What if the interest rates are too high and the housing market is falling in price?
You want to get into real estate but think the market isn’t quite right today. The market is cooling off, but you want to build wealth with real estate investments. How can you position yourself right now? There are a lot of actions you can take to set yourself up for success in the coming months. By getting your finances in order and educating yourself on the real estate market and how to evaluate properties during the falling housing market, you will be poised to strike when the time is right. Be ready to move forward on your path to financial freedom.
GOALS
Decide what your end goal is during this period of falling housing prices. It could be, “I want to have one cash-flowing property in a year’s time.” It is much easier to modify your behavior if you are working towards something rather than feeling like you are giving up something. Focus on the goal, not the sacrifice.
If you are single, then it’s all on you. If you are part of a couple, you need to get your partner on board. You can do this by setting goals together. You can start small, like sitting down to make a budget together. Identify the items you can’t live without and set reasonable goals you both agree. Get set to achieve a more prosperous future together.
FINANCES
When you find the perfect deal, you will want to have enough money saved. You will need enough for a down payment, closing costs, renovations that are needed to get the property rent-ready, and a reserve of 3 months of expenses in the event you need to make a significant repair or some other unforeseen circumstance.
Educate Yourself
Unfortunately, our schools don’t teach students about personal finance or how money works. Almost every real estate investor I know read Rich Dad, Poor Dad.
It is a wonderful, evergreen resource for teaching people to refocus their energies on becoming financially independent. The book Rich Dad, Poor Dad, by Robert Kiyosaki explains how money works. It helps explain the mindset one must develop to stop being reliant on a paycheck to cover your living expenses and to start building cash flow.
Another great book is Cash Flow Quadrant also by by Robert Kiyosaki, which explains how to create multiple income streams. My husband and I love what we do in our “day jobs”, and both have successful businesses, but we also realized that we had to be working to make money. Having passive income like rentals will allow us to retire earlier than we would have without them.
Start listening to money management podcasts in the car or when you work out. Browse money management blogs like FinSavy Panda, you will learn actionable tips to increase the amount you can sock away. Devote more free time to learning something that will help you achieve your goals rather than pure leisure. Falling housing prices will be to your advantage. Learn what a “good deal” is.
Put in the work now, while the housing market is falling, so when it stabilzes you can have a stress-free life in the future.
MAKE A BUDGET
A budget is a foundation for financial well-being. Track your spending over several months or review your credit card and bank statements to see what you spend. If you haven’t done this you will be surprised. Decide what matters to you. You can use a spending app like Mint. Which tracks your accounts, income and expenses and helps you categorize them in one place.
The bottom line is you need to spend less than you make. This lending Club Report shows that over 60% of Americans live paycheck to paycheck. This includes over 38% who make over S100,000 per year!
Increase your income
There are a lot of ways to increase your income. Ask for overtime or find a part-time job, and put every penny into paying off debt and saving. If you work a few nights a week after work or on the weekends, you can make a few hundred or thousand dollars a month.
When my husband and I were saving to buy a house, we put every bonus and raise in the bank for a few years. We didn’t upgrade our lifestyle because we got a raise or splurge because we got a nice bonus.
Get a side hustle, personal shopping with Postmates, Uber driving, reffing youth football, soccer, lacrosse, basketball, or baseball, even renting out your vehicle using platforms like TURO or HYRECAR .
You can earn money while you drive by putting advertising on your car, by using the app WRAPIFY Really, what could be easier than making money for every mile you are going to drive anyway? Hey, your broke neighbors and friends might think it’s weird, but remember, they are likely living paycheck to paycheck.
You could get a roomate, or rent out your garage if you own your own home.
Save More Money
Deciding where to save is a matter of priorities.
- Do you need a designer coffee every day? Would you be happy making coffee at home most days and splurging on Friday for the mocha-Frappuccino-latte with 3 pumps of hazelnut?
- Eating out is very expensive and has gotten even more so as restaurants’ food costs have skyrocketed. A trip to a fast-casual restaurant can cost $60 per couple (and even more with kids) when the same meal would cost $12 to make at home. Save dinner out for once a week or even less, or find the local happy hour and grab items from the happy hour menu only.
