Multifamily Opportunity, Middle-Class Wins, and Mortgage Rate Relief Arrives

James:
Hi, everyone. Welcome to On the Market podcast. I’m one of your hosts today, James Dainard, and as you can tell, our good buddy David Meyer is gone. He’s off on his honeymoon, enjoying the tropical warm beaches.

Kathy:
Of Thailand.

James:
Getting his legs tanned. It’s a trip of love. It’s always a good thing.

Kathy:
With Thai food.

James:
Yeah, with Thai food, exactly. We’re talking about how hungry we were before we got on. So it is me, Kathy, and Henry. We are going to be covering the show today.

Henry:
Yeah, and let’s be clear, Dave went for the food, but he’s really just going to eat pad thai that he could eat in the States.

Kathy:
In the form of a sandwich.

Henry:
Pad thai sandwiches. So today, we’ve got a correspondence show, and as a reminder, this is where we bring you an article that’s impacting the economy or the housing market. And then, we have a discussion about it as investors and talk about how it may or may not impact our business. But before we get into those articles, we wanted to discuss a fairly recent development in the multifamily space. Kathy, can you give us some insight on that?

Kathy:
Oh, yes, I can. This is huge news you guys. It happened on November 18th where Fannie Mae is now allowing homeowners, so not investors, but homeowners to buy a multifamily property, two to four units with just 5% down. Now, it used to be between 15 and 25% that you would have to put down to buy a duplex or a triplex or fourplex, but now it’s 5%. And it’s really important for people to understand that the income from those units can help qualify you for that loan. So no excuses, no excuses. This is your opportunity to get into a multifamily deal, two to four units as a homeowner.

James:
Yeah, this is huge because we saw small multifamily two to four units explode through 2022 to 2023. And as you look at deals now, and as investors, we’re looking for multifamily. We can’t really make it pencil at these high investor rates. And the big advantage is now people can put very little money down and get a percentage rate about 1% lower than an investor. So they get a way cheaper rate, way less down than what we have to put in, and it’s a huge opportunity for people to start buying small multi because the inventory has definitely increased. So I think this is a huge thing for all these house hackers and especially these first time investors.

Henry:
You have to take advantage of this if you are looking to get into investing, especially if you haven’t done a deal. Even if you have done a deal but you haven’t bought your primary home yet, why would you not take advantage of this? I always tell people, especially my students, “You should house hack. You should buy a duplex. You have to live in it for 12 months, so you should buy a duplex or a triplex or a quadplex every single year using a conventional loan until you or your spouse says, I will never share another wall again.” But you could rack up three to four duplexes doing this in three to four years and get yourself just a huge jumpstart with your real estate investing on. Even if you never bought another deal besides those two to three multifamilies, imagine the wealth in 30 years that you would have just from doing this house hacking method with these conventional loans.

Kathy:
And depending on where you live, you can get a four unit as expensive as a million dollars. Now, what’s 5% of that? You can do this. Now, I hope Doug Duncan my buddy over at Fannie Mae isn’t listening right now, but I do want to let you know as my experience as a former mortgage broker, your intention needs to be live there. This does not mean that you have to live there forever. So you should probably live there at least a year, maybe a little bit more. But after that, you can move and you can rent it out and it can be an investment property check with your mortgage broker to verify what I’m saying. But this isn’t your forever home. This is your way into getting multifamily property with just 5% down.

James:
And I think this is huge news for the small multifamily space because we’ve seen it be really flat the last 12 to 18 months, investors can’t make a pencil. So now as new buyers are looking for affordability, that low down payment and the cheaper rate really could explode this sector and actually make it to where flipping small multifamily could be a big thing too, or even conned a way to [inaudible 00:04:21] them up because people need affordability. But we have a lot of great things. We’ve seen all sorts of different articles coming out the last 30 days as the market’s just been kind of going crazy up and down, up and down. And we have a lot of things to cover on today’s correspondent show. So speaking of affordability, Henry, you have an article that covers what we’re talking about, making things more affordable, and it covers the costliest cities for the best middle class living. So how are people doing that?

Henry:
Yeah, this article is really cool conceptually, it’s something I really hadn’t thought about when it comes to thinking about expensive cities. So the article is titled Some of America’s Costliest Cities Offer the Best Middle Class Life. And essentially, what the article is telling us is that there are cool expensive cities where people like to live, but most people think these cities are unaffordable because of the cost of living. But some of these cities have economics where the job market is offering employment that pays people well enough to be able to afford a good middle class life in those cities in comparison to some other cities where the job market might not have caught up with that economy. And so, it talks about markets like San Jose and San Francisco, and we know those are markets where you can get really high paying jobs, really high paying jobs, especially in the tech industry. And those high paying jobs help to offset the cost of living.
And so, they’re saying that people in the middle class and even in the lower class still have a good amount of their money left over after all expenses because they’re making great wages in those areas in comparison to some other markets like Los Angeles where the wages haven’t quite caught up to the cost of living. And so, living there makes it much more unaffordable when you can live in a different city, have a high paying job and live really well. And so, I think that’s a cool way to look at, especially if you’re thinking about moving or relocating to a different part of the country, you want to be able to consider am I going to get paid to afford the cost of living for this place? So what do you guys think about this concept?

