Are Interest Rates Too High to Buy?

One of the big financial stories of 2022 was an end to the historic low interest rates we have enjoyed for more than a decade. The shock is causing people to ask Are Interest Rates too High?

 

Although rates are still below their sixty-year average, last year ended with mortgage rates sitting at nearly double where they had sat at the beginning of the year as the Fed spent the year ratcheting up the cost of borrowing to try and cool down an economy of rapidly inflating currency.

 

If you follow the housing market, you have probably heard that these higher interest rates make it a “bad time to buy.” Is that true?

 

To find a coherent answer, we have to differentiate the way homeowners think about interest rates vs. how investors think about them.

The Effect of High Interest Rates on Homeowners

The main impact of high interest rates on homeowners is that it becomes more expensive to buy or refinance. 

 

Because the mortgage payment is higher on the same principal balance, homeowners and aspiring homeowners tend to put off their purchase or refinance goals because they simply can’t afford it. This is especially true in periods of high inflation, when everything has become more expensive.

 

The one thing that could get homeowners back in the market is if prices start to come down. Those mortgage payments won’t be as high if the principal balance gets smaller. If homeowners catch a dip in prices, they may end up getting a great deal on a home with a lot of headroom to appreciate.

 

That’s why the Fed does the interest rate thing in the first place. Raising the price of borrowing decreases the demand in the market, which causes prices to fall — a counteracting force to inflated costs.

 

We have seen both of these effects in various markets — a slowdown in home transactions, accompanied by a dip in home values.

The Effect of High Interest Rates on Real Estate Investors

Higher interest rates tend to take the wind out of homeowners’ sails. With real estate investors, though, it’s a little different. 

Cash Flow

What happens to your cash flow when mortgage payments become more expensive? Obviously it eats into the cash flow … but that may not be as big a deal for a real estate investor. Why? Because in a time of high inflation, rents may have gone up as well. There could be little net change on the cash flow.

 

Of course, inflation may drive up other costs, like insurance and repairs. Eventually you hit a rent ceiling where tenants can’t afford it and the demand disappears. There are a lot of factors to consider.

 

Of course, investors who bought early enough to take advantage of low interest rates and rent increases are sitting pretty right now. But higher interest rates are not all bad news for real estate investors. 

Appreciation

Same as with the homeowners, investors stand to benefit from a decline in prices that could follow in the wake of a decrease in demand. If the goal of investing is to “buy low and sell high,” watching for prices to dip after an interest rate increase represents an excellent chance to “buy low.”

 

If interest rates ease up within the next year or so (as they are expected to do), you may have the opportunity to refinance into a lower interest rate and a higher valuation — possibly pulling out enough cash to make another property purchase! 

 

When you buy turnkey rental properties, be sure to wear your investor’s hat. Take the advice of many successful investors and think long term.  The house you buy today will definitely appreciate and be more valuable in the future despite any dips along the way. 

 

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Remember, interest rates change minute-by-minute. You could get lucky or unlucky when you lock your rate, regardless of the environment. Trying to “time the market” is usually a fool’s errand. That’s true with stocks, it’s true with real estate, and it’s especially true of interest rates.

 

The better course of action is to establish the criteria — e.g. cap rate, cash flow, projected ROI — under which you are a buyer. 

 

The beauty of real estate is that every market is different, and every property is different. With an expansive-enough pool of properties to pull from, a winning property can emerge from any economic environment … and you can be a buyer at any point in the cycle, adding cash flow and tax benefits to your portfolio.

 

Whatever happens with interest rates, or any other metric, MartelTurnkey will continue doing what it does best — bringing no-brainer, cash-flowing investment opportunities in growth markets to our select pool of savvy buyers. Reach out to us today if you want to be one of them!

Home Inspection for Turnkey Rentals — 3 Tips to Buy With Confidence

It bears repeating (because most people find it remarkable) — most of our clients buy turnkey rentals from us sight unseen. How can they do it? They get a profession complete a home inspection for Turnkey Rentals.

 

This gives many homeowners and real estate investors heart palpitations — especially those that like to crawl into crawl spaces and scrape every eave with a screwdriver in search of rot before they even think of making an offer.

 

For those who have better things to do than crawl into crawl spaces and scrape eaves, however, that means a lot is riding on the home inspection report. 

 

That sheaf of paper, prepared by a professional home inspector based on a multi-hour visit to the property, is your best glimpse into the bones of the house … and your best indication of whether or not, from a physical and structural standpoint, you’re buying a tank or a lemon.

 

Here are three tips for the inspection stage of your turnkey rental purchase, so you can feel confident about your investment.

1. Screen the Inspector

If you live far away from the prospective rental property, you probably don’t know any local home inspectors. 

 

We can recommend some to you, but it’s important to remember — the home inspector is your guy, not ours. The buyer hires the home inspector, because the buyer is the one with more to lose if the home turns out to be riddled with defects.

 

So take the time to call the inspector and do some due diligence. Make sure (s)he is licensed and has positive reviews online. You don’t have to use our recommendations. If you find someone you like better and the schedules line up, by all means go with the inspector with whom you feel most comfortable.

