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Rent Out Or Sell An Investment Property When Inflation Is High?

Published: 05/18/2022 by Financial Samurai 18 Comments

As a landlord since 2005, I’m constantly faced with the dilemma of selling a rental property or renting it out whenever my tenants move out. The older and wealthier I’ve gotten, the more I prefer to sell rather than rent out.

Being a landlord can sometimes create some very unpleasant experiences. Whether it’s getting paid late, experiencing damage, having to fix something, or resolving some type of misunderstanding, being a landlord is not for everyone. You need to be very disciplined and have good patience.

After I reached my limit of managing three rental properties, I stopped buying. Instead, I started investing my cash flow in private real estate funds that invest across the Sunbelt. This way, I could diversify my real estate holdings, and more importantly, earn more 100% passive income. Being a dad is a full-time job.

Once again, I’m faced with the dilemma of whether to rent out my investment property or sell it. But this time, we are in a unusually high inflation environment. If you’re facing the same dilemma, I will walk through the pros and cons like I do with other dilemmas in my book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. There are three chapters on real estate.

Every dilemma I face is viewed with a 70/30 decision-making framework. After analyzing the situation, my goal is to make the right decision at least 70% of the time with 70% confidence or greater. At the same time, I recognize that about 30% of the time, I will make a suboptimal choice and need to learn from it. I also accept there will always be some level of uncertainty.



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Profiles Of People Who Spend Six Figures A Year On Rent

Published: 05/16/2022 by Financial Samurai 40 Comments

Some say renting is like throwing your money away. If that’s the case, what about the people who spend six figures a year on rent? Is that like setting your net worth on fire?

I don’t think renting is throwing money away at all. You get shelter for the rent you pay. Renting is also necessary for many people in transition, i.e. those who don’t know for sure where they want to live or work. Further, if you are worried about the housing market, then renting could save you a lot of money or at least provide you more peace of mind.

If we ever move to Hawaii, we will likely first rent a fully-furnished place for 6-12 months. We’d like to try before we buy to make sure we really want to be in Hawaii for years. Further, we also want to ensure we really like the neighborhood as well.

Renting is also a simpler way to live. There is less responsibility, which feels freeing. For any homeowner who has gone through a big remodel or experienced a major maintenance issue, I’m sure renting at the time would have been highly preferable.



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Tappable Equity: Usable Home Equity Has Exploded Higher

Published: 05/04/2022 by Financial Samurai 39 Comments

Tappable equity is the amount of home equity available for homeowners to withdraw via a cash-out refinance or a second mortgage. It is typically calculated as total home equity minus 20 percent of home value. The 20 percent figure is used as a collateral cushion to protect the lender. 

Tappable equity is a new term that I’ve been hearing more often nowadays given the robustness of the current housing market. Most homeowners like to guess how much their homes are valued. They look at online pricing estimates and get all pumped about what a neighborhood home sold for.

Despite the excitement generated by changing home prices, it’s really the home equity that counts the most.

Home equity is equal to the current estimated value of a house minus the mortgage. For more precision, you could calculate home equity by also subtracting the estimated selling costs, including commissions, taxes, and fees from the market value of your home.



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Mortgages By Interest Rate: Homeowner Tenure To Increase

Updated: 05/11/2022 by Financial Samurai 37 Comments

One of the logical concerns in this current rising interest rate environment is how will home prices fare as interest rates go up? One way to answer this question is by discussing the number and percentage of existing mortgages by interest rate. For example, if most of the mortgages are locked in at a low fixed rate, do higher mortgages rates really matter? No, and yes as I’ll explain below. 

Since November 2018, the vast majority of homeowners with a mortgage have refinanced and taken advantage of lower rates. I’ve drummed this refinancing message since 2009.

In fact, 90%+ of mortgages in America carry an interest rate of less than 5%, which is the current 30-year fixed-rate mortgage average according to Freddie Mac.

Therefore, most existing homeowners don’t care that mortgage interest rates are trending higher because their monthly mortgage payments remain unchanged. Further, unless mortgage holders with mortgage rates over 5% are struggling financially, they likely also don’t care either. For if they cared, they would have already refinanced to a much lower rate!

Finally, only about 5% of homeowners with mortgages have an adjustable-rate mortgage as we learned in a previous post. Therefore, this means that 95% of homeowners with 30-year fixed and 15-year fixed mortgages are also unaffected. Just not the percentage of mortgages with ARMs is rapidly increasing and is now closer to 10% given the rise in mortgage rates.

If you are an ARM holder, you might be a bit nervous. However, chances are good that by the time your introductory fixed-rate expires, mortgages rates will have come back down again. After all, we’re in a 40+-year downward interest rate channel.

10-year historical trend line logarithmic chart


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Time For Homeowners To Buy Treasury Bonds To Live For Free

Updated: 05/02/2022 by Financial Samurai 63 Comments

If you’re a homeowner looking to live for free, buying Treasury bonds today just might be the key.

Once you’ve got your housing expenses under control, life becomes much easier. One of the obvious benefits of owning a house with a fixed-rate mortgage is that your mortgage stays the same as rents increase.