Kathy:
Oh man, I was born and raised in the San Francisco Bay Area, went to school in San Jose, lived in San Francisco. It’s never been affordable. Just want to make that super clear, for decades, it’s never been affordable. It’s nothing new. But you’re right, I have some friends, kids that are in their early 20s, they get right out of college and they’re making 150 grand in their first job. And while it’s still really hard to make the numbers work, you can afford to live in the Bay Area at that rate. You can’t maybe necessarily buy a property, but you can afford to live. And even people like my, I have a friend who teaches music classes, she does not have a college degree, but she just provides these really fun music classes to wealthy kids and makes a bunch of money that way, because if you’re surrounded by rich people, they want services. If you’re a massage therapist, if you do facials, you could charge more than you might in, say, Oklahoma City.

James:
And I think some of the cost of cities, the reason they offer some of the best middle-class life is it’s also the lifestyle and just the access to things, but it’s the job growth. The reason I love the Seattle market so much, which is a very expensive city, is there is massive growth going on between all the tech sector, all the medical, and there’s always jobs coming to the market. Even when there was all this waves of articles talking about how there’s these massive tech layoffs, people were still getting paid well, they were still getting hired and it gives stability. But then, some of these other major areas like Seattle, they have other benefits to living too, which is why it’s good for the middle class. We have no income tax, which is a huge deal, and it gives, as people want more affordability, it says overall 60% of Americans struggle to meet basic needs. Well, the best way to get basic needs is to get more taxes back in your pocket.
So some of these costly cities like Seattle, yes, the price of housing may be high, the cost to live there may be high, but they’re making it up in different ways and they get to live in a cool metro city where they can enjoy all the amenities. And I think that’s why some of these, it is funny, there was kind of a pullback out of these cities, but then as people left, they did start to miss them and they go, “Hey, I like having everything at my fingertips.” So I think the middle class still likes being in these expensive cities. They can make it work if they’re on the right one because there’s growth, there’s quality, there’s development, and there’s more things at their fingertips.

Henry:
And to be clear, people hear this word affordability and the first thing that comes to their mind is cheap or really low cost. And that’s not what we’re saying here. The study was basically looking at multiple factors like the cost of the goods and services in those areas in comparison to wage levels and different types of diversity and employment. And when you put that mix together, they’re just saying that the higher wages allow you to be able to afford to live there, not that it’s a super affordable area. But super cool to think about in terms of relocation, so what kind of cool article do you have for us Kathy?

Kathy:
Well, I wouldn’t say it’s cool. It’s actually more of a warning, and you’ve probably heard about it in the news. This particular article is from People Magazine, but it’s been everywhere and all over the news. The headline on this one is Airbnb “Tenant From Hell” Who Allegedly Lived Rent-free for 575 Days Leaves The Property Finally. So the key points are what happened? Well, first of all, it’s in California, in the Los Angeles area, it tends to be a very tenant-friendly state, and definitely in the city, San Francisco and LA, it’s all about the tenant, the landlord has much fewer rights. In this case, the landlord had rented out this space for six months to a tenant. I’ll just start there and say, if you are not doing short-term rental, if it’s over 30 days, get a lease agreement, make sure whether it’s through Airbnb or not, get a lease agreement because now you have a long-term tenant. It’s different than a short-term tenant. And the laws protect the long-term tenant. So I doubt that he did that, but that wasn’t in the article. Just a little tip for you.
In this case, after six months, she just decided to stop paying because she got legal advice that she didn’t have to pay. And the reason is because this unit was not permitted. And if you are renting out a unit that’s not permitted, it’s not legal. And that was the legal opinion. “Hey listen, this unit shouldn’t even be here. It’s not legal, you don’t have to pay.” So he couldn’t get her out. And finally, it came down to lawsuits and they’re suing each other. The landlord finally dropped his charges, but the tenant still has charges against him for harassment for kicking her out. So this is not a situation any landlord wants to be in, get your unit permitted.
And what’s interesting is in California, we kind of have aggressive ADU laws, the accessory dwelling unit where it’s getting easier to get those units permitted. In fact, it’s strongly encouraged. There’s all kinds of laws. A lot of the local municipalities didn’t really want to approve these ADUs, so more laws came out on a statewide level saying, “Too bad. We want these because we need the housing.” So go through the process, get it permitted. He wasn’t even able to get it permitted because she wouldn’t let him in. She had it locked. It’s a saga, something no landlord ever wants to go through. But great lessons for those of us, who I know a lot of people actually who rent out unpermitted units and it can really strike back. Especially with insurance, if there’s something that happens, a fire in the area or flooding, insurance may not cover those losses either if it’s not permitted.

