CASH IN ON YOUR PROPERTY’S EQUITY BEFORE IT’S TOO LATE!!!
DISCLAIMER: Usually when companies or people urge you to hurry or create a sense of urgency, they’re using dishonest salesmanship. Nexus doesn’t operate that way and we think it says a lot about the principles and values of that company when they try to gimmick people into action. However, in this case, please note that we are not trying to sell anything or benefit from expressing a time crunch, but instead are sharing our thoughts for the benefit of the reader. In our opinion, the writing is on the wall that change to the real estate market is coming soon and we want our clients and readers to be fully informed.
NEXUS’ APPROACH TO REAL ESTATE INVESTMENT 101:
So many of our clients, and employees, have benefited from a pretty straightforward approach to real estate investment: Buy a multi-family property, improve and maintain the living conditions to increase potential rent, let equity build for a couple years, refinance and pull that equity from the house in cash, buy another multi-family property with that cash, and repeat.
[ Learn More: A CLOSER LOOK AT THAT PROCESS BY DIVING INTO THE NUMBERS ]
That was the playbook before the market took off and it will continue to be the playbook well after, but it looks like things might begin to get a bit trickier. Property values are so high right now and they got there so quickly that it appears banks are going to pull back. Here’s what you can expect:
[ Learn More: WHY IT TAKES SO LONG TO CLOSE ON A RENTAL PROPERTY ]
LIKELY NEXT STEPS BY LENDERS:
Historically, real estate tends to cycle in decades. Every ten years or so you can expect a pop, a burst, a significant redirection. It’s been over a decade since the 2008 Housing Bubble burst. Prosperity has returned to the real estate market…potentially too much…so we’re due. Here are just a couple moves U.S. lenders could take to try to limit the impact of the expected market change:
RESTRICT CASH OUT REFINANCES:
The idea of stopping cash out refinancing altogether is being entertained by banks. Banks know that the property values are extremely inflated and that they’re going to come back down. They know people are cashing out and pulling real money on value that won’t exist in 6-12-18 months.
INCREASE DOWN PAYMENT REQUIREMENTS:
Several years ago, pre-Covid and before changes in supply and demand led to the surge in housing prices, banks were asking for a downpayment of just 20%. If you think back to the Nexus 101 approach above, you could buy a $300,000 home for just $60,000. Once the market took off, that 20% went up to 25% and it's been there ever since. Using the same example, you now need $75,000 in your pocket to buy the same property.
There’s a very good chance that lenders will raise that requirement to 30% in the near future, hence the urgency. The home that would’ve cost you $60,000 three years ago is soon going to cost you $90,000. A much smaller amount of people are going to be able to afford to buy, which will lead to lower demand, and real estate values will come down accordingly.
[ Learn More: HOW TO ACHIEVE FINANCIAL INDEPENDENCE AND RETIRE EARLY ]
THE OTHER BIG PIECE OF THE PUZZLE: INTEREST RATES
It’s all but certain interest rates are going to rise this year in response to recent inflation and tight labor conditions. Goldman Sachs recently stated that they expect there to be four rate hikes in 2022. What does this mean for real estate investment? Expect this to trigger another decrease in demand as another variable makes buying less affordable. At Nexus, we cater to all types of investors, but most of our clients are typical blue collar folks looking to take advantage of opportunities in real estate by buying one, maybe two properties. For many of these people, they’re likely to get squeezed out of the market pretty soon…unless they capitalize by grabbing their equity sooner than later.
CONCLUSION AND ACTION STEPS:
In the first half of last year, $1.6 trillion in loans were refinanced. That was a 33% jump from the previous year, but that draw will decrease as record low interest rates climb in 2022 and lenders look at ways to protect themselves against inflated value. If you have equity built up in your property, Nexus strongly recommends that you consider taking it out as cash before banks start making it harder, or less lucrative, to do so. There are other options as well, such as taking an equity line of credit or even selling. Our recommendation is that you put some thought toward trying to capitalize while the opportunity still exists.
Still have questions? With over 1100 units under management and franchises available nationwide, we pride ourselves on being the Real Estate Investment Authority®. Nexus was named the largest residential and commercial property management company in Southern New England and we look forward to helping clients and curious investors alike. Contact our team today!
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Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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