You know how when you’re under contract to buy a property and you & your mortgage loan officer are having that strategy session on WHEN you want to lock in your rate.
At least one time in your life - and I sure have in mine - you’re tempted to ask your MLO where they think rates are going… well, like I said, they’re just really difficult to forecast.
Your MLO often doesn’t know where they’re going to go.
Do you remember, last year, or I sure do because I follow this stuff closely, the number of people and professionals that said mortgage rates would be 8 to 10% by Spring of 2023?
Yeah, quite a few people said that emphatically. They’re about 6.3% today.
Before I get back to real estate, the quarter recently ended so let’s whip around the asset classes like we do sometimes at quarter-end.
Tech stocks got a boost in the first quarter, that helped the S&P be up 7%.
Stocks of the tech giants that are leading the charge in AI-powered search, Microsoft and Alphabet, outpaced that.
Meanwhile, the second- and third-largest bank collapses in US history happening within 48 hours hurt bank stocks.
Bitcoin was up 72% in Q1. Do we say that crypto winter is over when bitcoin hits $30K?
Oil prices were flat, beginning & ending the quarter at around $80.
Gold was up 7%, partly due to the bank failures.
Silver rose 4% for the quarter.
You know what’s been a really bad investment for the last decade, despite all the good things that you hear about its promise - investing in physical silver.
You read that there’s now more silver above ground than below ground.
10 years ago, silver was worth $25 dollars an ounce and it’s still worth… $25 an ounce.
That’s even worse than it sounds to laypeople. If you’ve held any investment for 10 years like that and it’s worth merely the same amount of dollars, inflation just chomped about half of it away.
We might have had 40 or 50% or more real inflation in the last decade… and silver bars didn’t pay you an income stream during that time either. What a poor performer!
Though I think that SOME precious metals can still be a good STORE of value.
That was whipping around the other asset classes in Q1 of this year.
One place to park your money that is NOT a good store of value is… savings accounts and CDs and MMFs.
Their interest rate, though it might feel good getting paid up to 4% or 5% on those, it ensures that you’re losing prosperity every day… because CPI inflation is higher than that, and then the real rate of inflation is higher than that yet. True inflation might be double your savings account rate.
Instead, the smart money BEATS inflation and all the time, a little more of the smart money is GETTING OUT OF DOLLARS too with these rising concerns about foreign nations doing more of their business in yuan or another currency outside of the petro dollar.
The dollar is currently under a lot of stress, besides just the inflation. Dollars in savings accounts & the like… don’t just lose to inflation… they’re actually keeping your prosperity denominated in dollars, which a growing chorus feels precarious about right now.
Is the dollar about to lose its world reserve currency status? I don’t know. I think people having been calling for that since shortly after Richard Nixon took us off the gold standard in 1971.
Instead, what about a fully renovated or brand new investment property, with a rent-paying tenant placed and its all under professional management for you.
That way it’s low hassle for you, yet because you own the asset directly, you have the CONTROL without the hassle, and you’re often paid those five ways.
This way, not only are you getting out of dollars with your down payment - another way to say it is that you’re converting your dollars into real estate…
Then on top of that, when you borrow the dollars for 75 or 80% of the purchase price… you’re getting out of dollars so much that you’ve essentially fund a way to go negative with your dollar position on that property.
When you buy through our network, since the property is new or renovated, you should often expect little or no ongoing repair or maintenance expense in the early years.
And here’s the thing that some investors overlook. You may not have an CapEx expense at all. Those big capital expenditures like a new roof or windows or a furnace.
That’s because when you buy new or rehabbed and you consider that your hold time often isn’t more than 7-10 years due to equity accumulation and leverage ratios, as you lever up into another property, you can leave the Capital Expenditures to the next buyer when you sell.
So, these are some reasons why buying residential real estate makes a ton of sense in this environment.
Will these next five years be as lucrative as the last five years? No, I really wouldn’t expect that - that’s because of the historically high price runup these past few years.
But I still cannot think of a better place to be than that strategically-chosen real estate.
You can go ahead and get started looking at some properties in markets and connect with our free investment coaching there if you so choose.
That’s all at GREmarketplace.com
Hey, I really had a great time chatting real estate and everything else with you today.
Until next week, I’m your host, KW. DQYD!