5 tips on how to buy property in a high-interest-rate environment from 5 real-estate investors who started with little or no money down

• Creative financing utilizes various types of loans to buy real estate.
• The featured investors used little or none of their own money to buy houses.
• Others took advantage of different government-backed loans.

On Monday, the average 30-year fixed mortgage rate reached a record high of 7.43%, a level not seen in the United States in nearly two decades.

Due to high debt, today’s buyers will pay significantly more for a home than when interest rates were below 3% two years ago.

To put it into perspective, a $400,000 house with a 3% interest rate would have resulted in a monthly payment of about $1,349 after a 20% down payment, according to Insider’s mortgage calculator. With today’s mortgage rate, the same setup would cost $2,222 per month.

It’s a setback for landlords who rely on monthly rental income for cash flow. However, buyers will have to adjust to the narrower margins, according to Sam Primm, a 35-year-old real-estate investor with over 200 properties. When Primm and his best friend, Lucas Walls, were 26, they purchased their first investment property. They have since expanded their portfolio without using any of their own funds by learning how to use various types of loans.

Primm has learned from his nine years of experience that there is never a perfect time to buy a home. Debt will make the purchase more expensive if interest rates are high. However, when interest rates are low, demand rises, and so do home prices.

Regardless of which way the pendulum swings, investors can still navigate the housing market with a few pointers. Insider gathered five pieces of advice from interviews with investors who are savvy and creative when it comes to securing loans for their next purchase. Insider had access to documents that proved their property ownership.

Investing despite rising interest rates

According to Primm, the key is to keep the cash flow positive on a monthly basis so that rental income covers the property’s expenses. This would allow you to ride out the choppy housing market while holding on to an appreciating asset.

In a high-interest-rate environment, one option is to choose longer-term mortgages. This would lower your monthly payments even if it meant paying more in long-term interest, he explained. To help offset the increase, you can make higher payments to the principal in some months. Borrowers can also choose to refinance their mortgage when interest rates fall again if the savings outweigh the closing costs, according to Primm.

Spend more time looking for a good deal, advises Sharon Tseung, a 33-year-old who owns over 21 rental units across the country. In 2013, she and her brother bought their first home in the San Francisco Bay Area, where home prices are higher than national averages. She didn’t have enough savings for a down payment, and she didn’t have two years of consistent income to qualify for the mortgage, so her brother co-signed and paid $30,000. She gradually repaid him and eventually bought him out.

It was a three-bedroom, two-and-a-half-bathroom single-family house for $240,000, which Tseung considered a good deal at the time. However, those prices have long since vanished.

According to recent Zillow estimates, Tseung’s property value has more than doubled to $603,000, with a monthly rent of around $3,148. According to Insider’s mortgage calculator, monthly mortgage costs would be $3,350 if purchased today with a 20% down payment. This does not account for additional costs, resulting in a negative cash-flow investment.

That’s why she started looking for deals outside of the state, in places like Jacksonville, Florida, where the median home price is around $295,000, according to Zillow. A less expensive home can help you offset the amount you spend on financing debt. It may also allow you to make a larger down payment.

However, she pointed out that better deals often require looking off-market rather than scouring the MLS. It may also necessitate contacting wholesalers, sending direct mail, or obtaining off-market listings from your agent, she added. Tseung also suggests using tools like Driving for Dollars, an app that allows you to find off-market properties in a neighborhood of interest and contact the owner.

Chris Gerbig couldn’t meet the 20% down payment requirement on his first home, so he used a Federal Housing Administration (FHA) loan, which only required 3.5% down. This loan frequently has a lower interest rate as well. The 30-year FHA loan rate was 6.75% as of Monday.

However, this fantastic deal is only available on a primary residence. Gerbig now has 129 rental units worth over $28 million and is always looking for ways to maximize his cash flow. He has recently completed seller financing transactions. This is when the seller offers to act as the bank, allowing you to make monthly payments with interest on the property. According to Gerbig, who has been on both sides of this type of deal, it’s a less common way to secure a loan but could offer very attractive interest rates.

He prefers seller financing because the parties can work out terms that work for them, such as a higher down payment with a lower interest rate. According to Gerbig, sellers will often agree to this setup if they no longer want to manage a property but want to continue receiving monthly cash flow from it.

According to Matthew Tortoriello, a real-estate investor who began buying property in 2008 by pooling $5,000 with two others to meet a $15,000 down payment, buyers must become acquainted with creative financing. This simply refers to unusual methods of purchasing property, such as those mentioned above. He and his business partner currently own 742 rental units through various types of loans.

According to documents reviewed by Insider, he obtained seller financing with a 2% interest rate on a $1 million loan to purchase a commercial building with a tenant in August 2022. The property was worth $2.2 million in total. He got creative with the remaining funds, using a 1031 exchange for $265,000 to defer taxes on a previously purchased property in order to purchase the next investment. He then borrowed the remaining $910,000 from a bank at a 6.5% interest rate.

Another option he recommends for buyers is assumable mortgages, which involve taking over the existing mortgage on the purchased property. This isn’t advertised, but asking your agent to present this option to the seller is one way Tortoriello has obtained this loan in the past. One way to increase your chances of a seller considering this option is to look for properties that have been on the market for at least three months.

Buyers may be eligible for additional government-backed loans. Ana Snider, for example, used a VA Loan, which was backed by the Department of Veteran Affairs, for her first purchase. If you are an active-duty service member or veteran, you can buy a house with no money down. She used this to purchase a four-bedroom, three-bathroom house in Lemoore, California for $268,000 dollars.

She advises first-time home buyers who are not service members to take advantage of state-level down-payment incentives. The terms of these programs vary by state, but she noted that they can be used in conjunction with an FHA or conventional loan. There are also USDA loans, which are mortgages offered by the Department of Agriculture for properties in certain rural areas. These loans can provide qualified buyers with up to 100% of the required financing, including closing costs.