2. Don’t Be Alarmed By a Long List of Defects

Home inspectors are thorough. Inspection reports, especially those for older homes like the ones we acquire and renovate, tend to identify dozens of defects. You are paying someone to go through your property with a fine tooth comb.  

 

If you have ever bought a home or investment property in the past, you have probably encountered this. That long list can be scary. 

 

Take heart. It’s nearly impossible to make an older home “perfect.” Even brand-new homes have defects. Most of them have little or nothing to do with the economic function of the property, or even yours or the tenant’s ability to enjoy the property. They are just bases the inspector is required to cover.  See something really concerning? A phone call with the inspector can clarify the findings. 

3. Compare the Scope of Work with the Report

We rehab every property that we acquire and bring to market as a turnkey rental. That rehab leaves behind a paper trail — specifically the scope of work, an official agreement with contractors and subcontractors as to what work must be done.

 

We provide a summary of the scope of work for every turnkey rental. When you get your inspection report back, compare it to the SOW.  If something seems to be askew, ask about it. 

 

In other words, the inspection becomes an opportunity to keep things honest — to verify that we actually did the work we told you we did. Isn’t that a good feeling?

 

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Read here for more info about buying turnkey property sight-unseen. Suffice it to say, at MartelTurnkey we fully expect — and wish for you — a robust home inspection process when you buy one of our turnkey rentals. Why? Because we have nothing to hide. Message us today to find out how easy it is to add one of our cash-flowing assets in growth markets to your own portfolio.

Why Real Estate Appreciates In Value?

We take for granted the notion that real estate appreciates in value. It’s why so many people yearn to be homeowners — not just to have a place that they “own,” but because it turns your personal residence into a vehicle for wealth creation. Not because you pay yourself rent, but because the property itself grows in value.

 

But why does this happen? It’s worth understanding the mechanism behind the appreciation of real estate, if for no other reason that it’s not guaranteed. Real estate can and does lose value. As we speak, some property somewhere in the US is becoming less valuable.

 

Understanding why real estate becomes more valuable (or less valuable) can help us make good investments by only buying property that is likely to appreciate.

 

To figure out why does anything have value let’s go back to Econ 101 — supply and demand. 

What is the Demand?

 

Let’s start with demand. For something to have value, people have to want it or need it in the first place.

 

Real estate obviously fits the bill. People need shelter in which to live … soil in which to grow things … buildings in which to do business. Humans need space, and as long as space is a thing that can be owned, people are going to want to buy it.

Follow The U-Haul Trucks

If you want to pick which real estate is going to appreciate, follow the demand. We sometimes say “Follow the U-Haul trucks” of the people moving out of one city and into another. If a city is growing economically — if big employers are bringing new jobs to that city, if people are flocking to move there in droves, if it’s a burgeoning tourist destination — demand for real estate in that city will almost certainly drive the prices up. Even ugly, outdated, or distressed property will increase in value.

 

What if jobs are leaving a city or a neighborhood? People are moving out? The town is dying? Even the most beautiful homes and commercial buildings will start to lose value, because the demand just isn’t there.

How Much Money Can This Property Make?

Another key factor to the demand for any given piece of real estate is its economic value — how much income can a particular class of property generate? Consider the booming eCommerce industry. It had a profound effect on the value of real estate. Warehouses to store all these products along the supply chain came into heavy demand, so the price of warehouses went up. Meanwhile, with fewer and fewer people shopping in stores, retail property has struggled to appreciate and even lost value.

What is the Supply?

A resource can’t just be in demand to be valuable — it has to be in limited supply too. 

 

Humans have an inelastic demand for breathable oxygen. We need it to survive. So why don’t we have to pay for it, like we have to pay for bottled water or heart surgery? Because (for now), breathable oxygen is in abundant supply. No supervillain has yet figured out how to take us all hostage by monopolizing the supply of breathable oxygen … so despite our insatiable demand for it, breathable air has no market value and remains free.

 

So what about the “supply” of real estate? It’s an old cliche — you can always print more money or issue more stock, but they aren’t making more land. Real estate is a kind of real asset — a tangible resource that is in limited supply.

Inflation 

Let’s talk about printing money while we’re on the subject. Real assets tend to gain value in times of great inflation of the currency (like the one we find ourselves in now). As currency becomes more plentiful, it becomes less valuable. It takes more of that currency to buy things. One of those things you can buy is real estate. Because of inflation, it takes more money to buy the same piece of real estate — meaning inflation has inherently forced its value higher!

What About All That Undeveloped Land?

But is real estate really in short supply? Over 96% of the United States is undeveloped land! Let that sink in. That’s a lot of real estate. Doesn’t that disrupt the supply/demand balance?

 

Not necessarily. Remember, some of that land is on the sides of mountains. Or hostile to the cultivation of crops. Or just so far away that it would be prohibitively expensive to run roads, power lines, water lines, and sewer lines to them. Or it’s just too far away — no one wants to live there. 

 

We come full circle back to demand. Yes, there is a lot of land … but how much of it is in demand, for one reason or another?

