Markets are always changing. Going into 2023 many investors are looking for answers for the year ahead and want to know how to invest in a correcting market. While no one knows for certain what the year will bring, there is one thing we do know — there will be opportunities to invest in 2023. Investors should always educate themselves on their local market and make strategic decisions. But what else should you do this year?
Don’t overpay to get a deal!
Let me repeat it for those who just glanced over that — DON’T overpay to get a deal! In the heated seller’s market of the last few years overpaying to get your foot in the door was becoming common. In a correcting market overpaying just to get a deal is setting yourself up for problems, especially with very little equity (or none!) to cushion from market swings, unforeseen repairs, additional holding, and any number of issues that can arise. Do not let a fear of missing out lead you to make rash financial decisions. There will be other deals out there, and if you build a business on overpaying you may not be in a position to buy the good deals once you find them.
Stack your capital.
We’ve all heard it before, and in this uncertain market it still stands as true: cash is king. If you have the ability to save cash now, do so. You never know when a great opportunity might come along and you’ll be able to secure it because you have enough cash on hand to make an offer. If you can’t beat your competition on price, you can compete by having the money to make a deal happen. If you have cash-flowing assets in your portfolio or are cashing in equity, be sure to stack that aside and be ready to invest in what opportunities this year will bring.
Build your network.
One of the most important things in investing (in every market cycle) is to build your network. Having a strong network will help you learn more about the industry, find partners with skills that complement yours, and get advice on how best to invest your money.
Investors who are successful at building their networks have one thing in common: they’ve worked hard at it. They’ve made it a priority and spent time reaching out to people they don’t know (or barely know), asking them questions about themselves and their businesses or careers — and then listening carefully as those people answered those questions. And not just any questions: good ones. The more you know about the people in your network and what they do, the more valuable they’ll be as resources when you need advice or help with something specific.
Leadership is essential for business growth, and a crucial part of that leadership is being able to step outside of your comfort zone. Change is unavoidable in the business world, and those who can embrace it and use it to their advantage will be one step ahead of their competitors. In this blog post, we’ll look at why it’s important for leaders to take risks and make changes, and how doing so can lead to successful business growth.
The Fear Factor When you examine your business today, what stops you from expanding or investing in new opportunities? Is it the fear of learning new markets or taking your business outside of your hometown? Is it the idea of hiring and managing employees and integrating new systems? What about finding the capital to make these investments? For many business owners, the reason their business does not grow is even more straightforward — doing the same thing repeatedly is easier than trying new things. It takes a growth mindset to step out of that comfort zone and into unfamiliar territory.
Growth Never Takes Place In Your Comfort Zone Learning from new experiences makes you a better business leader. If you never try anything new in business you’ll never learn, and as a result, your business will be less prepared to handle the changes that the market will inevitably throw your way. Leaders seek change within their industry and welcome opportunities to step outside of their comfort zone and try new things. Whether it’s incorporating new strategies, opening up to new markets, or integrating new systems, change is a requirement. It is only through taking your business to new places that you’ll develop the new skills needed to navigate those waters. But what if you make a mistake?
Mistakes Are Useful and Necessary for Growth. The culture around real estate investing and entrepreneurship can sometimes center too much around the pursuit and celebration of success rather than the value of making mistakes. There is not a business owner or investor out there who has not attempted something and found out, sometimes in very costly ways, that it was a mistake. Through trying, and sometimes failing, many hard-won lessons are worked out in real and tangible ways. Mistakes will make an imprint on you that success never will. Whether it was the red flags you realized you missed, the ways your leadership was lacking, or the market conditions you didn’t consider, mistakes teach us something valuable and are useful and necessary for growth. Do not hold back from growth for fear of making a mistake. But is there a way to reduce the impact when we do make mistakes?