Henry:
Yeah, Kathy, that’s great advice and this is something that’s happening all over the country. I think this article got popular because of how the house was, but this is happening to investors in a lot of places. So you really need to do, you’re right about, you need to get the permits, but what you’re really needing is when that permit process is complete, your municipality should give you a certificate of occupancy and that certificate of occupancy, that’s what you need to be able to protect yourself.
If you’re in a situation where you’re renting out a space and you don’t have that certificate of occupancy, then your rights aren’t the same as if they were. And so you need to make sure you pull the permits, protect yourself. Even if you’ve done the work and you didn’t pull permits and you’re going to use it for a short time, you might have to bite the bullet, call the city and just say, “Hey, we did this remodel. I’m sorry. What can we do to get this properly permitted?” Because you could find yourself in a world of hurt that could cost you a whole lot more than just if you go and try to pull those permits and even if you have to redo some of that work.

James:
And it can be costly, the cost of permits is well below 575 days worth of rent. Let’s say you rent that property, because this is a cool property. You look at it.

Kathy:
It’s a $3 million property with beautiful views.

James:
I wouldn’t want to leave either. You got a rooftop, tennis court, you got a spa center, it’s pretty awesome. Even if you rent that for 500 bucks a night, that’s $287,000 in income plus the tenant is asking for $100,000 relo fee. To permit that ADU would cost you less than 50 grand with architect’s permit fees. And so, to spend the money now, but I think it’s an important lesson for investors right now as things get regulated and there’s housing shortages, and as things get more and more expensive, and I think the political environment saying, “We want more affordable housing,” we’re the ones that they’re looking at, and it’s really important to cross your t’s and dot your i’s and make sure that you’re going through the right processes because you can get in a pinch and the last thing you want is for you to have some sort of neglect and for people to use that against you, whether it’s right or wrong.
Because at the end of the day, the day an unpermitted unit should not affect whether these people are paying rent or not. It’s absurd, but people are going to play that angle. And so, just make sure that you’re going through all the right processes, you’re checking everything, and then that you’re also vetting these people correctly as they’re coming in. Anytime I’m ever running to somebody, we want to make sure we get a read on them to make sure that there’re not going to be any issues for us later.

Kathy:
Yeah, be careful out there. When there’s headlines like this that become national news. I mean, People Magazine, that’s like people just flying across the country or whatever, and they’re going to pick that up and read it. Now, more people know that they can do that, so this could become more prevalent. And again, just protect yourself, protect yourself. All right, with that, James, you have a story on mortgages. What’s going on?

James:
Well, as we all are watching rates as investors, the mortgage rates and staying on top of them is so important for us, whether it’s analyzing cash flow or projections down the road. And one thing that people say about real estate all the time is it’s hard. You can never perfectly time real estate, and I believe that fully. You’re never going to hit it right on the head with a plan. It’s all luck at that point. But what we are seeing right now is rates are starting to slide backwards and the fed is taking their foot off the gas and we’re starting to see some rate relief here to where rates are starting to go down.
So the article was mortgage demand jumps six-week high as the interest rates continue to drop. And so, as things become more affordable, like your monthly payment because rates are going down, buyer demand is starting to come back into the market. The average cost of interest rates are 30-year fixed mortgages with conforming loan balances of 726 or less have decreased from 7.61 to 7.4. And that doesn’t seem like a lot, but that’s almost a quarter point. And if we continue to see this slide, you’re going to see more and more buyers come back into the market.
Applications to refinance homes also increased 2%. And even with the money being higher than it was 12, 24 months ago, people are seeing just a little bit of relief and they’re starting to refinance out their cash out of properties to pay off other debts. We’re seeing credit card debt increase. And so, we’re starting to see people go, “Okay, these rates aren’t that bad,” or they want to jump on them now. One of the biggest thing that I think every one of us is investors wants to watch, especially people that do dispo, fix and flip, development, whether you’re going to sell your BRRRR property and 1031 exchange it later is what’s going on with the inventory in the market, where’s the buyer demand.
So inventory supply is down 8.7% year-over-year. There’s not a whole lot to buy. And so, what we’re seeing is if rates continue to slide down throughout 2024, we could see a huge hockey stick in the dispos, and this is where you can really crush the market. There’s not enough homes, especially not enough good homes. A lot of the supply that’s in the market right now is not very good. And the stuff that is good is still trading at these really high rates. So as we get rate relief and more buyers come in, there could be more bidding wars and we could see some rapid appreciation towards the end of 2024.