The Real Estate That Is Most Likely to Appreciate

We can start to look at the supply of real estate in terms of “pockets of demand.” Suppose a city has a thriving urban core full of arts and entertainment. Lots of people want to live there or open a business there … but there are only so many homes and commercial spaces in that space. The demand is high, but the supply is limited … so that real estate is likely to appreciate.

 

What if a school district is widely recognized as the best in the city? Every family is going to want to live in that school district so their children get the best education. But there’s only so many houses in that neighborhood. Limited supply plus high demand equals appreciation. 

 

You have to be careful about chasing school districts into the suburbs. Thriving suburbs tend to have lots of new houses under development. If builders are constantly adding new houses to the market, they are increasing the supply, which pushes values down. If the demand is strong enough, this may not slow down appreciation, but there’s always a chance that the neighborhood will get overbuilt, with more houses than there are people who want to buy them — especially if a recession hits unexpectedly.

 

By contrast, urban core areas tend to have a much more limited supply. You can tear down old buildings and replace them with new ones, but the property supply is what it is. Homes in nice urban core neighborhoods in growing cities are some of the safest bets for appreciation. 

 

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As you can tell, supply and demand is much more than numbers on a page. It’s a story — the story of a city, a neighborhood, a piece of property. Understand the story, and you can glimpse the future. 

 

MartelTurnkey goes the extra mile to understand the story of every turnkey rental in our inventory. We don’t just buy any property in any city. We specifically look for the markets, the neighborhoods, and the property classes most likely to generate cash flow and appreciate in the near future. 

 

Reach out to us today and let us fill in the gaps so you can invest with confidence — and grow your net worth!

Are You Getting a Good Deal on Your Investment Property?

“Am I getting a good deal?” It’s a worthwhile question to ask yourself before any purchase, but never better than when considering an investment property.

 

As you become more familiar with a market and its neighborhoods, you will start to become familiar with its fair market values.

 

If you are new to a market, do your research. You have many resources available to help you determine the fair market value of a particular piece of real estate. Here are some places to start:

Free Resources on Getting a Good Deal

1. The “Zestimate” — Auto-Appraisals by PropTech Companies

Property technology (aka PropTech) companies have been working for years to refine a method of accurately appraising the value of a piece of property based on computerized data analysis. 

 

The most famous of these “auto-appraisal” algorithms is the “Zestimate” by Zillow. Search any property address in the US, and Zillow includes an estimate (or “Zestimate”) of its value, extrapolated from property data and data from recent nearby sales.

 

How accurate is the Zestimate? It has a nationwide margin of error of 3.2% for on-market property, 6.9% for off-market property. This adds up to thousands of dollars by which the Zestimate could be off.

 

But Zestimate inaccuracy tends to correlate with bad data. If you have independent verification of the data you find on the Zillow page (square footage, number of beds and baths, lot size, etc.) the Zestimate might be a better guide.

 

Bottom line — don’t stop with the Zestimate, but it’s not a bad place to start. 

2. Property Tax Records

The county appraiser periodically estimates the value of all the real estate in the county for taxation purposes. Property tax records are public and usually available online from the county’s website.

 

Bear in mind that the assessed value is rarely the market value. Counties often assign a percentage of the property’s appraised value as its taxable “assessed” value. It might be 80%, 50%, even 20% of the appraisal. Make sure to note the appraised value and not the assessed value, which could be much lower.

 

The most common occasion for a re-appraisal by the county appraiser is the sale or transfer of the property, at which time the appraiser notes the sale price. If the property has not been sold in years, the county appraisal might be outdated. But if the property sold recently, the county appraisal might be quite accurate.

3. DIY Comparative Market Analysis

The comparative market analysis (or CMA) is how REALTORs estimate home value. A CMA involves comparing the subject property to recent sales of similar properties in the area. There’s no reason you can’t do one yourself. It might take practice, but it isn’t rocket science.

 

To perform a CMA, you need to know what nearby property has sold recently. NOTE — this isn’t for sale, but closed sales. Whatever database you are searching, make sure you are looking at completed sales and not “pending” or “listed.”

 

The closer the property, the more recent the sale, and the more similar the property, the better. Bear in mind that properties are rarely identical. You might need to adjust the recent sale prices for differences between the properties — i.e. more or less square footage, an extra bedroom or bathroom, etc.

 

The most accurate database to search is the REALTOR multiple listing service (MLS). If you don’t have access to the MLS, the next best resource is Redfin, and after that databases like Zillow or Trulia.

 

Here’s an insider’s tip:  At MartelTurnkey, we share pages and pages of homes we have sold over the past years so you can scroll through them to see what houses in specific neighborhoods have sold for. Find these on the Turnkey Rentals for Sale pages.

Paid Resources

4. REALTOR Comparative Market Analysis

If you don’t trust your own CMA abilities, you can hire a REALTOR to do one for you. REALTORs usually offer CMAs for free with a representation contract, but if there’s no chance of a commission for representing you, they may charge a nominal fee.

5. Professional Appraisal

A professional appraisal is probably the most expensive option. It’s also not necessarily more accurate than a CMA. Professional appraisals are more for the lender to determine the maximum loan balance they will approve against the property. 