Learn to Make Mistakes Safely. This is as simple as starting small in new endeavors or investing with educated partners in new-to-you opportunities. Rather than doing nothing for fear of failure, accept that some level of mistake-making is going to happen and you’ll be all the better for it. Cushion yourself from those mistakes by testing new markets and researching them deeply before going in full force. Give yourself a long runway to ramp up new plans and see what results you are getting as you slowly trickle out a new strategy. Diversify your investments so that if one project does not go as planned you still have many successful projects out there you can build on. These are not industry secrets. Have a common sense approach to growing your business and live a pattern of life where you are always educating yourself and making informed, intelligent decisions in your business.
For many people, the beginning of a new year is an occasion for taking stock and considering one’s financial situation. What do you hope to have accomplished by the end of 2023? Will you be in a better position than now? Will your family’s life also be improved? If you are like most people, your goal is to one day be financially free. You want to build enough wealth to weather any economic changes while knowing you and your family have the freedom to choose what you do with your time and money.
This may seem like an impossible task. But if you are willing to make some changes in your life, it is possible. Financial habits shape our future financial picture. The choices you make today will leave an impact for years to come, whether positive or negative. This goes beyond just financial habits and decisions — building wealth requires persistence, hard work, and whole-life habit changes. The sooner you start creating good habits, the better off you will be in the future. But to grow enough wealth to be financially free, what habits matter most?
#1 Consistently Investing
Even during times of economic uncertainty, there are still opportunities to invest. Whether it’s investing in real estate, funds, or other assets, millionaires prioritize investing and consistently find ways to put their money to work. Investing in anything intelligently takes time and requires continuous education to know what is happening in that particular market. Millionaires don’t wait for perfect market conditions, they seek opportunities and make calculated risks.
#2 Patiently Watching it Grow
Building wealth is a long-term game with most investments, and this means being able and willing to let that money work without wanting to spend it. It takes discipline to watch your investment grow and leave it be, not allowing the temptation to spend all your earnings to take root. Don’t let the high-spending lifestyle eat away at all the passive wealth your money was building just to appear wealthy or successful.
#3 Being Persistent, Not Giving Up in the Face of Setbacks
Will you always make perfect investments? Of course not. Even with education and experience, you will still face obstacles as you work to build your wealth. Having grit, determination, and the will to keep going when things go wrong is necessary. Let setbacks be an opportunity to learn and grow rather than an excuse to stop trying.
#4 Being Open to Opportunities, Willing to Take Calculated Risks
Investing is different from just saving money for a reason — you’ve bought into an opportunity when you invest. When you save, your funds are stashed away but they are not working for you. Millionaires stay open to new opportunities and investment ideas but do their due diligence before leaping. Investing involves risk, however, those risks can be mitigated by intelligent investing and diversifying where you invest your money.
If you’re just getting started building wealth and working towards financial freedom, let this year be the start of new habits that help you on your way. It is never too soon or too late to change the way you look at investing, spending, saving, and working towards the financial goals you’ve laid out for yourself for the years ahead.
I am seeing a lot of real estate investors in a bind, and many face the same challenges. It makes us wonder if now is a good time to get into real estate. In this video, I share my thoughts on the situation and my predictions for the future.
Over the last year, we have seen a massive increase in interest rates on DSCR loans. DSCR stands for debt service coverage ratio and is one way the lender analyzes a loan. Real estate investors use DSCR loans to build a rental portfolio. Credit score, experience, loan -to-value, and asset type are other factors used to analyze it.
Let’s examine how a DSCR loan came to be. Most generally, hard money lenders and real estate mortgage brokers will sell these loans to real estate investors utilizing the BRRR strategy, which stands for buy, rehab, rent, and refinance. The BRRR strategy has been widely talked about over the past few years, and with rental rates rising and interest rates being so low, this has become one of the most popular strategies in real estate investing. These loans are usually brokered to a handful of large national non-QM lenders using warehouse lines of credit as their capital. The DSCR loan makes up as much as 40%-60% of the business for hard money lenders today, and this may be changing quickly.
