,

Regulation hasn’t caught up to generative AI


Generative artificial intelligence (AI) has tremendous potential to cut costs and improve customer experience, but regulation has not caught up to develop a governance program, industry pros said of AI’s implementation in mortgage lending.

Bias, discrimination, privacy and security concerns related to consumer information are some of the biggest risks in implementing generative AI, noted Brian Stucky, lead at Rocket Ethical AI at Rocket Mortgage. 

“We still do not have AI-specific regulation (…) We have to operate under the Fair Lending Act. Have we developed a model that is in fact fair? If you are using it in marketing, we need to make sure it does not infringe intellectual property,” Stucky said at an AI session at the 2023 Mortgage Bankers Association Annual Convention & Expo in Philadelphia on Monday. 

“With this rapidly evolving technology, there are a lot of risks. I think there are things that we don’t know yet and all of these risks are going to impact data privacy, cybersecurity and other concerns,” said Michele Buschman, chief information officer at American Pacific Mortgage Corporation.

The panel noted the findings of the latest Fannie Mae mortgage lender sentiment survey. More than one in four lenders (26%) considered misinformation to be the biggest risk in using AI and machine learning (ML), followed by cybersecurity (18%), bias and discrimination (16%) and privacy and security concerns related to consumer information (15%).

Lenders that adopt generative AI into the mortgage lending landscape wanted to see operational efficiency, the survey showed.

AI-based compliance review (50%), AI-based anomaly detection automation (39%) and AI-based mortgage loan offerings (32%) were noted as being the most appealing AI/ML application ideas.

Generative AI is still at an infancy stage and It’s important for lenders to experiment with what works and what doesn’t work for using generative AI, Stucky added. 

With AI expected to “lead to lasting change” unlike other technology hype cycles, enterprises will be significantly impacted whether they invest in AI or not, noted Buschman.

“Lenders will have to work with legal, risk, compliance and IT to define AI governance before implementing AI technologies,” Buschman said. 

Vendors might not be as experienced with utilizing AI, so asking due diligence questions for for data security is also key, Joseph Zeibert, vice president of FICO, pointed out. 

“There is not one playbook (in terms of implementing AI) (…) Not every problem has the same AI tool,” Zeibert noted.

Making use of data sources will be how lenders could differentiate themselves from other competitors, Felipe Millon, senior sales manager of housing finance at Amazon Web Services, said. 

“How do I start using it with other data sources we have? That is where the true value is in competitive advantage (…) How do you use that data that your competitors don’t have access to?” Millon said.  



Source link

,

MBA leadership says it’s “playing offense” to “stop the madness”


The market is rocky, margins are tight. And the grind may not end anytime soon, Mortgage Bankers Association President and CEO Bob Broeksmit told attendees in a fiery speech at the trade group’s annual conference this week in Philadelphia.

“Normally, I talk about the remarkable work you did over the previous year. Then I look at what we did on your behalf – the battles we fought and the victories we achieved. I close by reviewing what lies ahead – the policies we’re shaping, and the progress we hope to make,” Broeksmit said. “My tone is usually positive and upbeat. But not this year. I’m not upbeat. Frankly, I’m upset.”

Though MBA members have driven efficiencies to keep their head above the water and serve American families, there’s an enemy, he told them.

“While you’re fighting to survive, and while we’re fighting for you, Washington, D.C. is fighting against you. At a time when you and your customers need relief, you’re at risk of being hit with the most extreme overregulation. At a time when you desperately need stability, your own government is sowing the seeds of profound instability. Honestly, Washington is pushing you and our economy in the wrong direction. And no one will suffer more than American families – especially minority, low-income, and first-time homebuyers. This madness must stop before it’s too late.”

With that, Broeksmit rattled off a number of grievances against foes the Beltway.   

Mortgage rates

On the day Broeksmit addressed the crowd in Philadelphia, mortgage rates were north of 7.7% on a standard 30-year fixed-rate mortgage. Mortgage applications are at multi-decade lows, and housing inventory remains highly depressed, helping push home prices up.

The MBA, alongside several other trade groups, sent a letter to lawmakers and monetary policymakers that the government can do much more to help the housing industry while still fighting inflation. The Fed, for example, could buy mortgage-backed securities.

Housing trade groups urged Fed Chair Jerome Powell to make two clear statements — that the Fed does not contemplate further rate hikes, and the Fed will not sell off any of its MBS holdings until and unless the housing finance market has stabilized and mortgage-to-Treasury spreads have normalized. 

These steps will provide the market greater certainty about the Fed’s rate path and its plans for the MBS portfolio and reduce volatility for traders and investors, the organizations noted.

“We urge the Fed to take these simple steps to ensure that this sector does not precipitate the hard landing the Fed has tried so hard to avoid,” the letter read.

Spreads are widening for other, (theoretically) more controllable reasons, Broeksmit said.

“Fiscal policy and political dysfunction are contributing – the debt limit crisis, growing federal deficits, and gridlock on Capitol Hill that results in near-miss (or actual) government shutdowns. MBA is shouting this truth from the rooftops in Washington. And we’re playing offense.”

BASEL III, SIFI

Broeksmit said the so-called Basel III end-game proposal “is dangerous too.”

He said that the proposed new capital increases for banks “are a dagger aimed at the heart of the housing market.”

He added: “Washington wants banks to significantly hike the capital they hold against mortgage assets. Not just mortgages, but servicing. And warehouse lines. If this goes through, banks will pull back even further from mortgage lending and servicing, leaving consumers with less access to credit.”

The MBA’s CEO said it’s “almost like Washington wants fewer people buying homes,” and said the new capital requirements would not help close the racial homeownership gap or benefit first-time homebuyers, especially in low- and middle-income families.

“Basel III is a solution in search of a problem,” he concluded. “And it will create far more problems than it ever solves.”

He spared no venom for the Treasury Department, whose Financial Stability Oversight Council is threatening to designate non-banks as systemically important, and therefore subjecting them to even greater regulatory scrutiny.

“Put another way, they want to strangle IMBs with endless red tape,” he said. “Once again, the result will be fewer businesses lending to fewer borrowers, leading to less homeownership for those who need it. A policy of this magnitude deserves the strongest possible justification. Yet FSOC provided precisely none. It gave no proof that non-banks are systemically important. It just says so, as if the assertion is proof enough.”

MBA’s coalition-building

Broeksmit highlighted some of the group’s advocacy work over the past year, including killing the controversial adverse market refinance fee and the much-maligned DTI-based loan level price adjustments to GSE loans.

“And while this fight is even bigger, we’re shifting into overdrive,” he said. “The MBA is building diverse coalitions to take your message nationwide. We’re partnering with the NAACP and the Urban League to make clear that the Basel proposal will move the cause of equity in the wrong direction. And we’re fostering unprecedented collaboration with other industries and associations. Every day, we talk to the decision-makers at the White House and leaders in Congress. And I can already report that there’s broad and bipartisan agreement that change is needed.”

While the MBA will continue to advocate, Broeksmit called on members to be their own advocates, too.

“Policymakers don’t just need to hear just from us right now. They need to hear directly from you…With your continued partnership, we can defeat these threats. And if we keep standing together and speaking as one, we’ll come through this difficult time. We won’t just survive. We’ll rise by helping more Americans thrive – because that’s what you always do.”



Source link

,

Positioning your business for success in all market cycles


HousingWire recently spoke to Alex Elezaj, chief strategy officer at UWM, about the work independent mortgage brokers can do right now to prepare for when rates drop and how to go above and beyond for clients.

