In many rental markets, renters would very much prefer to own their own home but don’t necessarily quality for conventional mortgages. Since the crash of the housing market some time ago, many banks and lending institutions have put extremely tight restrictions on lending to “unqualified” individuals. This has created a barrier to homebuying in many markets, especially for young professionals. Many say that interest rates are poised to rise, which could cost you more in the long run by not buying a home now.
Based on projected mortgage rates and home prices in many local housing markets it becomes obvious what the buyer would gain over a typical holding period of owning a home. Investment property, for example would not only increase in terms of the equity increase, but also the obvious rental income one would gain as well. Real estate is an “able” investment – meaning that it is appreciable – it increases in value over time.
So just how much are renters losing per year by waiting to buy a home? The penalties for waiting to buy tend to be greater in smaller metro areas, especially in California. For example, the estimated cost of waiting one year was $61,805 in San Jose and $65,780 in Santa Cruz. Over the course of 30 years, homeowners save more than $1 million in Santa Cruz, the largest amount of any U.S. city.
So by those numbers, a lot of data scientists worked long and hard to tell us something we already know – renters are better off owning their own home! In fact, 80% of renters have stated that they would rather own than rent but they don’t have the necessary funds to do so according to a poll by the Federal Reserve.
So what are some other options other than conventional mortgages?
1. The Seller Carry – This essentially means that the seller of the property is willing to carry the loan for you. In some circumstances this can be very attractive to retiree-type homeowners who are looking to not only cash out of the equity in a property, but to also receive monthly income from the interest paid on the loan. The downside of course, is that they would have the right to take back the property if the borrower could not make the payments; which is essentially very similar to a conventional bank loan. If you do consider this option, please consult a real estate lawyer on the proper forms and procedure.
2. The Lease Option – In a lease-option, a property owner and tenant agree that, at the end of a specified rental period for a given property, the renter has the option of purchasing the property. This is a bit different than the seller carrying the loan in the fact that at the end of the lease period, the renter has the option to purchase the property. Like most things in real estate, most all of the different working parts of this contract (the interest rate, term, lease amount, cost of the “contract” or right to ownership) is negotiable.
3. Wholesaling Property – I mention this here not because it’s directly related to homeownership, but more indirectly
to cash flow, which leads to saving up a down-payment, which leads to being homeowner. Wholesaling is basically the business of locking down an investment property with a contract; an “option contract”. This contract basically states that the owner has agreed to sell his/her home at a specific price under a specific time-frame, as specified in this contract. What this does, is that it “locks” the price of the property at a specific price so even when the market rate of the home goes up in value, the contract is stilled locked at this prior agreed-upon price.
If the equity in the home is increasing and the price of the home in the contract is fixed – then this creates value – and this specific contract is now valuable to an investor or other homebuyer and they are willing to pay you for the rights to this contract. Here is where the cash flow is created.
In conclusion, I’ve listed a few creative ways to enter into the home market. This article is meant to simply peak your interest in investigating these ways more on your own. If you would like more creative ways, or to talk about other options, please feel free to reach out to me. I hope this helps.
– Marisa San Antonio