Real-estate investor Mike Webb shares his top 3 tips for new investors navigating the sky-high mortgage rate environment right now

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The outlook for real-estate investors has dramatically changed over the last year.

Mortgage rates have skyrocketed above 7% with the Federal Reserve taking drastic tightening measures to rein in four-decade-high inflation. The result has been a dramatic cooling in home price growth, and in some cities, month-over-month home price declines.

According to the S&P CoreLogic/Case-Schiller US National Home Price NSA Index, which incorporates 20 cities around the US, home prices fell month-over-month for the second straight month in August.

By all indications, the Fed is likely to continue on its hawkish path in the months ahead, and will keep interest rates elevated for an extended period, barring major economic deterioration. That’s bad news for prospective homebuyers, sellers, and investors hoping for lower rates, which typically act as a boon for home prices: the less a buyer has to commit to interest payments in their monthly budget, the more it can commit to a home’s equity.

With home prices falling and mortgage rates continuing to rise, is it still worth it to invest in real estate at the moment? Mike Webb, a firefighter and real-estate investor based in Maryland who has acquired a portfolio of 35 units, said in a phone call on Wednesday that he’s still buying properties as investors have to play the hand they’re dealt.

He listed three tips for new investors to keep in mind right now as they get started.

3 tips for new investors

The first is that they should underwrite deals conservatively. This means making sure the numbers work on a deal — that the monthly mortgage payment and other expenses are going to be covered by rent payments. One thing investors can do to be cautious is to assume rents could drop a significant amount in the future, say by 20%.

“You can’t sit there and use the last two or three years right now and just assume rents are going to keep climbing 10-30% next year,” Webb, who cofounded MDWVHomebuyer.com and helps run the First Responder Financial Freedom podcast, said. “What happens if they go flat, or what happens if they actually go down 10-20%?”

Second, Webb said to keep in mind creative financing strategies. One ideal strategy right now with mortgage rates high would be to acquire a property through assumed debt. This is when the seller passes on their property and mortgage on to buyer. Since the mortgage is older, odds are the rate on it lower than one could get on a new mortgage. Currently, 30-year fixed mortgage rates are at their highest levels in two decades.

“I would look heavily into the possibility of assumable debt,” he said. “If you can sit there and find one of these people that needs to leave their job, or move, or whatever the situation or motivation is…working out something creatively is probably where that tool in your toolbox is going to be very valuable.”

He added: “There’s going to be a lot more opportunity for creative financing.”

Some ways to go about finding these deals to attend real-estate meet-ups and consume to educational materials like podcasts or books, he said.

Webb also said to keep in mind that if interest rates drop in the future, one can always refinance to a lower rate.

Finally, Webb said to be cautious about home flipping as home prices drop and the economy cools with layoffs building. Home flippers have already been having a tough time with the impact that rising rates has had on demand.

“If you’re getting started, maybe this isn’t the time to try to go flip 10 houses at once,” Webb said. “The market is going down and rates are going up, this is seasonally a slower time of year going into the fourth quarter.”

Even the pros are having a rough time flipping homes right now. Redfin recently shut down its home flipping business, following in Zillow’s footsteps.

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