HousingWire: Why should independent mortgage brokers embrace today’s market?

resized-Alex-Elezaj_2

Alex Elezaj: It’s only a matter of time before rates drop, and when they do, there will be a clear difference between those who have been preparing and those who have not.

The way I see it, there are two types of people in the mortgage space right now: those who are simply waiting around for rates to drop and those who are putting in the work to better their business. The winners have spent 2023 focused on strengthening relationships with real estate agents, educating borrowers and improving their marketing strategies.

The reality is, we can’t control the rates, but we can control the service we provide and make sure we stay in front of past clients. Those who are focused on how they can get better and taking the steps to make improvements to their business are the ones who are going to come out stronger and more successful for the long term.

HW: What can independent mortgage brokers do right now to prepare for when rates drop?

AE: It’s important to leverage tools, technology and services that streamline operations and enhance your productivity now so that when volume increases, these steps are already part of the process. At UWM, we ensure our clients have a full suite of resources to help them grow their business in any market.  

For example, PA+ is an option for UWM clients to receive an additional level of loan processing support, with the goal being to ease some of the most time-consuming parts of the loan process from setup through closing. Most recently, we enhanced this service to allow brokers and their processors to choose which part or parts of the loan process they’d like a UWM loan coordinator to handle.

Not only does this give them more flexibility, control and support, allowing them to scale their business immediately, but it also offers brokers and processors additional assistance during busy times and makes them more available to have meaningful touchpoints with borrowers.

Some of UWM’s most successful clients are taking advantage of PA+ today to ensure their businesses are set up for success when rates eventually drop. Preparing is all about using the resources available to you.

HW: Providing a great client experience goes a long way when it comes to referrals and repeat business. What’s the secret to making long-lasting impressions?

AE: The reality is, nobody wants a mortgage. They want the house. This is why, as an independent mortgage broker, providing an elite client experience should be the main priority for every loan. When a borrower looks back at the homebuying process, we don’t want them to think about potentially stressful parts. We want them to remember how seamless and easy their broker made it.

To help with this, UWM recently announced Memory Maker, which allows independent mortgage brokers to send their choice of customized thank you items to borrowers and real estate agents. This includes personalized thank you emails or handwritten notes and gifts for borrowers, such as a cutting board, ice bucket or welcome mat.

It’s these types of gestures that leave a lasting impression in someone’s memory bank that can lead to repeat business down the road. On average, a person will own three homes in their lifetime. That’s a potential for three separate mortgages in addition to refinances. Believe it or not, a handwritten thank you note to a real estate agent or a customized cutting board for a borrower can go a long way in making sure that broker is top of mind when those needs arise. 

HW: We know rates will drop at some point. What will things look like in the wholesale channel when they do?

AE: The wholesale channel reached a new milestone last quarter with the broker market share achieving its highest level in over a decade. We’ve seen a massive shift in retail LOs transitioning to the wholesale channel, and we expect this trend to continue. The broker channel continues to prove it’s resilient and thrives in all market cycles, and we are prepared for the day rates tick down, just like we were prepared when the market shifted to purchases.

Brokers who are embracing this market and taking the time to improve their processes, marketing and client experience will win. It’s easy to get wrapped up in the doom and gloom surrounding the housing industry right now, but if we block out the negativity, outwork the competition and do right by every borrower we interact with, the independent mortgage broker channel will continue to dominate and be the obvious choice for consumers and real estate agents.



Source link

,

FHFA says GSEs are open to alternatives to loan repurchases


Regarding lenders’ vociferous complaints about increased loan buybacks from Fannie Mae and Freddie Mac, FHFA Director Sandra Thompson said the regulator expects originators to deliver loans consistent with the guidelines. But, she added, the Enterprises must implement a fair, consistent, and predictable process for identifying loan defects and the appropriate remedies.

“After multiple years of record-high loan volume, we have seen an increase in the absolute number of repurchase requests – which is to be expected,” Thompson said at the Mortgage Bankers of Association conference in Philadelphia on Monday. “The good news is that there has been a large decrease in repurchase requests since their peak in early 2022, as the Enterprises have worked through loans originated during the refinance boom.”

Thompson said Fannie Mae and Freddie Mac have closely examined their existing processes and practices, including efforts to improve language in the selling guidelines and provide more consistent feedback to lenders on buybacks. The goal is to lead to less ambiguity in underwriting.  

In addition, the FHFA is open to additional options that would ensure alternatives to repurchases are available and offered regularly. However, “work on this front remains ongoing,” according to Thompson. 

“While many of the details remain in development, we are considering initiatives to test and learn from various options for performing loans with defects,” Thompson said. “Taken as a whole, we believe these are meaningful improvements to uphold quality control while ensuring high-quality underwriting.”

Freddie Mac on Monday said its research shows that purchase mortgages have 35% more incidence of defects than refinancings. It cited loans missing key documents or those with inaccurate income calculations as the top factors.

“To address these issues, Freddie Mac committed to enhance our communication, collaboration and feedback with our lenders and industry partners. We also committed to enhancing our own processes. We did both, and it is working,” the GSE said in a prepared statement Monday. “Non-Acceptable Quality rates on our incoming loans are approximately 30% lower than their peak. With it, repurchase requests are trending down to approximately 60% lower than their peak. Within that 60%, repurchase requests to vitally important small and community lenders are even lower, down 68%.”

Freddie said it has made strides for three reasons: because loan file quality from lenders has improved; the GSE itself has improved the quality control review function; and Freddie has also advanced policy changes “that will minimize instances where judgment must be applied in the underwriting process.”

In a statement following Thompson’s remarks on Monday, the MBA said it has “advocated strongly” for FHFA to address the rise in loan repurchase requests, especially for performing loans and those with relatively minor issues underwritten during the pandemic.

“We share FHFA and the GSEs’ goal of high-quality underwriting and will continue to work with them to ensure the rep and warranty framework is being applied in a balanced way, and that there are appropriate alternatives that lead to outcomes short of a repurchase request.”

Another trade group, the Community Home Lenders Association, weighed in on Thompson’s remarks.

“More balance in repurchase demands is needed to reduce disincentives for lenders to originate mortgage loans to underserved borrowers,” said Scott Olson, the group’s executive director. “It is also necessary to avoid steep and unnecessary losses lenders are experiencing from selling off performing loans in a market with skyrocketing mortgage rates.”



Source link

,

FHFA extends certain rep and warrants to pandemic-related forbearance loans


The Federal Housing Finance Agency (FHFA) announced on Monday morning that it will treat, in some aspects, loans in COVID-19 forbearance similar to those in natural disaster forbearance.

The change, to be implemented on Oct. 31, means pandemic-related forbearance mortgages will remain eligible to certain rep and warrant relief based on the borrowers’ payment history for three years. 

In practice, the borrower’s time in forbearance will be included when demonstrating a satisfactory payment history in the first 36 months following origination. 

“I am announcing today that we have directed the Enterprises to extend their rep & warrant policies for loans affected by natural disasters to cover mortgages that have successfully exited a COVID-19 forbearance plan,” FHFA director Sandra Thompson said during the MBA Annual 2023, a conference held Oct. 14-17 in Philadelphia.  

“Now, loans that are eligible for repurchase relief after three years will not lose this relief due to a COVID-19 forbearance. Similar to the Enterprises’ natural disaster policies, missed payments during the COVID-19 forbearance will not cause a loan to lose eligibility for the 3-year rep & warrant sunset.” 

The FHFA understands that forbearance was an “invaluable” tool during the COVID-19 pandemic, and the loans serviced “should not be subject to greater repurchase risk simply because a borrower was impacted by the pandemic,” according to Thompson. 