Kathy:
These lower rates are going to hopefully unlock this market. It just got so locked up when rates got close to 8%. People didn’t want to sell for fear that no one would buy at those rates, and a lot of buyers hoping rates would come down. So on pause, that’s part of the reason why inventory is so low. So hopefully, as rates come down, more people will put their homes on the market, there’ll be more inventory that will hopefully keep prices steady or even down a little, but probably not because we have a long way to go to get to the inventory levels we would need. But I’ve been saying this for almost two years now. These high rates are an opportunity for you because in a locked market, you don’t have as much competition and competition drives prices up. So I do think that over time, and next year, if we see rates get down in the 6% levels, we’re going to see those bidding wars again. Then, you’re paying more for the property even though you’re getting a little discount on the rate. You got a window of opportunity here.

Henry:
Kathy, I have been screaming this to people on my social media and anywhere that they listen. I’ve been getting hammered in the comments because I’m like, “Look y’all, hot take, real estate prices are low. They’re not high right now. You have such a unique opportunity to be able to buy property at a discounted price with low competition because people feel like the prices are high, but they only feel like the prices are high because they’re comparing them to a couple of years ago. But if you compare them to what the new market will be, if rates continue to drop, these prices are low. And so, there’s this tiny window of opportunity right now where you can buy with less competition at a lower price that’s not going to be there and may not be there again for years to come.”
So the winners in the real estate game in the future are going to be the ones who are buying in this tiny window of opportunity. But I’ve been saying that the prices will go up if the interest rates start to drop and the interest rates aren’t even really dropping that much. And people are like, “Oop, here we go. Let’s do it. Let’s buy now.” So imagine if they come down somewhat significantly, man, I just think you’ve really got to pay attention to what’s going on and do what’s financially beneficial to you. I’m not saying go stretch yourself and put yourself in a terrible financial situation by trying to buy a rental property, but if you can afford it, I think this is a great time.

James:
And the fact that rates were up above 8% this year and we did not see a big housing decline. We saw the median home price go up 2 to 3% this year. And with the cheaper cost of money, that’s just slingshot everything forward. The MBA forecast that they predict a 30-year mortgage rates will drop to 6.1% by the end of 2024. I don’t know if it’s going to get there, I think that we’re going to be in the high 6’s. But think about this, on today’s rate, on a $400,000 loan, which is around the median home price for a first-time homebuyer, their payments can be $3,000 a month. If it goes down to 6.25 at the end of 2024, their payment’s going to be 2,500. That’s almost a 20% decrease in housing costs, which is going to automatically pull the market up. As people can afford more, it’s going to pull everything through because those are huge savings. And if it gets down there, you could see a 5 to 10% jump at the end of the year, even during the dead time of the winter.

Kathy:
Yeah. And you said prices have gone up 2 or 3%, but that’s on average nationwide. There are markets where I’m investing in, it’s been 8, 10% increase in value with these high interest rates. And to just give people an idea of the frenzy that you can expect, I think I told, I mentioned a few months ago that there was a house up the street from me with ocean views that was under 2 million, and that’s kind of unheard of. There were people flying out from all around the country to buy that property. There was multiple offers, 8 to 10 backup offers. I mean, it was nutty. And then, fast-forward to a month later when rates went up just a little bit and the next door neighbor was like, “Dang, I want to do that.” Put their house on the market. Crickets, nothing. So it really wasn’t that big a difference in interest rate to bring the frenzy on. So I think we’re on the cusp of it right now.

James:
Yeah, once that FOMO kicks in and people think they’re going to miss something, it could just absolutely explode.

Henry:
Yeah, let that rate drop another half point, and it’s going to go nuts.

James:
Well, Henry, just so you know, if the rates drop, my hard money rates do not.

Henry:
Spoken like a true businessman. I’m not mad at you, James.

James:
Well, you guys, these are all great articles today. I mean, we covered everything from costly, expensive cities that are cool places to live. I mean that kind of rates going down, these cool cities, they’re going to rebound pretty drastically. So you can have a cool place to live and it’ll be more affordable.

Henry:
Our cool articles are amazing because what we’re saying is you can house hack now on a conventional mortgage in a cool city that has a great cost of living compared to the salary that you’re going to make. And if you hold onto that property, the value’s going to shoot up when the interest rates come down. So I’m just saying we just gave you some great advice from a real estate perspective here with these articles.

Kathy:
Way to tie that all together, Henry. I love this. I miss Dave, but it’s been fun to kind of co-host this show together. We did it.

Henry:
What people can’t see is the amount of takes that we did in the backroom, but we pulled it off. This is not a live show. You should all be grateful for that.

James:
That’s our show today. We will see you next time for On The Market.

Dave Meyer:
On The Market was created by me, Dave Meyer, and Kailyn Bennett. The show is produced by Kailyn Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.