- Learn to cook and freeze some meals ahead to cut down on the weekday dinner or delivery. Spend a weekend day once a month preparing freezer meals or freezer meal starters like browned ground turkey or beef that can be made into taco filling or spaghetti sauce, or chopped up onions, peppers, and celery that can be quickly added to soup or stew.
- Limit drinks when you eat out, even on your “beer budget”; one beer that is the price of a six-pack doesn’t make sense! Opt for water and enjoy a cold brew when you get home.
- Look over your subscriptions for cable or streaming apps like HULU, Netflix, etc. Do you really need all of them? Do you really need to watch TV when you could be focusing on increasing your financial stability?
Improve your credit score
Your credit scores are determined by models that analyze one of your consumer credit reports and then assign a score (often ranging from 300 to 850).
Having a high credit score will make it easier to obtain credit to purchase or renovate a property you may want to purchase when the falling housing market is over. People with higher credit scores get better interest rates on credit, which will save you money on interest payments.
The two main consumer credit scoring models are FICO® and VantageScore®; these models use calculations based on data that indicate the likelihood of a person missing a payment. Credit models look for borrowing and repayment history patterns associated with consumers who default on debt. Based on your past history of borrowing and repayment, the model assigns you a three-digit score. Statistically the higher the score, the less likely a person will miss a payment. As a result, lenders treat people with high scores favorably. These borrowers can get lower rates and special incentives and qualify for more credit.
Credit scores are calculated using payment history, credit utilization, length of history, credit mix, and recent applications.
Payment history
This accounts for about 35% of your score. Paying bills on time helps your score. Your credit score is impacted each time you have a late payment.
I like to set up an autopay for the minimum payment for each account I have, then, after that payment is made I can pay an additional amount, or pay off the debt each month if it is a credit card.
Credit utilization
This accounts for about 30% of your FICO score. Your credit utilization is the percentage of your total credit card limit you have borrowed. If you have a credit card with a $5,000 limit, and you have a balance of $1,000, you have utilized 20% of your borrowing limit. You should try to keep your utilization under 30% of your limits.
Length of credit history
Length of credit history accounts for up to 15% of your FICO® Score. FICO® Scores increase over time. New credit users can’t speed that up, but establishing a record of timely payments will help build scores as credit history stretches out. If you got a card when you were 20, and you are now 35, keep the oldest card, even if you seldom use it.
Credit mix
Credit mix can influence up to 10% of your FICO® Score. The term “Credit mix” refers to the types of accounts you have open. The types of accounts you might have could include credit cards, mortgages, car loans, student loans, and personal loans. A FICO® Score tends to favor a variety of loan types, including both installment credit (loans with fixed monthly payments, like a mortgage or auto loan) and revolving credit (like credit cards, with variable payments and the ability to carry a balance).
Recent credit applications
Recent credit applications can account for up to 10% of your FICO® Score. When you apply for a loan or credit card it triggers a hard inquiry, in which the lender requests your credit score for use in its lending decision. Although hard inquiries typically lower your credit score by a few points, as long as you continue to pay your bills on time, scores typically rebound within a few months. Soft inquiries, like checking your own credit doesn’t impact your FICO score.
It’s okay if you want to shop for a good rate and terms on a loan when you are ready to buy a property. Credit-scoring models recognize that consumers want to compare their options, so multiple inquiries for certain types of loans, like mortgage loans and student loans, may only count as one inquiry. You typically have a minimum of 14 days to shop for these kinds of loans. Try to keep all your inquiries in a 14-day window.
Use programs like Credit Karma to improve your score and creditworthiness.
Learn About your Local Rental market
While you are sticking to your budget, saving money, spending less and building excellent credit, you must begin to start analyzing properties. Keep an eye on the market and neighborhoods you think you would like to purchase a property in. Become familiar with rental rates in your area, how much more does a unit with a garage get for rent, how much more does a 2 bedroom get than a one bedroom apartment?
Okay now are you ready to get your plan in action? To review, first step is looking at your spending and prioritizing discretionary spending, then cut back and figure out a way to bring in more money. You’ll need to improve your credit score and credit worthiness, and put some money away. In the meantime, become familiar with local rental neighborhoods, or if you live someplace very expensive look at a few small cities within driving distance to determine what market makes sense when the timing is right.
Please reach out if you have any questions about how to position yourself in a falling housing market, or you’d like to comment on this blog post.