In reaction to the announcement, Bob Broeksmit, president and CEO of the Mortgage Bankers Association (MBA), said that “FHFA’s policy change to provide rep and warrant relief for performing seasoned loans that have successfully exited COVID-19 forbearance plans is a longstanding recommendation that we are pleased to see implemented.”

Bi-merge, appraisal udates

Thompson also said the FHFA efforts to implement a bi-merge credit report “are moving full steam ahead.” 

On Monday, the FHFA also published its new Uniform Appraisal Dataset (UAD) appraisal-level public use file. It contains appraisal-level data from a nationally representative 5% sample of appraisals conducted between 2013 and 2021 and associated with mortgages acquired by Fannie Mae and Freddie Mac. 

The dataset can be used to, among other things, study housing valuation, housing market disparities and inequities, and consumer preferences.

“This data will allow stakeholders to continue to shine a light on the issue of appraisal bias and will allow public users to assess that issue as never before, within the framework of our laws that also support a consumer’s right to privacy,” Thompson said.  



Source link

,

White House announces new housing initiatives to boost homeownership


The White House on Monday announced a series of new initiatives designed to boost U.S. homeownership, alongside data detailing housing aid that has been provided since 2021.

New initiatives include allowing homebuyers to leverage income from accessory dwelling units (ADUs), expanding mortgage lending for U.S. Tribes, the launch of a new pilot program at the U.S. Department of Agriculture (USDA) for alternative eligibility criteria and additional home retention assistance programs for U.S. veterans.

New HUD, FHA policies

The U.S. Department of Housing and Urban Development (HUD) announced through the Federal Housing Administration (FHA) the publication of new policy designed to allow homeowners “to use a portion of the actual or prospective rental income from an [ADU] to be added to the borrower’s effective income for purposes of qualifying for an FHA-insured mortgage,” the White House said.

The new policies will allow U.S. homebuyers to “obtain access to affordable mortgage credit when seeking to purchase properties with ADUs, add ADUs to existing structures, or construct new homes with ADUs,” with such flexibilities designed to allow first-time homebuyers, seniors and inter-generational families to establish generational wealth, the announcement said.

HUD will also continue to work on updates for its 203(k) Rehabilitation Mortgage Insurance Program.

“FHA is considering potential policy changes that could increase the funds available to borrowers to make renovations and repairs,” the announcement said. “Other policies under review would permit more time for completion of those improvements.”

USDA, CFPB initiatives

USDA is also awarding $9 million to nine Native American Community Development Institutions (NCDIs) as a part of its efforts to “increase access to homeownership for Native Americans on Tribal Lands through a relending demonstration program,” the White House said.

The agency will also launch a pilot program “to test alternative eligibility criteria related to community representation for Community Land Trust Organizations” through its Section 502 Direct Home Loan Program.

The U.S. Department of Veterans Affairs (VA) will also launch a new home retention program to for veteran borrowers, saying the new “VA Servicing Purchase (VASP) program will help veteran borrowers who are behind on their mortgage loan who do not qualify for traditional home retention options.”

The Consumer Financial Protection Bureau (CFPB) is also currently developing “reforms to existing rules to help homeowners when they have trouble making their mortgage payments,” the announcement said.

“The reforms build on observations during the COVID-19 pandemic about places where the rules could be streamlined and simplified,” the White House explained. “The reforms will ensure homeowners can get the help they need without unnecessary delays or hurdles and are better able to not fall into foreclosure.”

Response from FHA

During a Monday morning session taking place at MBA Annual in Philadelphia, FHA Commissioner Julia Gordon spoke about the new initiatives.

“Just a few minutes ago, our office posted a new policy for single-family homes with [ADUs], and we’re going to allow both existing rental income for ADUs and prospective rental income to be included in the underwriting process to allow more borrowers to purchase properties with ADUs, to rehab existing houses to ADUs and to construct new homes with ADUs,” she said.

The new policies are designed to help more people build wealth that stems from homeownership, and is also designed to help “boost the supply of affordable housing in many of the neighborhoods where it’s most needed,“ she added.

New data

The U.S. Department of the Treasury also released new data measuring housing aid distributed by the Biden administration thus far, pegging the total figure at more than $12 billion in support. This includes the Homeowners Assistance Fund (HAF), a $10 billion fund designed to assist those financially impacted by the COVID-19 pandemic.

The Treasury Department estimated that HAF “has assisted nearly 400,000 homeowners at risk of foreclosure,” the White House said. “Through Q2 2023, the state, territorial, and Tribal recipients of HAF have expended over $5.5 billion to assist homeowners, a 32% increase from Q1 2023.”

HUD also announced that FHA’s first-time homebuyer rate is “the highest since at least 2000,” and that “FHA has supported nearly 1.8 million homeowners with purchase mortgages, and 83.6 percent or 1.5 million of whom are first-time homebuyers” since the start of the administration.

Flávia Furlan Nunes contributed reporting.



Source link

,

Mortgage origination market should improve by 19% next year: MBA


The trough for the mortgage origination market is nearing an end point and 2024 is shaping up to be a better year for the industry, economists of the the Mortgage Bankers Association (MBA) said at the 2023 Annual Convention & Expo in Philadelphia, Pennsylvania.

The MBA doesn’t expect the Federal Reserve to hike interest rates further this year as real rates – which are inflation-adjusted– are 2%. 

“They’re already at a place where if they do nothing, and inflation holds or falls further from here, they’re going to be slowing the rate of growth and the cumulative impact of the rate increases they’ve already made are not fully felt yet,” said Mike Fratantoni, MBA’s chief economist and senior vice president for research and industry technology.

Based on the cautious messages from even the hawkish Fed members, Fratantoni projected that the central bank will “definitely not be going to hike in November, a small chance that they would come back in December if these numbers turn around.”

The MBA’s view is that the Fed will cut interest rates three times in 2024 and inflation may come down a bit faster as a result. 

“I’m pretty confident that if this rate path precedes as we’re expecting, this is the bottom. 2023 is going to be the low-volume (mortgage origination volume) year for this cycle. So after falling 50% from 2021 to 2022, our current estimate has it falling almost 30% from 2022 to 2023. But then a rebound in 2024 — up 19%,” Fratantoni said.

Purchase originations are forecast to increase 11% to $1.47 trillion next year.

In terms of units, the MBA expects about 5.2 million units in the total number of loans originated in 2024, up from this year’s expected 4.4 million.

“It’s still a pretty challenging environment relative to if you look back historically, this is close to where we were in 2014. Maybe just below where we were in 2018 — still a challenging year for the industry,” Joel Kan, vice president and deputy chief economist of MBA, said. 

Mortgage rates will drop, but challenges linger

MBA’s baseline forecast is for mortgage rates to end 2024 at 6.1% and reach 5.5% at the end of 2025 as Treasury rates decline and as the spread narrows.

The historically high spreads between mortgage rates and the 10-year Treasury yield – which was triggered by the uncertainty about monetary policy and the direction of quantitative tightening  – will resolve in a “favorable direction over the course of the next six to 12 months,” Fratantoni added.

The MBA raised expectations of a mild recession in the first half of 2024 due to the combination of the cumulative impact of the rate hikes, the banking system tightening down on all forms of credit and the slow global environment all leading to a slowdown in the US. 

The unemployment rate is expected to rise to 5% by the end of 2024 from the current rate of 3.8%. Inflation, in return, will gradually decline towards the Fed’s 2% target by the middle of 2024, Fratantoni said.

As mortgage rates come down to the 6%-range in 2024 and the 5% range in 2025, borrowers will see less of a trade-off in moving, Kan projected. 