 

You can order an appraisal even if you aren’t applying for a loan, but in the analysis phase of a real estate deal it’s usually overkill. Don’t worry — if you are applying for a mortgage loan to finance the purchase, an appraisal will definitely happen at some point.

 

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You can use any or all of these resources to verify the market value of the property in the MartelTurnkey inventory of turnkey rental properties ready to go. 

 

Our goal is always to hand over a done-for-you investment with positive cash flow — meaning any MartelTurnkey rental will help you achieve financial freedom through passive income. 

 

But a “good deal”— that is, a turnkey rental at or below market value — could mean more headroom for appreciation … which means more potential ROI!

Turnkey Rental vs. Multifamily Syndication — Which Is Better?

Multifamily syndication is all the rage in real estate investor circles. If you’re unfamiliar, this is when a group of investors pools their money to buy a large apartment complex. Most of the money partners are “passive” investors, with a person called the “deal sponsor” or “deal operator” putting together and actively managing the deal. In this article, we will compare Turnkey Rental vs. Multifamily Syndication.

 

Turnkey rentals are a kind of passive real estate investment. At MartelTurnkey we do the hard part — acquiring the property and renovating it. Your property manager leases it out and handles the day-to-day. All you have to do is wait for the cash flow.

 

Turnkey Rental vs. Multifamily Syndication

So here we have two passive real estate investment strategies … How do they compare? Which one is better? Let’s compare the two on seven metrics. Spoiler alert — we saved the biggest one for last, so make sure to stick with us to the end.

1. Barrier To Entry

If you intend to finance the purchase with a mortgage (which, as we discuss in this article, you should definitely do) the biggest barrier to entry for turnkey rentals is that you have to personally qualify for the mortgage. This isn’t as hard as it looks, though. If you can qualify for a home mortgage, you can almost certainly qualify for an investment mortgage.

 

With multifamily syndication, the deal sponsor is usually the one who has to qualify for the commercial mortgage. But this isn’t the only barrier to entry. Many deal sponsors have “minimum investment” thresholds of $50,000 or more. Compare that to MartelTurnkey, with initial investments starting in the low $30k range.

 

Some multifamily syndications are only open to accredited investors — people with $1 million net worth (excluding their personal residence) and/or gross income of $200,000 or more. This barrier alone means many multifamily syndications are off-limits to a majority of beginner investors.

 

Advantage: Turnkey Rental

2. Initial Investment

When you buy a turnkey rental, you expect to get a “clean” property. If the sellers were scrupulous with the renovation, you should have no major repairs for years to come. So once you have made the down payment and paid closing costs and fees, that’s it — you’re all in.

 

Multifamily syndications, on the other hand, tend to buy property that still needs renovation. The initial investment includes a renovation budget. If the renovation goes over budget (which is far from uncommon), the deal operator may have to do a “cash call” — ask the investor group to pitch in more money.

 

Advantage: Turnkey Rental

3. Compensation for the “Active” Investor

Some people denigrate turnkey rentals because you’re “overpaying” due to the seller’s profit margin. Why not just buy a fixer-upper and do it yourself? 

 

Remember, though, that renovations can go over budget. With a turnkey rental, you’re paying appraised market value for less work and less risk. Whatever our profit margin, MartelTurnkey strives to hand over a property with positive cash flow on day one, so your risk is minimal.

 

Compare that to a multifamily syndication. The deal operator may take compensation in the form of up-front fees, an ongoing percentage of the rent collected … even a percentage of the deal equity that they didn’t pay for. And remember point #2 — there’s still renovation to be done.

 

Advantage: Turnkey Rental 

4. Return On Investment

When it comes to ROI, the location and the desirability of the property make all the difference, regardless of whether it’s a single-family home or an apartment complex. 

 

Multifamily property has some advantages due to “economies of scale.” Look at it this way — you collect a lot more rent per roof that needs repairing, since eight or more people live under that roof.

 

Of course, the deal sponsor’s fees could eat into that profit margin. Keep in mind, too, that commercial real estate moves in cycles — multifamily may be popular for a few years, then it may shift to industrial, then retail, and so on. 

 

By contrast, turnkey rentals tend to be single-family homes, which are always in demand and appreciate excellently.

 

Advantage: Tie

5. Financing

As mentioned above in #1, with multifamily syndications the passive investors usually don’t have to go through the crucible of applying for the mortgage. The deal operator takes care of that. With turnkey rentals, you have to get the mortgage.

 

Multifamily property may also qualify for “agency” loans from government agencies like Fannie Mae and Freddie Mac, which have attractive terms, including interest-only periods and non-recourse terms.

 

Advantage: Multifamily Syndication

6. Tax Advantages

All the same tax advantages that apply to multifamily property apply to single-family property. 

 

According to most real estate thought leaders, multifamily has a big advantage — it’s more cost-effective to take accelerated depreciation on an apartment complex than on a single-family home. 

 

However, in this article we not only describe what accelerated depreciation is and why it’s so amazing, we also describe how technology has caught up to the point where it may now be cost-effective to take accelerated depreciation on a single-family rental as well. 

 

Advantage: Tie

7. Control Of Your Destiny

One of the biggest advantages of turnkey rentals over multifamily syndications is that you get to call the shots. 