However, now that interest rates have risen, it may now be prudent to buy U.S. Treasury bonds to actually live for free. The 10-year Treasury bond yield has risen to about 2.9%. If your mortgage rate is below that amount, you’re on easy street.

I’m assuming most homeowners with a mortgage refinanced since 2019 to lock in a lower rate. Some lucky folks were able to get 30-year fixed-rate mortgages for 2.9% or less. Meanwhile, the vast majority of people who took out adjustable rate mortgages and 15-year fixed mortgages locked in rates at under 2.9%.

U.S. 10-year yield secular trend historical chart


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Making More From Your House Than From Your Salary Makes Life Easier

Updated: 04/10/2022 by Financial Samurai 68 Comments

One of the great benefits of being an investor is that you can sometimes make more from your investments than from your day job. After several years of doing so, you might even start wondering what’s the point of working so much!

According to Zillow, home value appreciation in 2021 was higher than median wages in 25 of 38 major metropolitan areas. In 11 areas, home price appreciation was greater than $100,000.

With millions of homeowners making more from their houses than from their salaries during the pandemic, maybe we’ll avert a recession after all.



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How Bad Real Estate Agents Can Cost Sellers A Lot Of Money

Updated: 04/20/2022 by Financial Samurai 23 Comments

As a buyer, you love bad real estate agents because you can take advantage of them to get better pricing. As a seller, you obviously want a good real estate agent so you can maximize your profits.

According to the National Association Of Realtors, there are supposedly around 1.5 million real estate agents today. However, there are way less than 1.5 million homes for sale in America. As a result, competition to make money as a real estate agent is fierce. The top producers consistently get the lion’s share of the transactions.

Let me be clear. Most real estate agents are not bad. Further, using the word “bad” is just a catchall term to include “inexperienced,” “disorganized,” “out-of-town,” or “aloof.”

Identifying bad real estate agents will help other buyers and sellers in the long run.



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Should I Buy A Fixer-Upper Property? Evaluating The Pros And Cons

Updated: 04/10/2022 by Financial Samurai 44 Comments

In this strong housing market, you may want to buy a fixer-upper property that fewer people want in order to get in. If you’re young and full of energy, buying a fixer to build sweat equity is a good idea. I did so twice to some great returns.

Let me share whether you should buy a fixer-upper and the pros and cons. Remodeling a property is not for the faint of heart.

“Forget money. Remodeling is the number one cause for divorce.” – Anonymous

Before my current house, I had never bought a fixer-upper before. The most I did in the past was build a new bathroom out of a closet, put up a wall to create an en-suite bathroom, and remodel my ground floor by adding a shower and blowing out a center divider so one could fit a bed. Oh, I also changed all of my windows, which wasn’t so bad.

After my remodeling activities, I swore never to do another remodel project again because it kinda feels like hell on earth. But that was almost 10 years ago.

After getting ferociously outbid on a particular piece of property ($1.2 million ask, went for $1.8 million), I decided to look away from nicely done properties. There seems to be a massive embedded premium for new or recently remodeled properties that I wasn’t willing to pay. All I really wanted was a view, gosh darnit it. The property itself almost seemed secondary!



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Foreign Real Estate Investors Are Coming To Buy Up American Homes

Updated: 04/13/2022 by Financial Samurai 59 Comments

Although COVID has been bad for many of us in so many ways, the pandemic did one good thing. The pandemic helped protect American homebuyers from a resurgence in foreign real estate investors. In a big way, the pandemic has throttled the demand from foreign real estate investors to buy American homes.

Before the pandemic hit, 2020 was shaping up to be another solid year. There were growing talks that capital restrictions out of China would ease. Foreigners wanted U.S. assets, and they wanted them bad, partially thanks to a tremendous current account surplus.

Currently, mainland Chinese residents can convert up to US$50,000 per year on foreign currencies for travel, overseas study or work, but not for buying overseas property, securities or life insurance policies.

But before 2018, Chinese foreign buyers were buying United States property in droves. It was easier for citizens to pull resources to buy U.S. property. Then, the Chinese government started cracking down.

Once lockdowns and travel restrictions were in place in the United States and many foreign countries, it became very difficult for foreigners to transact. As a result, COVID gave U.S. buyers the opportunity to buy up our own real estate with less competition.

With the start of the Ukrainian Russian war, the demand by foreigners to buy American real estate has now increased even further. International capital is looking for a safe haven.



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The Ideal Environment For Real Estate Investors Is Here

Updated: 04/10/2022 by Financial Samurai 59 Comments

If you were to ask me to describe the ideal environment for real estate investors and new real estate buyers, right now could be it. After two years of a white-hot real estate market, finally, real estate investors are seeing better deals.

Please know that I’m completely biased for real estate. Roughly half of my net worth and passive investment income comes from real estate. In addition, there’s no asset I appreciate more than our primary residence because it shelters my family. And nothing is more important than family.

For those of you who are bearish on real estate, I welcome your point of view!



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