Kan added: “I think that’s when you’re going to see more inventory free up, that’s when we’re going to see more of these housing transactions able to take place.”

The MBA anticipated first-time homebuyers will account for a large portion of housing demand over the next few years, given the largest age cohort entering its prime homeownership ages. 

“There will still be challenges, as median purchase and interest payments remain high, for-sale inventory is scarce, particularly for entry-level homes, and credit availability is low,” Kan said.

A couple more painful quarters ahead

The mortgage origination market for banks and independent mortgage banks was painful given that they all saw five consecutive quarters of net production losses. 

While production losses were less severe in Q2 2023 from the previous two quarters, lenders are projected to have a few more painful quarters until the end of the spring of 2024 – mainly due to the traditionally slow winter season, Marina Walsh, CMB and vice president of industry analysis, anticipated. 

For lenders, excess capacity continues to be a challenge with low productivity levels and high expenses per loan.

“Lenders have reduced their head counts and gross expenses, but the record-low volume is a primary driver of these escalating per-loan costs,” Walsh said. 

The MBA previously estimated that a 30% decrease in the mortgage industry employment from peak to trough will need to occur, given the decrease in production volume.

The MBA estimated that the industry is roughly two-thirds of the way there from the previously mentioned 30% overcapacity in the industry. 

Mortgage industry employment dropped 20% in 2023 from the peak in 2021 and the number of active MLOs for state-licensed companies dropped 29% from the same period, according to the MBA.



Source link

,

Agent strategies for getting first-time homebuyers across the finish line


In August, Zillow‘s 2023 Consumer Housing Trends Report proclaimed that half of all homebuyers are purchasing their first home, the highest share that Zillow has ever recorded.

Up from 45% last year and a notable increase from 37% in 2021, the report also mentioned that this share of first-time homebuyers likely hasn’t been this high since 2010, when there was a first-time homebuyer tax credit.

Zillow research also found that a majority of homeowners with mortgages have locked in a rate below 5%, and are almost half as likely to consider moving.

It’s true that first-time buyers make up a larger piece of a smaller pie, as housing inventory shrinks. However, this rise in first-time buyers helps explain what’s driving demand and keeping upward pressure on prices in a market with mortgage rates currently surpassing 7%.

One of the primary reasons for this surge is the strong presence of millennials in the housing market, particularly those at the peak, around ages 33 and 34. This demographic cohort, known predominantly for its size and influence, is getting married later, having kids later and now embracing homeownership even in the face of higher interest rates. 

But, how do we get them over the finish line when buying a home? Especially when we keep hearing some of these younger first-time buyers lament that they think renting is better overall than buying. (It’s not. It never will be. I’ll explain later.) Not to mention the current mortgage rates at decades-high levels as well as sellers who are locked in with pandemic low rates. 

Here are the following strategies agents can use to guide first-time homebuyers toward achieving this monumental step. 

Get the down-payment conversation straight

We know that one of the biggest hurdles for first-time homebuyers is saving for a down payment. There has long been a misconception that a 20% down payment is required to purchase a home.

But, collectively at the Denver Metro Association of Realtors (DMAR), we all agree that this is really no longer the case and hasn’t been for some time. Instead, we are guiding prospective buyers on more attainable down payment options, such as 5% of the home’s purchase price to get them in sooner.

(Editor’s note: There are conventional mortgage options with down payments as low as 3% and government-insured loans with a low- or no-down-payment requirement.)

For example, if you were to buy a home priced at $500,000 with a 5% down payment, you would need $25,000 upfront. While this may seem daunting, it’s important to remind them that there are many down-payment assistance programs available to help prospective buyers bridge the financial gap.

It’s true that a lower down payment upfront means bigger monthly mortgage payments — but it also means becoming a homeowner sooner and the bigger picture is the appreciation value over time.

Homebuyers using a variety of mortgage loans to finance their home purchase are eligible to use assistance options to help with their down payment and/or closing costs. Check with your local or state housing agency for a list of programs.

Credit repair and management tactics

A healthy credit score secures a favorable mortgage rate. Look at the long-term here and help work with first-time homebuyers to improve their credit scores and establish a solid credit history.

Strategies may include creating a credit repair plan, paying down outstanding debts, and managing credit responsibly.

It’s essential for potential homebuyers to understand that a higher credit score can lead to a lower interest rate, which can significantly impact their monthly mortgage payments over the life of the loan.

Rate buy-downs are another option I recommend in this market. This approach is negotiated in the contract; it’s a seller concession to the buyer for a set amount.

Let’s use $10,000 as an example. The buyer then has the option to use this amount to buy down the interest rate with their lender. Sellers are even using this as a tool to attract buyers. 

This not only reduces the monthly mortgage payment but also makes homeownership more affordable over time. By strategically leveraging rate buydowns, first-time homebuyers can enjoy the dual benefits of a lower monthly payment and a more affordable long-term homeownership experience. 

What budgeting and saving look like right now

It goes without saying that first-time buyers need to prioritize budgeting and saving.

It’s part of our unspoken job to guide individuals in creating realistic budgets that allow for consistent savings toward their down payment and other homeownership-related expenses.

Prospective buyers are encouraged to explore various savings strategies, such as setting up dedicated savings accounts, cutting unnecessary expenses, and considering additional income sources like part-time work (hello, Uber) or bonuses.

Understanding long-term benefits

This is the crux of strategy for first-time buyers: helping them understand their long-term goals.

Agents must work with first-time buyers to mentally get them past the current rate, which is certainly not going to last forever. We need to help them understand that they have the luxury of time. We’re not competing, and inventory out there is now up for some negotiating on things like pricing, inspection, and rate buydowns. 

Additionally, buying a home offers substantial long-term benefits over renting, even if the initial monthly payment may be higher.

We have to help first-time buyers see the bigger picture by highlighting the advantages of homeownership, such as building equity, tax benefits, and potential appreciation in property value. The win, essentially, is the strategy.

Nicole Rueth, Branch Manager and SVP of national mortgage lending company The Rueth Team, recently demonstrated it best. If a Denver area first-time buyer purchases a home at $550,000, it’s true that with factors like the initial closing costs, etc., the immediate gains are nilch, seemingly making rent look more attractive.

But the point is that if you look at the appreciation gains over the next nine years, it’s a totally different story. The gains over time ultimately pan out in tax benefits, year-over-year appreciation and amortization gain of $303,150.

It’s a no-brainer; it’s helping first-time buyers understand that the initial costs upfront will pay them back in rewards. 

In the Denver metro, for example, the standard appreciation rate has historically been around 6%, outpacing the national average. While it’s not there right now, it still means that homeowners have seen their property values grow consistently over time.

Final thoughts

By emphasizing these benefits, organizations motivate first-time buyers to prioritize homeownership as a wise long-term investment.

By providing guidance on saving for a down payment, repairing credit, budgeting and understanding the advantages of buying over renting, these organizations empower first-time buyers to achieve their homeownership dreams.

Moreover, they educate prospective buyers about the realities of today’s housing market, dispelling myths about down payments and emphasizing the importance of strategic, long-term thinking in real estate investment.

In the end, homeownership remains a sound financial decision and a key avenue for building wealth.



Source link

,

Depreciation 101 and When to Sell a Reliable Rental


“Should I sell my rental property in 2023?” If you own investment property, you’ve probably asked yourself this numerous times over the past ten months. Prices are high, inventory is low, and your appreciated property’s profits could be turned into even more rental units, making you wealthier over time. So, how do you know if selling and swapping is the best move to make? Or, if you do sell, could you be missing out on even more wild appreciation potential? Let’s find out!