 

When you invest passively in a multifamily syndication, the deal sponsor has all the power. They hire and fire, they set and execute the strategy, they approve repairs and renovations, they decide when to sell or refinance. You have little or no say in any of that. It’s like owning stock in Apple — yes, you might make money, but you don’t get to design the next iPhone.

 

Worst-case scenario — if the deal sponsor turns out to be negligent or crooked, the passive investors could suffer huge losses before finally wresting control back from the errant deal sponsor.

 

With a turnkey rental, on the other hand, you’re the boss. Once MartelTurnkey hands over the keys, our clients are free to change strategies, change property managers, sell or refinance at will — no need for permission from anyone. With a turnkey rental, you are truly in the driver’s seat of your own financial destiny.

 

Advantage: Turnkey Rental

 

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The winner … turnkey rentals! Maybe not surprising, coming from a company called MartelTurnkey, but we’re pretty confident in our logic. We can also back up our confidence with results. Take a look at our property inventory, and if you’re ready to consider investing, reach out to us today!

7 Real Estate Goals for 2023

REI Goals 2023

It’s a cliche, but for a reason — the end of the old year and the start of a new one is a natural time to reflect on where we are today, and where we want to be this time next year. To help you out we are proposing 7 Real Estate Goals for 2023. 

 

Some people talk about making resolutions … We like to think about setting goals. Depending on your stage in the journey, here are some real estate investment goals to consider:

1. Acquire Property

This is never a bad goal to have on your list. We’re not real estate investors if we don’t acquire property. Whether we’re talking about your first acquisition or your fiftieth, it should always be on your radar to potentially add to your portfolio of real estate investments.

 

Want to know what it will take to acquire a new asset? Check out the MartelTurnkey selection of turnkey rentals for sale. We estimate the all-in initial investment (down payment, renovation, closing costs, everything). This will give you a good baseline of how much capital you will need to come up with to add to your portfolio. 

2. Consider an Exit Strategy

If you already have a portfolio of real estate, consider exiting the investment this year. It may not be the right time … but at least crunch the numbers once this year, maybe even once a quarter. 

 

What is the current value of the asset? See what kind of profit (and tax liability) you might realize from selling it. Maybe you could refinance the loan and pull out cash to acquire another asset. Make sure to estimate how the bigger loan will affect your cash flow.

3. Update Your Personal Financial Statement

Checking in on the value of your assets is a great time to update your personal financial statement. Your personal financial statement is a one-page accounting of your:

 

  • Assets (cash, real estate, investment account balances, automobiles, commodities, jewelry, crypto holdings, etc.)

 

  • Liabilities (loans, accounts payable, etc.)

 

  • Income (employment income, business income, investment income, etc.)

 

  • Expenses (housing payment, automobile payment, any recurring bills or discretionary spending)

 

Lenders will want to see this personal financial statement … and as you make wise investments, it will be fun to watch your net worth and cash flow increase!

4. Expand Your Network

Ever hear the phrase “Your network is your net worth?” Never is this more true than in real estate. The more people you know, the more deals you will discover and the more problems you can solve.

 

Make a goal to add one new person to your network each week — an investor, a vendor, a real estate professional, etc. At the end of the year, you will have added over 50 people to your network.

5. Practice Deal Analysis

Real estate investors need to be able to crunch the numbers on a real estate deal. Set a goal to practice in 2023. This is especially true for new investors, but even experienced investors could benefit from brushing up.

 

Start by downloading the deal analyses we prepare for our inventory of turnkey rentals. Make sure you understand the math we use. See if you can verify the data we use online. We’re happy to jump on the phone and talk you through our logic so you can reproduce it yourself.

6. Improve Your Credit

A great credit score can significantly grease the wheels of your real estate investing career, making it easy to obtain financing at great terms. If your credit score is a little worse for wear, take some steps in 2023 to raise it. These steps could include:

 

  • Reducing the balances on your revolving debt. (Credit cards, HELOC, etc.) How close you are to your revolving credit limits plays a big role in your credit scores.

 

  • Negotiating with creditors. If you have accounts in collections, consider calling the collection agencies and offering to pay in full. They may agree to remove the black mark on your credit score. 

 

  • Acquiring more credit cards. Increasing the number of credit accounts in your name actually helps your score (as long as you don’t max them out and miss payments!)

7. Try Something New

If you have a comfort zone with real estate investing, don’t hesitate to double down on what’s working. But sometimes it pays to step outside of our comfort zone. Try a new investing technique you’ve been meaning to try. You don’t have to dive in with both feet — just dip your toes and see how it feels.

 

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There’s still a little time to get on our schedule for a strategy call before the New Year. Whether you make contact before the celebration or after, we look forward to hearing more about your goals for 2023.

 

Happy New Year from MartelTurnkey! We look forward to a prosperous 2023, helping you turn your financial dreams into a reality.

 

Is the 30-Year Mortgage Worth It? (The Answer May Surprise You)

30 Year Mortgage

In the era of bitcoin, everyone wants to be a disruptor — an iconoclast that tears down the old and ushers in the new. That’s how people become billionaires — right?

