Alternative Strategies for Investing in Real Estate: Beyond Traditional Homeownership

Bloomberg — Mortgage rates are high. Prices continue to increase. Besides, there is nothing to buy.

In the opinion of many, It is a triad of frustrations that has deprived them of purchasing a house, which has long been a key avenue for building wealth in the U.S. However, despite this difficult housing market, there are other solutions that, in the opinion of financial advisors, are worth considering for people determined to invest in the real estate sector.

For example, buying only land or turning to close relatives for financial help. Naturally, this may not work for everyone. However, for those looking for a home, with some capital and creativity, there are less traditional options to save money and create wealth in today’s market.

Here are some different ideas that advisors are sharing with their clients:

Purchase of land

If current prices put home ownership out of reach, you may want to consider purchasing land. Elliot Peppera financial planner and tax director at Northbrook Financial in Baltimore, said he helped a client come up with a plan to buy land because she was determined to buy property but couldn’t afford the right house.

Advantages : “This was a good path to take because my client was going to get a house one way or another and this was a way we were able to not disrupt his ongoing monthly cash flow,” said Pepper, who noted that his client was able to make a smaller down payment for the land. “She will still be able to own an asset that she believes will appreciate in value over time, which is one of the main reasons people buy real estate in the first place.”

Disadvantages : It takes a skilled person to build a house or someone willing to manage a construction crew, Pepper said. What’s more, a piece of land may look fantastic, but It is up to the buyer to determine how suitable it is for building a home and what the regulations may be. Construction loans are available for people who need financing, but they typically have higher interest rates than standard mortgages. That said, they are also short-term and can sometimes be converted to standard mortgages once completed.

Hack a house

It’s a strategy that TikTok influencers and personal finance bloggers love to share: buy a house and then rent part of it to cover part or all of the mortgage payment.

“I think fundamentally it could work,” Pepper said. But he warned that some online gurus encourage would-be buyers to take their tricks too far.

Advantages : At a time when mortgage rates are approaching 8%, getting that someone split half of your mortgage could bring you closer to the obligation you would have with a lower rate. The strategy is similar to another popular online idea: buying vacation rentals and renting them out part-time to cover costs.

Disadvantages : Renting a house entails cost of being an owner. “Broken toilets at two in the morning, electrical problems, painting… anything that may arise, at the end of the day, it will not be the tenant who will take care of it. The tenant will call you,” Pepper said.

Would-be real estate hackers should also remember that renting out part of a home could be against the terms of a mortgage. Experts recommend checking with lenders before listing a rental for sale. The U.S. Internal Revenue Service (IRS) requires landlords to report their rental income, and owners may be subject to laws local rental. Vacation rentals can also face negative reactions from neighbors and restrictions on how many days they can be rented.

Loans for parents

The mom and pop bench could be a good option for some first-time buyers who have the privilege of having parents with plenty of moneysaid Brandon Welch of Newport Wealth Advisors in San Diego.

“In order for that loan to not be a gift, there is something called the applicable federal rate that the IRS publishes each month,” Welch said. By October, the long-term annual rate is 4.46%.

Advantages : That figure is much lower than the average mortgage rate. At the same time, the father (or another family member) earns a return of 4.46%. That’s about the same thing a saver could get in a high-yield savings account right now, but with the added benefit of helping a family member buy a home.

Disadvantages : “You have to be able to trust your children that they are capable of keeping their end of the bargain,” warns Welch. He adds that being a lender to a family member can also cause anxiety. Parents who lend a large amount of cash should really be in a position to not need it, at least not as a lump sum, in the future.

Renovations

A close cousin to the parent loan (an idea offered by financial advisers, for those lucky enough) is to renovate an existing family home to accommodate more people.

Advantages : Expanding on an existing property can be a good way to tap into savings without the need to take on an expensive mortgage, he said Marc Alan, owner of Marc Alan Wealth Management in Rockaway, New Jersey. Parents get a renovated home and more time with their adult children, who get housing and can stop renting. A possible plan could include the child also inheriting the entire house.

Disadvantages : “Your parents have to like you,” Alan said. They also have to live in an area close enough to the jobs and schools that a younger family may need. Just like building a house from scratch, renovations aren’t everyone’s idea of a good time. And zoning regulations can prevent expansions (or any significant changes), so it’s important to check your local laws first.

Markets in motion

While $1 million is not enough for a studio in some parts of Manhattan, would cover a five-bedroom apartment with a pool in other cities. This tool can show you where your paycheck would arrive in different parts of the country.

“With the availability of remote work, I think some people are looking at other places that they may not have considered before,” he said. And Heronfinancial advisor at Elemental Wealth Advisors in San Luis Obispo, California.

Advantages : There’s a good chance you’ll find a deal elsewhere. Buying a cheaper home means you’ll have to borrow less, which could make high rates more manageable. Putting 10% down with a 7.5% mortgage rate on a $1 million home would result in monthly mortgage payments of about $7,000. Meanwhile, payments for a $500,000 home would be around $4,000.

Disadvantages : Saving money on a home is generally a good thing, but going too far can contradict a fundamental adage of personal finance: Don’t buy what you don’t want. What’s more, lower wages, taxes, and transaction costs can make that low sticker price go up once you add it all up.

“My view on this has actually been changing,” said Newport Wealth’s Welch, echoing many advisors who warned against ignoring quality of life issues when searching for housing. Aside from the potential ramifications for personal happiness, cheaper starter homes may be harder to sell in the future.