Welcome back to Seeing Greene, where your investor, agent, lender, big guy at the gym who helps you with your form, and mentor, David Greene, is here to answer your real estate investing questions. This time, we hear from a Canadian investor debating selling her pricey Toronto triplex for cash-flowing American real estate. Then, David shows you exactly where to find rental property leases, when pulling out equity may not be a good idea, what to do when you CAN’T get home insurance, and how to calculate depreciation on your next rental.

Want to ask David a question? If so, submit your question here so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can hop on a live Q&A and get your question answered on the spot!

David:
This is the BiggerPockets Podcast show, 831. The question would be, are those three triplexes going to appreciate at the same level or better than the one in Toronto? Are you able to add value to those three triplexes? Are you going to be able to buy fixer-uppers, put some elbow grease into them, make them worth more? Are you going to be able to buy them below market value and buy some equity? What you need to do is look at your potential opportunities and say, “All right, if we have $500,000 in the US, where would we put it and how would we grow it?”

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, here today with a Seeing Greene episode. And yes, I remembered to turn the light on green behind me. I love it whenever I remember. If you haven’t heard one of these shows, they’re very cool. We take questions from you, our listener base, and answer them directly for everyone to hear. One of the only real estate shows where the host, me, takes your questions directly, does my best to answer them, lets everybody else hear. Today’s show is pretty cool. We’ve got questions about how to compare properties in an apples-to-apples way. This will eliminate a lot of the confusion people have when it comes to making moves within their portfolio. When to hold them, when to fold them, and when to walk away.

David:
We talk about how to pay off loans that you took out to buy your last property. This is a question that comes up a lot when people are trying to figure out how to scale. Tackling insurance woes. I don’t know if that’s you, but odds are, if you’re a real estate investor, you’re having some issues with ensuring your properties as well. And how to figure out the return on investment when you are adding in depreciation. All that and more on today’s show.

David:
If you listen to today’s show and you love it, which you’re going to, there’s a chance for you to be a part of it. Head over to biggerpockets.com/david, where you can submit your question in video format or if you’re shy, in written format. And hopefully, we feature it on the show. And I’m going to be at the BiggerPockets Conference this weekend. It’ll be great to see you there. If you’re attending, make sure you come say hi. Give me some knuckles. Just like you show up to listen and learn here, you get to go the extra step and meet people just like you. If you’re not going to be there, I hope to see you next year.

David:
All right, before we get to our first question, a quick tip for all of you. In the past, you’ve heard a lot of us influencers, including myself, giving you strategies for how to leverage properties or take out loans to buy the next property. Though while there’s always been a component of risk involved in that strategy, the risk was significantly lower than it is today because rents and values were going up very fast. It was easier to get equity out of properties to pay off the notes that you took to get the next property. It became very common to use a loan to put the down payment on your second, third, fourth, fifth, whatever step you are in your portfolio. And I just want to say be careful with that right now.

David:
I’m not saying don’t do it, but I am saying that the risk is significantly higher in taking out loans to buy properties than it was in the past, and the reason is they’re not appreciating as fast as they were. Though real estate is still a very strong market and probably the best investment vehicle that I’m aware of, it just isn’t as good as it was in the past. So, maybe rethink taking out loans to buy properties and look into the good old-fashioned technique of making more money, working harder, being disciplined and saving up the down payment to put on future properties.

David:
All right, let’s get to our first question.

Karine:
Hi, David. My name is Karin Leung. I’m from Daytona Beach, Florida. And my question to you is how would you recommend that I convince my husband to sell our triplex in Canada and reinvest those funds in real estate in the US? So, I’m originally from Toronto and we bought a triplex, which has appreciated tremendously. I have no regrets about it. It’s done really, really great things for our net worth, but at this point, I’m kind of tired of doing taxes on both sides of the border. And I really want to work on building a real estate portfolio here in the US, especially now that I’ve already quit my W2 job. I’m just having trouble understanding how to do an apples-to-apples comparison of the opportunity cost of keeping the triplex, versus selling it and reinvesting the funds here, especially given the currency conversion with capital gains tax, but also, the strong appreciation in Toronto. So, any advice is appreciated. Thank you.

David:
Thank you, Karin. This is a pretty nuanced question, so let’s see what we can do to help you here. If I’m hearing you right, it sounds like the biggest motivation for wanting to do this is the work that it’s taking to do taxes in both countries, since you live here and you own the property there. I will admit, I don’t know all the nuances between Canadian real estate and taxes and American real estate and taxes. So, forgive me if I miss something that could play into the algorithm of this decision because of that fact. But I am working on a book that’s going to be coming out after Pillars of Wealth that will hopefully shine some light on situations like these. The book highlights the 10 ways that we make money in real estate. And I wrote it because I see so many people that only focus on one way, which is what I call natural cashflow.

David:
They just look at, “Well, what’s a property going to cashflow right when I buy it?” And that’s all they know how to analyze for. That’s the only way they even look at real estate making money. But once you’ve done this for a while, you would start to see that there’s ways it can make you or save you a lot of money in taxes. Like you said, you’ve grown huge equity buying this triplex in Toronto. There’s ways you can add value to properties or add cashflow to properties. There’s a lot of ways that we make money in real estate. And when you understand all 10, it really opens up your perspective on if I sell the triplex in Toronto, in what ways am I losing money? So, one would be you are losing the future equity of that property going up in value.

David:
So, according to the framework of the book, you’re probably going to lose some natural equity, which is what I call it when property values go up along with inflation, and some market appreciation equity, which is the type of equity that we gain when we buy in the right area, that goes up more than other areas around it. Toronto is notorious for having really, really strong equity growth, and cashflow won’t keep up with it. But if you’re adding value to the properties that you buy here, now you have an apples-to-apples comparison. So, let’s say you sell that triplex. I don’t think you mentioned how much equity you actually have, but let’s say you could buy three more triplexes with the equity that you take from the Toronto one. The question would be are those three triplexes going to appreciate at the same level or better than the one in Toronto? If they’re not going to appreciate at all or they’re not going to appreciate as quickly, that leads towards keeping the Toronto property. Or maybe they’re going to go up the same.

David:
Are you able to add value to those three triplexes? That’s forced equity. Are you going to be able to buy fixer-uppers, put some elbow grease into them, make them worth more? Now, there’s some money that you just made. Are you going to be able to increase the cashflow of those properties? Are you going to be able to buy them below market value and buy some equity? Or is it going to be the opposite? Are you have to pay more than the appraised value for those triplexes? What you need to do is look at your potential opportunities that you could take, say, the 500,000 of equity that you have and say, “All right, if we have $500,000 in the US, where would we put it and how would we grow it?” And this framework of the 10 different ways is really a way of our brains to understand what options we have.

David:
Part of it is cashflow. Yes, like, okay, well, I’m getting this much cashflow in Toronto. How much would I get if I bought in America? But another part of it would be, am I buying equity? Can I force equity? Can I buy a place where you live, in Daytona Beach, and buy it a little under market value and then add some square footage to it and add a unit to it? So, now you forced equity and you forced cashflow. You’re making more cashflow, maybe, than if you had kept a place in Toronto, and the area that you live in right now is growing as well. What if that’s growing at the same level as Toronto? You really want to try to turn as many of these decisions into apples-to-apples comparisons as you can because then it becomes clear what you’re doing. And the last piece would be if you sell in Toronto, you’re going to have some inefficiencies. You’re going to have closing costs, you’re going to have realtor commissions.