The DSCR loan capital comes from Wall Street. Aggregators will generally write loans using their warehouse lines of credit. Then, they will pool hundreds or thousands of these loans together into a product known as a mortgage-backed security. These will be purchased by institutional asset managers like REITs, pension funds, insurance companies, etc. The purchasers of the mortgage-backed security DSCR loan packages are looking for a fixed-rate investment, something they can count on. It is an alternative to US treasury bonds, other types of bonds, and even conventional mortgage-backed securities written on owner-occupied properties. As inflation has soared out of control, investors are demanding higher returns. Uncertainty in the real estate market also commands a higher return. Lastly, the cost of capital is climbing with rising interest rates, which also increases rates on the DSCR product.
The spread in value between conventional mortgage-backed security and a DSRC mortgage-backed security has risen to double what it was recently. In the past, you could expect a rate differential or value differential of anywhere from 75 to 100 basis points, and now that differential has risen from 1.5% to 2%. Because of this, coupled with rising interest rates, the interest rate charged on a DSCR loan has doubled over the past year. A quick internet search on DSCR loan interest rates shows advertised rates anywhere from 7.5% to 8.5% on a 30-year DSCR loan at a 75% LTV and a 1.2 DSCR. Of course, this hinges on good credit of over 720, and any of those missing factors will make that interest rate climb even higher.
So, the question for real estate investors is this: can I purchase a home today, rehab it, rent it out, and then refinance at an interest rate that still allows me to cash flow on my rental property? The short answer is no because that process takes time. Depending on how much rehab that house will take, it could take months to complete. With rates rising as quickly as they have, it’s challenging for us to predict where interest rates will be once your property is ready to refinance. If rates climbed another full percentage point, would your property still cash flow? If so, maybe you take the chance, perhaps you can make it through, and possibly the deal still cash flows for you. But if you’re buying at the peak of prices, where people are bidding against each other for this property, it may not make sense to continue the BRRR strategy.
If you want to move forward with this strategy in such an uncertain and volatile time, my first advice is to make sure you have a lot of cash available to you in case you have to cover a negative cash flow for a while on your new rental property. Number two, I would also make sure you’re buying deep. In other words, the days of buying at 80% of value or 1% rent-to-price ratios are over. Those properties are not going to cash flow at these higher interest rates going forward. Buy it deep. Paying too little will never hurt you in real estate investing but paying too much certainly will. And third of all, buy deals that have a very short timeline. In other words, a quick rehab and a solid rental base so that you can rehab it quickly, fill it quickly and refinance it quickly as rates continue to climb.
With the most recent PPI and CPI numbers this week (Oct. 14, 2022), the FED is almost certain to raise rates again. While the Federal Reserve rate does not necessarily impact the 30-year owner-occupant or conventional mortgage rate as much as it does other loans, a DCSR loan is not a conventional one. It is considered a commercial loan and is directly affected by the FED funds rate. Any increase by the FED can almost guarantee that DSCR products and hard money products will rise accordingly. It may not be a point-for-point rise, but it will rise. Over the coming months, I would expect the rates on DSCR loans to get as high as 9% and 10%, which rivals what we were paying for hard money rates on the fix and flip loans not that many months ago.
In my humble opinion, this will kill many DSCR lending programs. This market shift will shift the focus of hard money lenders from the rental loan programs they broker to the fix-and-flip product—their flagship (and most profitable) product, to say the least. The national non-QM market is filled with undercapitalized lending companies that will not be able to navigate the changing market with current capital reserves and will fold under the pressure of rising rates. Let’s face it; their rates were the only thing they had going. Once that is gone, the writing is on the wall.
Buying rental property is always a good strategy if it is purchased at the right price and you have available capital at a cost that allows your property to be profitable. My suggestion is to get to know local lenders and build a network of local capital. That could include local banks, local hard money companies with their own DSCR programs that are not brokered, and private money investors. The cheap national companies provided a great opportunity for a time but continuing that reliance may prove to be detrimental to your growth. Having a plan B in case your lender leaves you at the closing table is a good strategy in any market, this one in particular.
I am excited to share that we have successfully opened Texas Pride Processing. After many months of hard work, we finally see things coming together. We passed our inspection on the first try! I am proud of my team and the work we’ve accomplished here. Phase one is complete, and we have three more phases to go. This is only the beginning!