[UNITED STATES] In the ever-evolving landscape of real estate investing, adaptability and innovation are key to success. This rings especially true in today's market, where soaring interest rates have made traditional property acquisition methods increasingly challenging. Enter Michael Hyun, a savvy real estate investor who managed to secure a 2.75% mortgage rate in an environment where rates were hovering around 7%. His story is not just one of financial acumen, but a testament to the power of creative thinking in real estate investing.
The Challenge: High Interest Rates and Cash Flow Concerns
In 2023, the real estate market faced a significant hurdle: mortgage rates had climbed above 7%, making property acquisition a daunting task for many investors. For Michael Hyun and his spouse Eileen, this presented a potential roadblock to their investment strategy. "With a property like this, it would not cashflow if we had gotten the 7% interest rate, meaning the rents would not pay for our mortgage and expenses, and we would be negative every month," Hyun explained.
This situation is familiar to many real estate investors. High interest rates can significantly impact the profitability of rental properties, often turning what would be a cash-flowing asset into a liability. Traditional methods of shopping around for better rates from various banks and mortgage brokers were yielding little difference, leaving investors like Hyun in search of alternative solutions.
The Solution: Creative Financing and the 'Subject-To' Method
Faced with this challenge, Hyun turned to a less conventional approach: creative financing. Inspired by real estate investor and YouTuber Pace Morby, Hyun discovered the potential of the 'subject-to' method. This strategy involves taking over the property ownership and the existing mortgage tied to it, rather than securing a new loan at current market rates.
Hyun elaborates on the process: "Wholesalers basically post their deals there. And if you like them, then you'll email the wholesaler, and they will basically get you to buy their contracts. And when I say contract, I mean basically they already have written an agreement with the seller saying that they will buy the house. And that contract, the wholesalers are selling to me for about $10,000".
The Deal: Breaking Down the Numbers
Using this method, Hyun was able to locate a property that fit his investment criteria:
Property: A fairly new, single-family 3,000 square-foot home built in 2022
Location: A small town in Texas
Sale Price: $475,000
Existing Mortgage Balance: $368,486
Existing Mortgage Rate: 2.75%
Total Monthly Payment: $2,844
The key to this deal was the existing mortgage rate of 2.75%, significantly lower than the prevailing market rates. Hyun paid the seller $16,735 in cash and used carry-back financing for the remainder, where the seller finances the gap by accepting monthly payments until the owed amount is reached.
The Benefits: Cash Flow and Tax Advantages
This creative financing approach allowed Hyun to achieve two crucial objectives:
Positive Cash Flow: By securing a much lower interest rate, Hyun ensured that the property's rental income would cover the mortgage payments and expenses, resulting in positive monthly cash flow.
Tax Benefits: As real estate professionals under tax law, Hyun and his spouse were able to leverage their properties to reduce their tax liability significantly. In fact, they managed to reduce their federal taxes by 99%, including what Hyun owed from his W-2 income.
The Risks: Understanding the Due-on-Sale Clause
While the 'subject-to' method can be highly advantageous, it's not without risks. Hyun points out the most significant risk: the due-on-sale clause. This provision in mortgage contracts allows the lender to call in the loan if the property title is transferred.
"What that means is that the mortgage company will basically say you need to pay off the loan immediately, and they'll give you a couple months' notice," Hyun explains. While this clause isn't commonly enforced, it's a risk that investors using this strategy must be aware of and prepared for.
Lessons for Aspiring Real Estate Investors
Hyun's success story offers several valuable lessons for those looking to invest in real estate, especially in challenging market conditions:
Think Creatively: Traditional financing methods may not always be the best option. Be open to alternative strategies that can yield better results.
Leverage Existing Mortgages: In a high-interest-rate environment, properties with existing low-rate mortgages can be goldmines if acquired through the right methods.
Network and Research: Hyun's discovery of this strategy came through following industry influencers and joining relevant online communities. Continuous learning and networking can open doors to new opportunities.
Understand the Risks: While creative financing can offer significant benefits, it's crucial to fully understand and be prepared for the associated risks, such as the due-on-sale clause.
Consider Tax Implications: Real estate investing can offer substantial tax benefits, especially for those who qualify as real estate professionals under tax law.
The Future of Creative Real Estate Investing
As the real estate market continues to evolve, investors like Michael Hyun demonstrate the importance of adaptability and innovation. While traditional methods of property acquisition and financing will always have their place, the ability to think outside the box and leverage creative strategies can make the difference between a good deal and a great one.
For those looking to emulate Hyun's success, it's important to:
- Stay informed about market trends and conditions
- Build a network of real estate professionals, including wholesalers and experienced investors
- Educate yourself on various financing methods and their legal implications
- Always conduct thorough due diligence on any property or deal
- Consider consulting with legal and financial professionals before engaging in creative financing strategies
Michael Hyun's story is a powerful reminder that in real estate investing, where there's a will, there's often a way. By combining creativity, market knowledge, and a willingness to explore unconventional methods, investors can find opportunities even in the most challenging market conditions. As Hyun's experience shows, sometimes the key to success lies not in following the crowd, but in charting your own path.
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