David:
So, you want to look at, all right, if we sell this property, how much is it going to cost me to sell it and can I make that money back or more of that money back buying into a new market? And the last piece of advice that I’ll give you is try to analyze for 10 or 20 years down the road. If you keep that triplex for another 10 years, are rents going to keep pace or is rent control in that area going to stop you from increasing cashflow? Is equity going to go nuts or is it kind of tapped out? You don’t see that prices could go much higher in that area? And then, compare it to wherever else you might invest. I just like South Florida, I think that’s a solid market right now. A lot of investors are scared of it because the prices are high, but my opinion is that they’re high for a reason. You have a lot of money moving into that area. I think it’s going to keep growing.

David:
So, keep an eye out for that book on the 10 ways that you make money in real estate. It’s a framework that will help you make these decisions, and then do a little bit of research and go back to your husband and say, “Hey, if we keep the property, here’s where we’re likely to be in 10 years. If we sell it and reinvest that money into three or four other properties, here’s where we’re likely to be in 10 years,” and that decision will become a little more clear.

David:
All right, so to recap, you want to make decisions like these apples-to-apples, not apples-to-oranges. Confusion happens when we are mixing up fruit. Look at potential opportunities before you make the decision on if you should sell what you have. You could buy or you can force equity as well as adding cashflow to the units. Look for opportunities like that before you make the decision on should I sell? First be looking at, well, what would I buy? Look at the cost to sell and how you can make back the inefficiencies when you exchange real estate. And then, take a long-term view. In 10 years, where will I be and which is the better path?

David:
All right, our next question comes from Luis. Luis asks, “Hi, David. I love the show and I love that you answer all our questions and your awesome analogies. My question is about midterm rentals. How do you form a contract for your midterm rentals? I don’t have an idea where to start or what I should write on the contract to sound professional to big corporations. Would you just hire a lawyer to form it or find an experienced property management company to handle the paperwork? I hope you get this and wish you the best. Also, can you say hi to Rob’s quaff for me?”

David:
I would love to. In fact, I started telling Rob that he needs to shake his head feather instead of shake his tail feather because that’s exactly what that quaff looks like. So, if you guys are hearing this, make sure you go to @robuilt on Instagram and tell him to shake that head feather. Maybe put a little Nelly song clip in there from YouTube.

David:
All right, this is advice. Good question. I can answer it pretty quickly here. I would use a property management company. I would use their form, since they’ve done this before. And then, they’re going to have you sign those forms and I would just keep them. And then, if you decide, “I don’t want to use property management after the first year,” whatever your agreement is, you’ve got a template that can answer the questions you’re asking me now, is how do I put that together? And you just adjust that template to make it say what you want it to say. I think this is a great business principle in general. You want to do something yourself? Great, that doesn’t mean that you need to be the one to go figure it all out. You want to learn how to snowboard? Great, hire an instructor, spend a little bit of money, learn how to snowboard a lot faster, and then you don’t need an instructor every single time.

David:
This works with buying real estate, using a real estate agent. This works with construction, hire a contractor or a handyman and watch what they’re doing. This works with property management. Use one, see what their system is, get all the forms that they’re using and then decide if you want to do it yourself. It will shorten your learning curve a ton. And if you are a BP Pro member, remember that there are landlord forms available for all 50 states that Pro members get access to for free. Now, they’re not going to be midterm rental specific forms, but they do work for traditional rentals. And if you want more information about how to manage a midterm rental check out BiggerPockets Podcast episode 728, where I interview Jesse Vazquez, who actually manages some of mine, and he shares his system for making connections with big corporations.

David:
Our next video comes from Kapono [inaudible 00:11:58].

Kapono:
Hello, David. This is Kapono from Honolulu, Hawaii, and I got a question for you. We used a HELOC loan and a 401(k) loan as a down payment, 25% down on investment property, SDR in Monument, Oregon. The value of the property is about 10K more than last year, so there’s not a lot of equity in the deal. We’d like to refinance, so that we can pull out the 25% down payment and pay off the 401(k) and HELOC loan. That way, it’ll cashflow better. Because right now, the 410(k) loan is about 700 a month and the HELOC loan is about 150 a month. How can we pay off the HELOC and 401(k) loan, get that money out of the deal so we can fund future deals, maybe a business loan, or got any input for us? Take care. Aloha.

David:
All right, thanks, Kapono. Well, congratulations on the midterm rental. I’m assuming that it’s performing well, so good on you there. If I understand your question correctly, you’re saying, “I took out loans as the down payment to buy the property and I want to pay those loans off so that it will cashflow better, but the property itself doesn’t have enough equity to do that because it’s only gone up $10,000 or so.” You probably don’t have options to use equity from the property that doesn’t exist to pay off these loans. And this is one of the reasons that on Seeing Greene, when people say, “Hey, should I take out a HELOC on X property to buy Y?” That I’ve cautioned people against doing that.

David:
And I’m not saying don’t do it, but I’m not recommending it as liberally as I did in the past when values of real estate were going up incredibly fast because of all the money that we were printing. That coupled with low rates and a craze in the market made it so that the risk was much lower to put yourself in debt to buy real estate. It’s not the same anymore. The risk to take on additional debt is much higher. Now, I don’t think you’ve got a quick answer. So, the way that I’m going to advise you is to check out Pillars of Wealth: How to Make, Save, and Invest Your Money to Achieve Financial Freedom, and look for some ways that you can create additional income and save additional income to pay that debt off.

David:
In the book I refer to different ways of paying off debt. One of them is the snowball method. So, you start by paying off that 401(k) loan. Then you take the money from the 401(k), I believe you said it was $700 a month. You put that towards paying off the HELOC. Once you get that one paid off, now you’re cashflowing more. That’s additional money that you could put towards saving for the next property or paying down debt. This becomes tricky when we want to scale fast and we want to scale fast because we’ve been listening to podcasts for years of people that said, “Just keep leveraging and leveraging and leveraging, and buying more.” That works great when equity growing in properties like fruit on trees, but when that stops, we have to go back into a much more realistic way of trying to build income. That’s why I wrote this book.

David:
There’s a lot of people that look for creative ways to buy real estate rather than blue collar ways that work no matter what. And that involves saving your money, living on a budget and looking for ways to make more. So, Kapono. There is a benefit to this in that you are now going to have an incentive to ask yourself, not just how do I create income and make money investing, but how do I do it in the other two pillars? Are there ways that you can start saving more so you have more money to put towards paying down this 401(k) loan? And are there ways that you can step out of your comfort zone and start making more money? I don’t know what you do for a living. I don’t know what skills you have, but now might be the time to start working on building more of those and becoming more productive and efficient because now you’ve got a carrot to chase, paying down these loans, so that you can make more money on your real estate, so that you can live a safer financial life overall.

David:
So, check out Pillars of Wealth. You can find it at biggerpockets.com/pillars, and then let me know what your thoughts are after reading that and re-analyzing your situation.

David:
All right, at this segment of the show, we’d like to go over comments that were left on YouTube from previous Seeing Greene episodes. So, if you’re listening to this, go check it out on YouTube and leave your comment there, and maybe I’ll read one of your comments on a future show. All right, the first comment comes from MJ9496. “Are there banks that won’t recall the HELOC after you find permanent financing for your real estate investment? When I used a HELOC to buy a property, the bank that put it into permanent financing made me close my HELOC.” Okay, I think I understand what you’re saying here. When you put a HELOC on a property, what you’re actually doing is you’re putting a second-position mortgage on the property. That’s what a HELOC is.