 

In that kind of entrepreneurial environment, the 30-year mortgage seems like a dinosaur. “Thirty-year fixed rate?! That’s what my grandfather told me to get! And he still refuses to get into an Uber.”

 

Well, sometimes you need to listen to your grandfather. Maybe this will blow your mind, but it shouldn’t. The 30-year fixed-rate mortgage is the best deal in the financial world. If you want to turn a good credit score into generational wealth, it’s your best friend.

 

Why? For three reasons …  

1. The Interest is Absurdly Low

Interest is the cost we pay for credit. If you have ever gone mortgage-shopping, you’re probably used to seeing interest rates in the 4-4.5% range. On a good day, you might see rates below 4%.

 

Compare that to as much 10-20% for personal loans, 5-14%+ for student loans, up to 13% for small business loans from a bank, up to 60% for invoice loans, and as much as 200% for merchant cash advances, according to Value Penguin. And don’t even get us started on credit cards, where interest rates of 20% or higher are the norm.

 

Yes, we’re in a low-interest-rate environment, and that may come to an end one day … but even if mortgage rates go up, other loan rates will too. The 30-year fixed-rate mortgage will still be among the best deals in town.

2. Your Payment is Locked for a Ridiculous Period

In addition to this low interest rate, the 30-year fixed-rate mortgage locks this rate in for a ridiculously long period of time. 

 

How many businesses get to lock in their cost of credit for 30 years and never have it change? With the 30-year mortgage, your debt service repayment never changes, making it easy to budget compared to other forms of business credit.

 

Almost no business can take advantage of 30-year fixed-rate financing … but the owner of the lowliest rental house can. 

3. It Provides Insane Leverage

Return-on-investment allows businesses to grow … but leveraged ROI makes them grow quickly

 

In this article, we demonstrate how adding a simple mortgage to a simple rental house increases the ROI from 6.5% to 17.5%, rocketing past the S&P 500 in terms of annualized return. And that’s before you take into account the many tax advantages of real estate ownership.

 

Other assets and businesses can be leveraged, but not with the ease that anyone with credit and income can achieve by walking into their local credit union. 

 

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The 30-year fixed-rate mortgage is the secret weapon behind the millions of Americans who have become millionaires simply by owning rental property. With terms this good, it’s actually fairly easy to do.

 

Martel Turnkey makes it even easier by providing you with the properties themselves —rehabbed, rented, and ready to go. We can even provide you with detailed profit-and-loss statements so you know exactly how big a mortgage you should get to avoid going into the red. 

 

Want to put this Holy Grail of a business credit solution into practice, fast? Contact Martel Turnkey today!

 

Can I Buy Real Estate with my IRA or 401(k)?

REI with retirement accounts

Can I Buy Real Estate with my IRA or 401(k)?” If you ask a traditional financial planner, they will probably say “no.” Not unless you buy a share of a REIT … which they can sell you for a fee or commission. What a coincidence.

 

Surprise surprise — this is not the whole story. The truth is, the sections of the tax code that create these tax-deferral vehicles for retirement savings make no prohibition of what kind of assets you can use to make tax-protected investments. 

 

These financial advisors are only telling you that you can’t hold rental real estate in your IRA or 401(k) because that’s not a thing they can sell you. 

 

So what does it take to invest in real estate with your IRA or 401(k)?

What Kind of IRA or 401(k) Do I Need to Hold Real Estate in my Retirement Accounts?

Self-Directed IRA

This is actually the easy part. If you have an IRA with a custodian who tells you that you can’t use it to buy real estate, all you need is a self-directed IRA from a custodian who creates and maintains these accounts for a small fee. A simple Google search will yield tons of these guys.

 

You can get a self-directed version of any IRA in your arsenal — traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA, IRA BDA, whichever. 

 

Just remember, you need to find a like-kind IRA to do this. If you have assets in a SEP IRA, you can’t move them to a Roth IRA without penalty. It has to be SEP-to-SEP, Roth-to-Roth, etc.

 

Once you have a like-kind self-directed IRA account set up, you can transfer cash from your old IRA to your new self-directed IRA and use that cash to start buying real estate!

Solo 401(k)

If your employer set up your 401(k) you almost certainly can’t use that account to start buying real estate. It was probably set up by a money manager who will tell you “no.”

 

But if you leave that employer and get to take that 401(k) with you, you can get a “solo 401(k)” from the same custodians that offer self-directed IRAs. You can then transfer assets from your old 401(k) into the solo 401(k) and start buying real estate with those funds.

Are There Special Rules I Need to Know to Hold Real Estate in my IRA or 401(K) Account?

First of all … you can’t buy your own home. If you try to do that, the IRS will view this as a withdrawal from the retirement account for your own benefit, and you will face taxes and penalties. Sorry.

 

Secondly, you can’t “actively” manage your real estate investments. Well, you can, but this will open you up to UBIT — unrelated business income tax. The whole point of these accounts is to avoid taxes, so subjecting yourself to UBIT defeats the purpose.

 

Here’s how it breaks down:

 

Fix-and-flip, rentals you actively manage yourself = UBIT. Bummer.

 

Passive investment in syndications, rental real estate in the hands of property managers = No UBIT. Super!

