- Maryland realtor Bill Armstrong says now could be the time to get into an adjustable-rate mortgage.
- He also recommended that new buyers find a realtor that isn’t actively looking for a property.
- If looking for appreciation, he said single-family properties are best.
With mortgage rates back above 7% and home prices remaining high, now is not the best time to purchase a rental property. Payments on new mortgages have risen dramatically, making it more difficult to cover expenses solely through rent payments.
However, there are opportunities in every market, according to Bill Armstrong, a realtor in Frederick, Maryland.
Armstrong, who says he invests in real estate himself, provided two tips for new investors navigating the current market in an August 25 episode of the National Association of Realtors’ “Real Estate Today” podcast.
The first piece of advice he gave was to look into an adjustable-rate mortgage rather than a fixed-rate mortgage.
30-year fixed mortgage rates are at their highest in over two decades. Because they are already high, interest rates are likely to fall in the coming years. According to the CME’s FedWatch Tool, market odds indicate that the Federal Reserve will cut interest rates by early next year.
Because adjustable-rate mortgages carry more risk because the Fed may raise interest rates, their rates are typically lower in the first year than fixed-rate mortgages. According to Bankrate data, the average 30-year fixed-rate mortgage is currently 7.53%, while the average 5/1 adjustable-rate mortgage is 6.5%. A 5/1 adjustable-rate mortgage, in this context, means that the buyer pays a 6.5% rate for the first five years (though rates are determined by other factors such as income and credit score), and that rate changes every year after that based on what the market rate is at the time.
“It’s unfortunate that interest rates are now in the 7% range, but this may be the ideal time to consider an adjustable-rate product,” he said. “If you can get a preferred interest rate that’s a little bit better than the market right now, on the front end, it makes a lot of sense to consider that.”
When interest rates fall, he says, people can refinance into a fixed-rate mortgage.
Second, Armstrong advised finding a realtor who invests in real estate but isn’t actively looking for a new home.
This means they understand the market you’re looking in but aren’t looking for deals for themselves first, according to him.
“You have to understand that you’re going to get something that’s been looked over for their account first,” Armstrong said if the realtor says they’re looking for properties for themselves right now.
Single-family, multifamily, or condo?
When it comes to the types of properties that new investors should consider, Armstrong advises that they be aware of the pros and cons of each and base their decision on their own wants and needs.
If an investor is looking for appreciation, he says single-family homes are the best bet, followed by townhomes and then condos.
Maintenance and homeowners association fees are also less common in single-family homes. Of course, condos are typically the least expensive of the three options.
Multifamily properties have a risk advantage, according to Armstrong. He claims that even if one tenant vacates a unit, there are enough other tenants to cover at least a portion of the building’s mortgage payment. If the building is paid off, at least some of your cash flow remains.
“I recently sold a four-unit building and explained to these people that if one person goes down, you still have 75% of your income coming in.” “Even if two go down, you still have half your income,” he explained. “Well, if you own a single-family home and it becomes vacant, you’ve got a 100% vacancy.”