Home prices in 2022 have been rising steadily throughout the year, affecting homebuyers, landlords, and other investors. Additionally, inflation rates have made purchasing homes at fair market prices difficult. This leaves investors wondering why interest rates are rising and how they can successfully finance a new rental unit. Keep reading to learn how investors can navigate home prices in 2022.
Why Are Interest Rates Rising?
If you didn’t know, an interest rate is a cost of borrowing money. Over the past several months, interest rates for numerous products across the United States have risen tremendously. But why? The main reason interest rates are so high right now is the Federal Open Market Committee’s (FOMC) attempt to stabilize inflation rates.
Currently, inflation is at a 40-year high, which means the FOMC is taking swift action to combat the current spike. That said, let’s look at the interest rate outlook and average home prices in 2022. After all, these two details are some of the most significant deciding factors for landlords and homebuyers alike.
Interest Rate Outlook and Average Home Prices in 2022
So far, since the start of 2022, we’ve seen inflation and interest rates skyrocket compared to years earlier. Additionally, home prices have been increasing, making it hard for investors and homebuyers to make a purchase. It’s been a seller’s market in the months leading up to now, which isn’t exactly ideal for investors looking to expand.
The rest of the year doesn’t look too promising for investors, either. Interest rates and home prices in 2022 aren’t slowing down any time soon. Investors can expect high-interest rates as an attempt to stabilize the economy.
How Are Landlords Affected By Home Prices in 2022?
Landlords are affected by home prices in 2022 because expanding a rental business can be difficult when home prices and interest rates are high. In addition, since inflation rates have caused interest rates to rise, it’s more expensive to borrow money from the bank. In turn, this may cause investors to avoid purchasing rental homes at all.
On the other hand, since the spike in inflation and increase in interest rates, landlords have raised monthly rental rates. Unfortunately, this has caused an affordable housing crisis in some areas across the United States.
All in all, there are ways investors can be successful during periods of inflation. However, seasoned investors and new landlords need to keep in mind that investing in real estate is highly dependent on the housing market and property location.
As such, rental property investors need to navigate periods of inflation and high-interest rates. How can landlords invest during periods of inflation? Well, most rental properties rise in value during periods of inflation. So, landlords or property management companies in Northern Virginia can charge more per month.
If you’re wondering about how landlords can succeed during inflation periods, here is how real estate can protect against inflation.
Does Real Estate Protect Against Inflation?
In some cases, real estate can be used as a hedge against inflation. For instance, property investors can charge more for their rental units during periods of high inflation while paying the same mortgage payment as usual. As a result, landlords can see more profit while others pay higher housing costs.
Since house prices typically increase over time, landlords can take advantage of inflation impacts on real estate. Here are a few ways real estate can protect against inflation:
- Property owners can increase their wages- Investors with several rental properties can increase their wages by raising rates at each short-term rental. For instance, profits increase when landlords raise rates but the monthly mortgage payment remains the same.
- Effects of inflation on debt- When the price of homes increases, it lowers the loan-to-value of property mortgage debt. The property equity increases, but the mortgage payment remains the same.
- Property value increases over time- Real estate historically increases in price over time. In other words, despite inflation, your property could be worth more in the future.
If you’re just getting started in real estate, navigating inflation and high-interest rates can be challenging. As such, it’s crucial for investors to plan out creative financing options and plan according to high-interest rates. Next, we’ll go over some creative financing options for investors.
Creative Financing Options For Investors
Creative financing refers to unique methods for securing funds and capital to purchase real estate. Traditional financing options typically require contacting your bank, credit union, or home mortgage office and getting approval for a home loan.
However, investing isn’t always as easy as it seems. For example, most lenders require a credit score in the 600s or better and at least a 10% down payment. On the other hand, some lenders require proof of savings dedicated to property expenses such as maintenance and repairs. Additionally, the more rental properties you own, the harder it could be to obtain another loan.
Ultimately, these downsides of rental property financing leave investors wondering how they can use creative methods to buy real estate. Luckily, there are creative ways to finance a rental property. Keep reading as we go over some creative financing options.
- Hard Money Loan
- Use Current Equity
- Find Investment Partners
- Retirement Accounts
Hard Money Loan
Sometimes referred to as a private mortgage, a hard money loan is one way for investors to bypass conventional loan processes. These loans are designed to quickly help investors with credit issues qualify for a mortgage.
Since they have fewer restrictions than a traditional loan, hard money lenders typically base the loan amount on the quick-sale value of a property that the borrower already owns. Although interest rates are typically higher with hard money loans, it’s great for investors that don’t qualify for a typical mortgage loan.
Use Current Equity
Using current equity in a home you already own to pay for new investment is very non-traditional. However, this is a simple way to finance a rental property and can help investors expand their business quickly.
Equity is determined by the fair market value of your property. So, say the property is worth $250,000, and you owe $175,000. Then, you may be able to use $75,000 as equity to finance your next purchase.
Using current equity can benefit those that don’t have enough money for a sizable down payment. Or, it can be used as a strategy to purchase several rental properties to add to your portfolio.
Find Investment Partners
Another great way to finance rental properties is to do it with partners. After all, investing with another person can provide flexibility, more financial stability, and more real estate industry knowledge. Additionally, going into the process with another person means that your name isn’t attached to the mortgage agreement.
You can enter an investing partnership with just about anyone–a family member, a friend, or a business partner. As long as you have your partner alongside you, landlords could potentially purchase as many rental properties as desired.
However, although there are several benefits to having investment partners, it’s essential to recognize the risks. Therefore, picking your business partner(s) wisely is crucial so you don’t end up with a failed business plan and loss of profits.
The seller-second option means that the seller provides a second mortgage on the property to cover most, if not all, of the down payment required for loan approval. This financing method is used mainly by individuals that don’t qualify for the entire loan amount or those with a small down payment.
Before using this financing method, one thing to note is to make sure the loan you’re applying for will allow a second mortgage to be attached. Most loans allow it. However, some do not. Unfortunately, you could lose the deal if yours does not qualify for seller-second financing.
Most people start a retirement account at some point in their careers to save up for life later. Although it’s not always wise to dip into your retirement account, some investors may see the benefits of using a retirement account to finance a rental property.
After all, most retirement accounts will let you borrow from yourself with a low-interest repayment plan afterward. As such, rental investors have this creative financing option as well.
How Can You Get the Most Out of Your Investment?
One of the best ways to get more out of your rental investment is hiring property management. So whether you’re trying to expand your business or navigate home prices in 2022, Professional Property Management of Northern Virginia is here to help.
Contact PPM today to learn more if you’re an investor looking for comprehensive rental management services in Northern Virginia.