https://www.youtube.com/watch?v=IW5UIY1avBc
Option 1: Rate Buy-Downs Michael explains rate buy-downs as a method to reduce mortgage rates by paying upfront points, which are one-time payments equal to 1% of the loan amount. He uses an example of a $500,000 home purchase with a $100,000 down payment and a 7% interest rate, showing how paying points can lower the interest rate. He notes that sellers can be negotiated with to cover these points, making it a strategic tool in property transactions. Additionally, he mentions that builders of new construction homes are offering significant rate buy-downs as incentives.
Special rate buy-down options include the 1-0, 2-1, and 3-2-1 buy downs, where a significant number of points are paid upfront to reduce the interest rate for the initial years of the mortgage, gradually increasing to the standard rate.
Option 2: Seller Financing Michael highlights seller financing as a trending topic in real estate, especially useful in high interest rate environments. Seller financing involves the seller of a property providing the loan directly to the buyer, eliminating the need for a bank. The terms are negotiable, and this method can potentially offer lower interest rates. However, finding willing sellers can be challenging, as most prefer immediate lump sum payments. Sellers often need to own the property outright to offer this option. Michael notes that while seller financing can offer great rates, sellers often demand higher purchase prices in exchange.
Option 3: Subject-To The final option discussed is 'subject-to' financing, which differs from seller financing but falls under creative finance. In this method, the buyer takes over the mortgage payments of a seller, essentially stepping into their financial position. This is particularly advantageous when the seller has a lower interest rate than the current market rate. However, Michael points out the risks, such as assuming a property with negative equity and the complexities involved, advising caution for beginners.
Michael concludes by inviting viewers to join his HENRY (High Earner Not Rich Yet) Real Estate Investing Facebook group for discussions on real estate strategies tailored to high-income earners. He encourages subscribing to his channel for more insights and offers personal consultations for deeper engagement.
The video serves as a comprehensive guide for those looking to understand and navigate the options for securing lower interest rates in real estate investments.
Hey guys, it's Michael. At the time of this recording, the average 30-year fixed rate is sitting just over seven percent. For those of you who don't realize the significance that interest rates play in the grand scheme of things, consider this: This is your monthly payment on a $500,000 property with a seven percent interest rate, and this is the monthly payment for that same $500,000 home but with a four percent interest rate. So, you can clearly see why having a lower interest rate is very desirable. It makes your monthly payments lower.
The title of this video is "Four Percent Interest Rates are Still Possible," and yes, that is not clickbait. It is still more than possible in today's market. Actually, I'll do you one better. If you stick around to the end, I'll share with you how some investors are even getting rates in the two percent in today's market.
So, I'm going to share three options that you can use to get a four percent interest rate or better. For those of you who are new to the channel, my name is Michael, and I show people why they should invest in real estate if they want to grow their net worth. If you find this video helpful, then leave a comment and let me know.
Option one is rate buy-downs. If you didn't know this already, there is an option where you can purchase what's called a rate buy-down when you are getting the loan for your home. Essentially, what that means is that you can pay some upfront points in order to temporarily reduce your mortgage rate. If you don't know what a point is, it's basically just a one-time payment equivalent to about one percent of the loan amount.
For example, if you're trying to buy a $500,000 home with a seven percent interest rate and a $100,000 down payment, your loan amount is $400,000. That means that one point would be $4,000, and maybe you could reduce your interest rate by 0.25 percent with that one point. Now, it is possible to pay a ton of points and just get your mortgage rate down really low, but then you're going to have to pay a lot of points to get there. Typically, you can have the seller pay for these points as sort of a negotiation tool.
For example, you could say, "Hey seller, I'll buy your property for $10,000 over asking, but I want you to buy me two points in order to reduce my interest rate." So, if you give the seller 10K over asking but then get two points in return to lower your interest rate, you might have paid 10K over asking, but your monthly payments would actually be lower than if you bought the home for list price but then got zero points from the seller. So, the first takeaway when it comes to rate buy-downs is that you can have the seller pay for the points to reduce your interest rate.