What Are the Downsides of Buying Real Estate in an IRA or 401(k)

All income must stay in the IRA or 401(k), and all property expenses must come out of funds from the IRA or 401(k). You can’t commingle funds outside of the account to make repairs or pay the property taxes. It all has to stay within the IRA or 401(k). Anything that goes in must follow the rules of contributions, and anything that goes out may be subject to taxes and penalties.

 

One big drawback of buying real estate with an IRA or 401(k) is that you usually can’t get a traditional mortgage, which means you lose the power of leverage. You may be able to find an unconventional or private lender, but this may trigger UBIT, so be careful.

 

Finally, since money in an IRA or 401(k) is not taxed, you don’t get the tax advantages of real estate investing. 

 

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If you want to buy real estate without a mortgage loan with your IRA or 401(k), the turnkey rental properties we source for clients at MartelTurnkey make an excellent choice. Our houses  are rehabbed, rented, and under the care of a property management company when you close. Contact us to see what we have that might fit your needs!



A Tale of Two Investors (Apple vs Real Estate) Part 3 of 3

Welcome back to our third installment of A Tale of Two Investors. Make sure that you read Part 1 and Part 2 if you haven’t already.

2012

In Part 2, our investors survived 2 major financial crisis’ and here is a comparison of their equity position.

 


In 2012, the housing prices nationwide stopped going down and investors began to slowly warm up to investing again. Interest rates were low, the banks and the auto industry were saved. At the end of 2012, Mr Moore had accumulated a significant amount of cash as shown by the table below so he decides to refinance his portfolio and use his cash to acquire 80 more rental units.

 

Mr McIntosh also has some amazing news. The Apple stock soars to $700. Here is a comparison of our 2 investors.

 


Our two investors appear to have very similar returns but let’s not forget that Mr. Moore is receiving positive cashflow as shown below.

2014

In 2012, Apple started paying dividends again and Mr McIntosh reinvested his dividends at the end of each year by purchasing additional shares. When Apple announced a 7 for 1 stock split in 2014, Mr McIntosh had accumulated 1802 shares. The price price per share after the split is $93.70. Mr McIntosh is extremely pleased with the result of his investments so far.

 

 

During 2013, Mr Moore acquires 30 more rental units and at the end of 2014 he is able to acquire an additional 47 rental units.

2018

As Apple continues to pay dividends every quarter, at the end of each year Mr McIntosh uses the proceeds to acquire more shares and in 2018 Mr McIntosh managed to accumulate 13,411 shares of Apple. Currently, each quarter Apple pays $0.63/shares so Mr McIntosh receives annual cashflow of $34,000. We put a question mark beside that cash flow number because this cashflow is uncertain since Apple decides how much it will pay in dividends. In fact, Apple can decide to stop paying dividends altogether like it did in 1995.

 

To summarize Mr McIntosh’s equity position increased from $4,400 to $2,264,000 over 37 years which represents an annualized returns near 18%. This is a much more significant return than the S&P which is 11.3% with dividend reinvestment (See calculator here).

 

 

On the other hand Mr Moore has achieved financial freedom and beyond. He continued to reinvest his cashflow every year and at the end of 2018 Mr Moore is the CEO of a Real Estate empire holding $27M in assets. Mr Moore not only generated $10M in equity with a 22% annualized returns he also has created a company that generates almost half a million a year in net cash flow.

Next 10 years


Above is the hypothetical equity position of our two investors today. Now really put yourself in their shoes. If you are Mr. McIntosh, do you continue to hold? What will happen to Apple in the next 10 years? Will they continue their dividend program? Will the revenue continue to rise at the same rate? Where do you get your information? How do you affect the direction of the company? I think we all agree that the future is uncertain for Mr. McIntosh and most of us would sell at least some of the portfolio. Remember that this is not the strategy he used to get these unusual results.

 

Now put yourself in Mr. Moore’s sandals. What do you do next? I think many of us would be thinking of how to allocate the cash flow. More acquisitions, more loan payout, more vacations.

Conclusion

It should be clear by now that even an investor who choses a stock that they knew would be a winner is no match for a disciplined real estate investor. No investors know in advance that a stock will be worth 534 times more 37 years later. As we’ve demonstrated not many investors would stick to the same investment for 37 years considering that the company changed CEO, started to lose money and market share, on top of the regular ups and downs of the market and the economy. We’ve seen that a real estate investor:
– has choices over the direction of his investments because he is the CEO of his enterprise
– can leverage his cash to accelerate the equity growth and net cash flow with consistent reinvestment strategy
– can easily survive the worst financial crisis and could even take advantage of such crisis to acquire strategically
– can obtain financial freedom with positive cashflow
– can build an enterprise with significant asset that can be passed on to his descendents

 

If you want to get started on your real estate portfolio just like Mr. Moore then check out our current inventory and schedule an advisor call with us.

Sources:

Housing Price Index
History of Apple
Mortgage rate history
Inflation Calculator
Consumer Price Index

A Tale of Two Investors (Apple vs Real Estate) Part 2 of 3

Welcome to part 2 of A Tale of Two Investors (Apple vs Real Estate).  If you didn’t read part 1 please click here.

