The Federal Reserve is currently keeping interest rates down in an attempt to boost the economy. Their theory is that lower rates will encourage people to make investments in real estate, businesses and consumer purchases. But what about those who depend on earning interest to make a living? This small, yet significant segment of society, are also the consumers who are likely to make larger purchases. In the meantime, these potential consumers are hanging on to their portfolios waiting for the market to improve. They are clinging to their cash assets, with little return, waiting for a sign that investing their money will become more secure as well as profitable.
For these folks, I am suggesting a new perspective on a very old profession. Recession can be perfect timing for unparalleled opportunities, if we are properly advised. Holding mortgages can be one of the few tangible and solid investments during these times.
With regard to mortgages locally, real estate values in the Highlands-Cashiers area are holding better than most parts of the country. I believe this is because our typical property owner does not entirely depend on the economy for survival. Although our property values have decreased some, all indications point to leveling off. We are not seeing appreciation rates as of yet, but they will surely come in due time.
Mortgage loans have been the backbone of the banking industry since the foundation of our country. They have recently become problematic due to poor lending practices prior to the recession. Many lenders gave higher loan to value mortgages on properties with inflated values. In many cases these loans were made to unqualified buyers or to those depending entirely on their existing pre-recession income.
Certificates of deposit (CD’s) are the most secure investment, but they are currently earning an average interest rate of 2%. If you happen to own property free and clear of mortgages, you could sell and easily earn a 4 to 5% return by holding owner financing for a qualified buyer. If you want to consider a potentially higher profit margin, there are still some foreclosures and short sales available which can be purchased far below today’s market value. By buying low and reselling these properties at their higher value, holding seller financing at 4 to 5% interest could increase your profits substantially. Mortgages can also be relatively short term investments. It is not uncommon for mortgages have interest only monthly payments with a scheduled balloon payoff in three to five years. Again, the typical Highlands-Cashiers buyer is affluent and more often than not they pay cash for real estate. However, in these times they may want a mortgage until they can sell an existing property or they may be awaiting a scheduled pay-off from another investment.
My suggestion is to hold a mortgage substantially lower than the current market value of the property. In the remote case that foreclosure becomes necessary, you will be in a position to sell the property again, at the market value at that time, with the possibility of receiving even higher profits. Upon selling you could cash-out, reinvest or hold yet another mortgage on the property at the going interest rate at that time.
In this New Year, let’s consider a fresh prospective on a conservative, yet traditionally profitable venture. Holding a mortgage is a sensible and practical approach to investment in today’s economy. A professional agent with experience in owner financing and knowledge of the local real estate market will appreciate the opportunity to apply for the position as your Realtor.