One thing I'll quickly mention is that builders right now, for new construction homes, are currently offering pretty steep rate buy-downs. I've seen some really new construction homes where builders are offering 5.5% interest rates on their new construction homes as an incentive for buyers to buy their homes. So basically, the builders are just giving a huge credit to the buyers to buy down their rates.
Now, with the rate buy-down option, there are three special options you might want to consider:
All three options work very similarly. Basically, with a 3-2-1 buy down, you'd be paying a good amount of points upfront so that you can reduce your interest rate by three percent in the first year of ownership. That means your year one interest rate would be somewhere in the ballpark of four percent because, right now, the average thirty-year is seven percent. In the second year of ownership, your interest rate would be two percent lower, which is around five percent. Then finally, the third year, your interest rate would be only one percent lower than the current interest rate, which is seven percent. So in year four, you now revert back down to the regular interest rate of seven percent. That's how the 3-2-1 buy down works, and you can probably figure out how the 2-1 buy down and the 1-0 buy down works.
So like I said, not clickbait, it is possible to get a four percent interest rate in today's market. But remember, that's just a temporary rate. What if I told you that you can actually get a four percent rate for the entire 30-year mortgage? And what if I told you don't even need to involve a bank to get this loan? Well, that brings me to option number two, which is seller financing.
If you keep up with the real estate investing world long enough, you know that there are certain topics within real estate investing that kind of become really popular one year but then kind of die out the next year. Well, in my opinion, 2021-2022 was like the year of the short-term rental boom and Airbnb and all that kind of stuff. But I think 2023 is really shaping up to be the year of seller financing, mainly because of the high interest rate environment that we're in right now. Seller financing kind of helps to combat that or mitigate that.
Here's how it works: Seller financing is actually the simplest way to buy anything. It doesn't just apply to homes. And I've heard of people selling their cars with seller financing. The concept works like this:
So, imagine you bought a bike, actually, let's say that you bought a Cybertruck for a hundred thousand dollars in cash. Now I come to you, and I say, "Hey, look, I really like that Cybertruck. I want to buy it, but I only have twenty thousand dollars with me right now. So why don't I just give you a 20% down payment today, and the rest of that eighty thousand dollars, I'll pay it back to you. But I'm going to pay it back to you over the course of 30 years."
Now in my example, replace the Cybertruck with a home, and there you go, that's seller financing in a nutshell. The reason why it's called seller financing is because the seller of the Cybertruck, or in this case, the home, is essentially carrying the loan. Because as you might have noticed, there is no bank involved in this transaction. It's just between me and the seller.
And here's the kicker: Because seller financing is between the seller and the buyer, you can negotiate any terms you'd like, but the seller has to agree to them. So, how do you get a four percent interest rate with seller financing? Well, it's pretty simple. You find somebody who's willing to sell you their home for a four percent interest rate.
Without seller financing, I'd have to go to the bank to get an $80,000 loan, and then take that eighty thousand dollars, combine it with my twenty thousand dollars, and then go give the seller a hundred thousand dollars and pay them out completely. But then I'd have to go turn around and pay the bank for that $80,000 loan that I got. And the bank determines those interest rates; it's not really that negotiable for me.
And so, this is why seller financing has become one of the hottest topics in real estate investing today, because you can potentially get a significantly lower interest rate if you find that right seller who's willing to sell it to you at that interest rate.
Now, when I first heard about this, the first question I asked was, "Well, why doesn't every seller do that, then?" Right? Because they're earning interest on that money that you owe them. But for this question, it really comes down to when does the seller need that money? If the seller decides to finance the Cybertruck to you using seller financing, they don't get their eighty thousand dollars back today. They would only get that twenty thousand dollars that you're down paying today, but then they get the remaining eighty thousand dollars back over the course of 30 years, with interest. So, they'd actually maybe make a hundred thousand dollars over the course of those 30 years, but they had to wait 30 years to get that money.
Whereas, if the seller chooses not to use seller financing, the buyer has to go to the bank to get a loan, and then it completely buys out the seller. So, the seller now has that hundred thousand dollars back in his pocket today, and he can use that hundred thousand dollars to go reinvest into something else today.