David:
Okay, so let’s say you’ve got a million-dollar property. I know that’s expensive, but the math will be easier for me. And you owe $500,000 on your mortgage. That’s your first position lien. Then, you take out a HELOC for $300,000 on that property. We tend to look at this like it’s just a loan, but it’s a loan against the equity in the property, because as a second position lien, they don’t get paid back until the first position is paid off, which means if there’s not a lot of equity, they won’t get paid back. That’s why they base the loan on the equity in the home, and that’s why we call it a home equity line of credit.

David:
Now, when you refinance that property, you pulled money out of it. So, you owed $500,000 on this million-dollar property, and you refinanced on a new note that was $800,000, which meant you paid off the first loan for 500, you received $800,000 on your new cash-out refi, and you are left with $300,000 yourself. Well, that 300,000 had to go to pay off the HELOC that you had on the property. So, now you’re left with no money theoretically. And I think that’s what you’re asking is, “Well, how could I have kept the HELOC on the property itself, so I didn’t have to pay it back, so I could have that $300,000 of money in the bank?”

David:
The problem is if the bank had let you keep the HELOC, you would’ve received $800,000 on the refi. You would’ve paid off $500,000. So, now there’s a note for $800,000 on the house and there’s a note for $300,000 on the HELOC. That’s a total of $1.1 million of debt on the house, but the property’s only worth a million. No bank’s ever going to let you borrow more than a property is worth, at least no responsible bank would, and that’s why you can’t keep the money. You’ve actually traded the HELOC money in for a new first position note, you got the money then, right? And I know that this may sound complicated as I’m trying to describe it with words. If it was written out on paper, it would make a lot more sense. But no, you can’t keep the HELOC when you go to refinance. You have to pay off the debt that that property is collateral for.

David:
Now, if you don’t refinance all the money, let’s say that you only borrowed 500,000, not the full 800,000 on this million-dollar property, then the new lender might let you keep the HELOC loan. They might say, “Okay, you can keep that 300,000 because you only borrowed 500.” It’s still at 80% total loan-to-value. Hope that helps you make sense. But if you want to get money out of a property, you’re going to have to pay off the notes that are attached to it.

David:
All right. On episode 819, we talked about the state of multifamily insurance where Andrew Cushman and I interviewed Robert Hamilton. And MG.1680 left a very insightful comment. They say, “I’m from California, insurance is so hard to get now. I built ADUs from detached garages. I didn’t expect that ADUs require a totally different policy from the main house.” Yeah, this is something a lot of people wouldn’t have heard until they did it, and it might’ve even been a time where they didn’t require a different policy for all we know. But insurance companies have looked harder at how they’re insuring homes, and they’ve made a lot of adjustments to the way that policies are issued. There is a big insurance problem going on in a lot of states. California is one of them, Florida’s another one. But really, across the country insurance premiums are skyrocketing, and I don’t know why more people aren’t talking about it.

David:
In fact, I hardly ever hear anyone talk about it other than me here on BiggerPockets. But when you are underwriting for your properties, insurance was almost an afterthought. For years, I’d be buying $150,000 property. My insurance was 30 bucks a month. If I could reduce it down to two thirds, it was still 20 bucks a month. I saved $10. It wasn’t really worth diving into the insurance element that much, but now it is. Some premiums are doubling, tripling or more in areas. If any of you know why this is happening, please leave me a comment on YouTube and let me know what your theories are as to why insurance is going so high, but it’s a problem. I started an insurance company, Full Guard Insurance, and we haven’t been able to underwrite policies because carriers are literally fleeing certain states. They will not underwrite insurance there. So, MG.1680, I’m sorry to hear this is going on, but no, you’re not alone. Investors everywhere are experiencing similar problems.

David:
All right, our next comment came from the Late Starters Guide, episode 820, which was a show all about how you can get started investing in real estate, even if you’re getting a late start. From MartinBeha9999. “Great episode. I really like that there is an expiration date on a milk carton, but we are not like that. If you spin that analogy on, we could also be exactly like that as indirectly, it is mentioned right afterwards.” Martin goes on to say that, “There might be an expiration date on the carton itself, but the milk inside is different. Milk may expire, but it turns into yogurt and then it turns into cheese. And boy, don’t we all love the cheese way more than the milk, even though it’s technically already expired twice?”

David:
Great perspective here. The strategies that work when you’re young may expire, but there are strategies that work better and approaches that work better when you are older that could be even more delicious than the young. And from TyJameson7404 says, “Epic panel and investment education,” with a whole bunch of happy emojis. Thanks for that. And our last comment comes from F-I-O-F, Fiof, who said, “You stay in a hotel with a box fan. Well, I guess that’s how you stay rich.” This was because I’ve recorded an episode from my hotel room, and I left the box fan on the counter. I’ll be the first to say I was shocked by the comments about this, how many people notice things like a fan, like that’s a bad thing. But people really didn’t like it that you could see the box fan.

David:
So, here’s my commitment to you, Seeing Greene and BiggerPockets listeners. The next time I record from a hotel, I will put much more effort and energy into the background of the show, which I thought had very little to do with the actual content that’s going to make you wealthy, but apparently means a whole lot more to people than what I thought. Thank you for being a fan. My only fans will be you, not the box fans in the background.

David:
If you would like to have your question read on Seeing Greene, just head over to biggerpockets.com/david where you can submit a video question or a written question, just like the one we’re about to hear. This comes from Shannon Lynch in St. Augustine, Florida.

Shannon:
Hi, David. I have a house hacking insurance liability issue I’m hoping you can help me with. I recently started renting my primary residence on Airbnb and Vrbo on weekends and holidays for extra income. I have not been able to find any umbrella policy, CPL coverage, or any type of rental-related liability coverage to help protect me and my home during the times that the house is being rented. It seems that part of the problem is because I vacate the property when it’s being rented, so I’m not physically present. I actually stay with family while renters are here. That seems to be causing issues with regards to my eligibility for any type of renter liability coverage. I gave much more detail in my email to you, as I’m trying to keep this video under 60 seconds. So, any guidance help you could provide, I would really appreciate it. And I’m in St. Augustine, Florida, insured by Citizens, oldest city in the nation. Thanks, David.

David:
All right. Thank you, Shannon. Now, I called in the insurance experts on this one, and I got a little bit of detailed feedback to share with everybody. So, first off, like I mentioned earlier, insurance is very difficult right now, especially where you live in Florida. In fact, it was referred to as a hellscape for insurance in general. It’s very possible that there is not a carrier that would ensure this risk in Florida, and if that’s the case, your only option is to start setting money aside to cover yourself in case something does go wrong. So, one piece of advice that I was giving is that you get an investment property insurance policy and then add personal property coverage and increase the liability with possibly a rider that you would occupy the home for a period of time in the year. But that will primarily be a renter’s policy.

David:
Once again, it’s a situation that insurance is really not built for and it will require either a combination of coverages or a super specialized insurance policy in a state where 90% of carriers do not offer quotes right now. Shannon, this might be something where you’re going to literally have to go uninsured for a period of time until we find carriers that will work in the state of Florida. We’re having the same thing happen in California within the real estate agent community where we have to serve our clients. It’s becoming a big thing where agents are asking everyone else, “Hey, I need this type of property insured. It’s in a high fire area,” or a high hurricane area where a lot of insurance providers have just thrown up their hands and said, “Hey, we don’t want to deal with this anymore.”