 

Part 1 ends in December 2000, Mr. McIntosh benefited from a stock split back in June, while Mr. Moore reinvested his passive income and acquired additional properties. The table shows the equity difference between our two investors.

 

 

At the end of 2000

Only a few months after their meeting, Mr. McIntosh’s financial picture has changed significantly. The stock market crash of 2000 saw Apple stock price go down to $14.80 by the end of December. Mr. McIntosh’s equity goes from $48,611 to $12,935 which is significantly lower than what it was in 1987. This is a significant blow to Mr McIntosh finances. He doesn’t have too many choices, he could sell and realize a loss, invest more but he doesn’t have the money. For the purpose of our story, he continues to hold on. Many investors moved out of the stock market and headed for bonds or Real Estate.

 

Mr Moore on the other hand is unaffected by the crash and decides to take advantage of the low mortgage rate to refinance his rental units and use the cash to acquire additional rental units. Mr Moore can get a loan for about $435kk (80% of $544,620). The net proceeds of the loan would be about $117k (435k – existing loan 318k). So Mr Moore now has $138k ($117k plus cash on hand $21k) to acquire additional rental units. The current price of the units are about $39,000. Mr Moore needs to put a down payment of $7,780 for each rental unit. Since Mr Moore has $138k cash he can purchase 17 rental units! At the end of the transaction Mr Moore’s balance sheet looks something like this.

 

 

 

With this kind of cash flow and considering that he needs $8,300 as down payment, Mr Moore continues to acquire rental units very rapidly. In fact he is accelerating the pace of his acquisitions.

2001 to 2005

Things are going well for Apple during that time. Apple introduces the iPod in 2001, opens retail stores and iTunes in 2003. On February 28th, 2005, Apple announces a 2 for 1 stock split. The stock closes at 44.86 after the split. Mr McIntosh ’s equity position now looks like this.

 

Mr Moore uses his net cash flow to acquire additional rental units. At the end of 2001 his $27k of cash flow allows him to acquire 5 more rental units with a down payment of $41,881. The net cash flow increases every year and by the end of 2005 Mr Moore has 54 rental units in his portfolio with $84k of cash on hand and a net cash flow of almost $60k per year. Below is a table comparing each investor’s equity and their respective annualized returns.

 

 

At the end of 2005 Mr Moore decides to refinance and reinvest the cash by acquiring additional rental units. Each rental unit needs about $11,000 in down payment so Mr Moore acquire 14 rental units. The table below outlines his position before refinance, after refinance, and after refinance and acquisition.

 


After this acquisition, Mr Moore’s net cash flow is raised to $25k (as shown below).

 

 

At the end of 2005, Mr Moore continues to reinvest in his business. He uses the $10k in cash left after the acquisition in addition to the $25k of cashflow to acquire 5 more rental units.

 

Financial Crisis 2008

We started seeing the effect of the Financial crisis in 2007 where the real estate values went down by 5.6%. In 2008 the housing value went down by 8.5%. These reductions were the sparks that ignited the financial crisis. The reduction in asset value along with subprime mortgages, Mark-to-Market rule, derivatives valuation, and other factors brought the biggest financial crisis ever seen.

 

Mr Moore didn’t escape the crisis. The table below illustrates how the Mr Moore’s asset was impacted with the first column showing the balance sheet at the end of 2006 representing the highest asset valuation while the next 2 columns shows how the drop in real estate affected his equity. You will notice that the reduction in equity is dampened by the positive net cashflow and the principal payment on existing mortgage.

 

Like all investors, Mr Moore is concerned by the events unfolding and he does not acquire additional properties until 2012 when the real estate market started recovering. This very conservative assumption means that Mr Moore will not be able to acquire assets at a lower price. Mr Moore could also use the cash to pay down his loans but he just sits on his cash at 0% interest. Some homeowners seeing their property value underwater decided to stop paying their mortgage, and the banks began widespread foreclosure. This is the impact to Mr. Moore’s equity between 2006 and at the bottom of the market in 2012.

 

 

 

As you can see from the table above, the asset value was reduced by almost 20%. The negative of housing value was dampened by positive net cash flow, and normal reduction in principal from mortgage payment. The tenants renting Mr Moore’s apartments still needed a place to live so the rental income was not affected by the crisis, Mr Moore continued to pay his mortgages even if some of his properties were under water so the bank didn’t foreclose on him. As you can see below Mr Moore is still generating strong positive cashflow.

 

 

Mr McIntosh is jubilating at how well Apple stock is doing. Only a few years ago his position was worth $78k and his equity nearly doubled every year in 2006 and 2007. By the end of 2008 however Mr McIntosh saw the value of his portfolio cut in half only to see astronomical growth until 2012. We’ll get to that in the next section.

 

Conclusion for Part 2

In this article we reviewed the impact of 2 major financial crisis on the equity position of our 2 investors.

 

Once again it is pretty clear that Mr. McIntosh is at the mercy of the stock market, the economy, the news, the banks, the government, the federal reserves.  Mr. Moore is still impacted by the same entities but has more flexibility to protect his assets or take advantage of an opportunity.

Please continue reading Part 3