But there are two things you should understand about seller financing: Number one is, most people want their money back today, not over the course of 30 years with a four percent interest rate. And so, it's pretty hard to find these type of sellers. Number two, they usually have to own the home free and clear in order to do this. So typically, you might see people who are retiring, opting to sell their home with seller financing, because they might not necessarily need the lump sum of profit sitting in their bank account. Maybe they do want to make an increased amount over the course of 30 years and just get a passive interest payment from you for the next 30 years.
So, this option might sound great, but there's one thing that I noticed about doing this. When a seller agrees to use seller financing at four percent, they know that they are giving you an amazing rate. And so, what I've noticed is that they typically want you to give them a much higher purchase price because they are giving you such a deal on the interest rate. All in all, if you can find the right seller, then seller financing can be a great option.
That brings me to the third option, and with this last option, I'm going to show you how some investors are actually finding interest rates in the two percent range. It's crazy right now. Okay, and this final option is called subject-to. This is not the same thing as seller financing, but subject-to and seller financing are both under the umbrella of creative finance.
The guy that you have to follow if you want to learn more about creative financing is Pace Morby. So, go give him a follow if this sounds interesting to you. With subject-to, you as a buyer are essentially taking over the mortgage payments for a seller. Let's say that when a seller bought a home for five hundred thousand dollars and let's say they used a VA loan where they only had to put zero percent down. Well, the market hasn't been that great, and in some cities, we've seen some negative appreciation.
Now that the seller's home is worth $470,000 and they, let's say, lose their jobs, the sellers can't sell their home because even if they do sell it, they won't have enough proceeds to pay off their loan. Remember, they bought it with a zero percent down loan, so their loan balance is literally five hundred thousand dollars even today. If they sell the property for $470,000, they'd still have $30k left on their loan.
And that's when a subject-to buyer comes in. Most likely, they bought their property, the sellers, in 2021 or 2022 when rates were at 2.5 percent. So, maybe they have a 2.5 percent interest rate on it. So, a subject-to buyer comes in and says, "How about you just let me take over the monthly payments, and then you transfer me the title of the property?"
So, what's essentially happening here is that the subject-to buyer is assuming the position of the seller, and the seller, who wasn't able to make the payments, can avoid foreclosure by giving up the property to the subject-to buyer. Now, the buyer can take over the loan payments, but they also get possession of the home, and the sellers can just walk away from it with no ramifications or foreclosure.
The one downside of this approach, right, is something called a due-on-sale clause, which I won't go into the details of, but you should definitely look into if you're going to utilize this strategy. Now, the main problem I actually have with the subject-to approach is this: Why would you assume the position of a seller in that scenario if you're the subject-to buyer? Because essentially, you're assuming a $500,000 loan when you know that the property is only worth $470,000. Why would you do that?
Well, the main benefit that you get with this approach is that you have a 2.5 percent interest rate. You didn't get a new loan; you're just assuming the existing one that the sellers had. But if you're able to hold on to this property long enough, eventually, those home prices will come up, and the rents will rise. And if you're able to hold that property, you'll be sitting really pretty with a 2.5 percent interest rate.
But I don't typically recommend this strategy for beginners since it's not usually the best idea to go buy a property in negative equity, like the moment that you go buy it, right? And just for the purpose of getting a lower interest rate. I don't know if that's the best option, in my opinion. But that's just my opinion. It is a very situational tool, so depending on your situation, it could be good for you.
Anyways, if you guys want to schedule a one-on-one strategy call, the link is in the description below. Anyone who does a consultation will actually receive an exclusive invitation to my HENRY (which is High Earner Not Rich Yet) Real Estate Investing Facebook community group, where we talk about strategies specifically for HENRYs. You guys know that I always say that the style of real estate investing is wildly different for high-income earners versus lower-income earners, and so this is a community to help higher-income earners reach financial freedom through collaboration with like-minded investors.
So, go ahead, subscribe to the channel if you haven't already. Leave me any feedback in the comments if you have any questions. I reply to all my comments. So, thanks for watching, and I'll see you guys in the next one. Peace out, guys.