David:
I don’t know exactly why this is happening. Some of my research has revealed that there’s a lot of fraud that goes on in the state of Florida. I’ve heard that there’s a policy that if a homeowner makes a claim about a problem with their roof, that the insurance company has to replace the entire roof, not just fix the problem there was. So, people are frequently making claims just to get all new brand new roofs, which ultimately ends up creating higher premiums and higher costs for everyone. And if the premiums get too high, the carriers just back out completely and say, “I don’t want any part of this.” I wish I could give you a better answer. It turns out that this is a very difficult problem for a reason, so don’t feel bad about yourself because you didn’t have a solution. If I hear anything more, I will make sure to report it in the BiggerPockets Podcast.

David:
All right, our next question comes from Aaron Sardina in Maine. Aaron says, “What is the math behind basic depreciation and how it can be factored into tax savings and return on investment when analyzing a property in your portfolio? You don’t have to pay taxes on 3.6% of the purchase price each year, but maybe you only put 20% down.” Okay, that 3.6% is coming from, if you take 100% of the value of the property and you divide it by 27 and a half years, that’s 3.6% a year. But just to be clear here, you’re not getting 100% of the value of the property. You’re getting 100% of the value of the improvements on the land. The land is not calculated into this, Aaron.

David:
“But maybe you only put 20% down. So, are you getting to avoid taxes on 18% of your down payment, which would be 5 times 3.6? But then if you’re in the 20% tax bracket, you are saving 20% of the 18%, and so is that your annual dollar amount That can be added to your ROI? I feel like there could be a whole show on calculating the benefits of depreciation, and that’s a big piece that I’m struggling to understand when analyzing how our portfolio is performing. I’m wondering now that our portfolio has grown, if it would make sense to start buying some more expensive properties that don’t cashflow very well in order to offset our future tax liabilities. And I’m wondering what the ROI would be on a property that doesn’t cashflow and is only purchased for depreciation purposes. Is that a good use of money?”

David:
Well, Aaron, you’re asking a good question, even though it was a little bit confusing how it was worded there. And I can’t tell you what a good use of money is, I can just explain the benefits and the risks. The benefit is that, yes, if you’re a high-income earner, you could buy a property that breaks even, or even God forbid, loses $100 a month, so you lost $1,200 a year, but what if you save $20,000 in taxes? That actually is a good financial position. The risk is that you saved the money when you first did it, but now you’re bleeding money every month going into the future. So, the way that I think you should analyze this is if I saved the $20,000 I would’ve spent in taxes and I set it in a reserve account, how long would that last to offset how much I’d be losing every month if it was negative cashflow?

David:
You don’t want to buy a property that’s going to be negative cashflow forever. The only time I’d advise doing this is if it’s going to be negative cashflow for a period of time, but the rents are going to go up and the property’s going to stabilize to where, in the future, it does make you money. And the reason that we don’t have a calculator to help you analyze this is that not everybody makes the same amount of money. So, if you yourself, Aaron, get $50,000 of depreciation, but you make $500,000 a year, that’s a bigger savings to you than somebody who makes $50,000 a year. It’s tough to be able to put all this together.

David:
It also depends if you’re a full-time real estate professional. So, if you’re sheltering income that you made from real estate related activities or your W2, you get a much bigger tax benefit than if you’re just sheltering the money that you made from the income of the property. In general, what you’re describing here is talking about sheltering the rents from the property itself, and the down payment, the money that you put into it is a piece of your ROI, but there’s a lot more than that. There’s also going to be money that you put into improving the property. There’s going to be closing costs. It sounds like you’re trying to fit everything into a spreadsheet, and that’s where people get mixed up. Not everything in life, not everything in investing will actually fit into the spreadsheet.

David:
A better way to look at it would be to say, “Okay, if the property’s going to cashflow $5,000 a year and 3,000 of that is going to be covered by the depreciation of the property, I’m going to be taxed on $2,000. How much is my tax?” Then, you take that tax and you say, “All right, I only pay this much tax on $5,000,” and you compare that to how much tax you would’ve paid on $5,000 made any other way. Most of the time, real estate comes out on top because of this depreciation. Hope that helps.

David:
All right, that was our last question of the day, and I’m so glad that you joined me for Seeing Greene. I’d like to know what type of shows would you want to see in the future? What type of content would you like to see in the future? What type of questions do you want to see asked, and do you want to be the one asking that question? Head over to biggerpockets.com/david, where you can submit your video question or your written question. And hopefully, you get featured on one of these shows.

David:
Remember, if you like the podcast to go pull it up and leave me a review wherever you listen to your podcast. Those really help out a ton. And if you’re watching on YouTube, make sure you leave some comments for us to read on future shows. I’m David Greene. You can find me at DavidGreene24.com, spartanleague.com, or DavidGreene24 on wherever your favorite social media is. Go give me a follow and send me a DM. Let me know what you thought about today’s show. Thanks, everybody. If you’ve got a minute, check out another BiggerPockets video. And if not, I will see you next week.

 

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [email protected].

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.





Source link

,

Core inflation makes the case for a Fed pause


Today’s CPI report was good because it shows core inflation, which the Fed cares about, is trending in the right direction. The Fed feels much better today because of all the rate hikes they have done to get the Fed funds rate above the growth rate of inflation.

Last year, CPI core inflation was running at 6.3%, and shelter inflation was still higher even though the data line was set to cool down. I talked about this on CNBC when they asked me to forecast the reality of rent inflation in 2023. Over a year has passed since that day, and core inflation is running at 4.1%, lower than the Fed funds rate. As you can see in the chart below, inflation has made progress in the right direction.

So, while the bond market doesn’t like this report, the Fed members must be pleased with the progress made. Yes, today’s jobless claims data came in good again as the four-week moving average of jobless claims is near 200,000 — not close to my Fed pivot level of 323,000. However, regarding the growth rate of core CPI, the slow trend lower is something the Fed likes to see.

From BLS: The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in September on a seasonally adjusted basis, after increasing 0.6 percent in August, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.7 percent before seasonal adjustment. 

Part of the reason the Fed has not hiked as much recently is that they know the growth rate of inflation is falling, but they still want to attack the labor supply because of some fear that wages might spiral out of control again. This explains the Fed’s hawkish tone after the last Fed meeting when they didn’t hike rates, giving the bond market the green light to push the 10-year yield higher.

Now, over the pat 10 days, seven Fed presidents have tried to talk the bond market down. After this report, I expect them to stick to that game plan.

Also, shelter inflation has a lot of room to move lower, and since shelter inflation is 44.4% of CPI, we have enough data to scream at the Fed: “Land the Plane, Jay! You’re done.” Once you exclude housing, the Core CPI was 0.1% monthly. This has been a trend over the past few months, which the Fed well knows.

While I don’t believe that we will see the builders finish all the rental supply under construction because construction loan rates are too high, we will still get more supply to the rental marketplace over time. That will help with the shelter inflation data, which peaked a while ago.

So, even though the headline inflation print was a tad hotter than forecast, the core inflation trend is moving along in the right direction, and that is what the Fed cares about the most. The Fed wants to keep the Fed Funds rate higher for longer. They want to ensure that core inflation returns toward 2% so they keep talking hawkish. However, the recent 10-year yield spike has forced them to try to talk the market down. Even today, the 10-year yield spiked after the report and kept heading higher, currently at 4.71%

Now that core inflation is lower than last year, the Fed doesn’t need to be talking about rate hikes anymore. Even talking hawkish with where inflation and rates are at doesn’t make sense.

Regarding the bond market, mortgage rates, and the Fed, I talked about this on the HousingWire Daily podcast this week trying to make sense of why so many Fed presidents are trying to jawbone the bond market from getting out of hand. Hopefully, with all the data about inflation and rates, it’s a good reason for the Fed to just chill, enjoy Halloween, Thanksgiving and Christmas, and let’s not play the Scrooge role now.



Source link