Time to Invest in Real Estate?

The million-dollar question:

Is now a good time to buy real estate?

Feels like every other day I get asked this question.

30-yr fixed mortgage rates are hovering at 7% — the highest they’ve been in 20 years.

Yet the Case-Shiller U.S. National Home Price Index is off just 1.6% from its June 2022 peak.

If you scroll through social media there is a ton of noise.

Some folks believe housing prices are set to rise again later this year.

Others think more pain is on the horizon.

Everyone acts like they have the crystal ball when really no one knows what’s to come.

Me included.

But you’ve asked, so I’ll give you my answer:

If you can cover your monthly payments using fixed rate debt, it’s never a bad time to buy real estate.

Let’s break this down:

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The key assumptions:

• You want a low-risk, conservative place to invest your cash

• You don’t need the money anytime soon (5+ years)

• You want a low maintenance investment

• You want to reduce your tax bill

• You want to beat the S&P

The execution:

1. Buy real estate using fixed rate debt.

2. Make sure rental income will cover all of your monthly expenses (including repairs and maintenance).

3. Run a cost seg report and take advantage of 80% Bonus Depreciation.

4. Refinance when interest rates inevitably fall.

5. Pull out cash tax-free and/or lower your monthly payment.

The illustration:

Say you buy an single-family investment property today as follows:

• Purchase Price: $500,000

• Down Payment: $125,000

• 30-yr Fixed Interest Rate: 7%

Your mortgage payment would be roughly $3,000/month.

If at any point in the future interest rates fall, you will have an amazing opportunity to refinance.

You will be able to pull out a large chunk of your initial equity and keep the same monthly payment.

The table below shows you how much equity you can pull out under various interest rates (see last column “Refi Proceeds”).

Here’s how to interpret the blue row:

If in 5 years the 30-yr fixed interest rate is 5%, and the value of your home rises to $620,000 (+4% per year), you could refinance, maintain the same mortgage payment and pull out $112,007 tax-free (90% of your initial equity).

That’s a win.

Now, you may be thinking:

“What if house prices stay the same?”

You’d still refinance and your monthly payment will drop considerably, unlocking passive income.

“What if house prices fall further?”

That’s quite unlikely, but if they did you would continue to hold the asset. The rent growth would provide some extra passive income and you’d wait for house prices to rise again.

“Does this apply to commercial real estate?”

Yes. In fact, I prefer passively investing in private real estate syndications. I only invest with Sponsors who use fixed rate debt.

“Does this apply to short-term rentals?”

Yes and no. Yes, the real estate component of an STR may be a good investment. But short-term rentals are high maintenance. They require much more of your time. They should be viewed as a business.

“What is a cost segregation report and bonus depreciation?”

Start here: The Single Best Tax Strategy for High Income Earners

Bonus Depreciation is phasing out over the next 5 years. In 2023, it is still 80%. Take advantage while you can.

The key point:

It’s easy to get scared off by high interest rates.

And normally I’m not a fan of investing in real estate without cash flowing day one.

But it has become increasingly difficult to do that.

Especially while housing prices remain elevated.

So if you want more exposure to real estate, what’s the play?

Find quality assets in a great locations.

Make sure your rental income covers your monthly costs.

Take advantage of bonus depreciation while you can.

Then wait….

Once interest rates pullback, refinance.

Take out most of the cash you put in tax-free.

That’s it for today.

My inbox is always open!

Happy Saturday fam,

Danny