(Bloomberg) -- Mortgage rates are high. Prices are still going up. And there’s nothing to buy.
For many, it’s a frustrating trifecta that has shut them out of owning a house — long a key way to build wealth in the US. But even in this forbidding real estate market, there are alternative solutions financial advisers say may be worth considering for people determined to invest in property.
This could be buying land only or leaning on close family members to help with financing. Of course, that may not work for everyone. But for the right house hunter — with at least some capital and an openness to creativity — there are less conventional routes buyers can take to save money and build equity in today’s market.
Here are some alternative ideas advisers are sharing with clients:
Buying Land
If today’s prices are putting homeownership outside of your reach, you may consider buying a plot of land. Elliot Pepper, a financial planner and director of tax at Northbrook Financial in Baltimore, said he helped a client come up with a plan to buy land as she was dead set on purchasing property but couldn't afford the right home.
Upsides: “This was a good path forward because my client was going to get a house one way or the other and this was a way we were able to not disrupt her ongoing monthly cash flow,” said Pepper, who noted his client was able to make a smaller down payment for the land. “She’s still going to be able to own an asset that she believes will appreciate in value over time, which is a big reason why people buy real estate in the first place.”
Downsides: It takes either a handy person to build a home, or one willing to manage a construction team, Pepper said. What’s more, a plot of land may look great, but it’s up to the buyer to determine how suitable it is to build a home on and what the regulations may be. Construction loans are available for people who need financing, but typically have higher interest rates than standard mortgages. That said, they are also shorter term and sometimes can be converted to standard mortgages upon completion.
House Hacking
It’s a strategy TikTok influencers and personal finance bloggers love to share: buying a home and then renting out part of it to cover some or all of the mortgage payment.
“I do believe that fundamentally it could work,” Pepper said. But he cautioned some online gurus encourage aspiring buyers to take their hacks too far.
Upsides: At a time when mortgage rates are approaching 8%, getting someone to split half your mortgage could bring you closer to the obligation you’d have under a lower rate. The strategy is similar to another popular idea online: buying up vacation rentals and leasing them out part time to cover your costs.
Downsides: Renting out a home comes with the cost of being a landlord. “Broken toilets at two in the morning, electrical issues, paint… everything and anything that could come up, at the end of the day, it’s not going to be the renter who’s going to deal with it. The renter’s going to call you,” Pepper said.
Aspiring house hackers should also remember that lending out part of a home could run counter to the terms of a mortgage. Experts recommend checking with lenders before listing a rental. The US Internal Revenue Service requires landlords to report their rental income, and landlords may be subject to local tenancy laws. Vacation rentals may additionally face backlash from neighbors and restrictions on how many days they can be rented out.
Parent Loans
The bank of mom and dad could be a good option for some first-time buyers with the privilege of having parents with cash to spare, said Brandon Welch of Newport Wealth Advisors in San Diego.
“For that loan to not be a gift, there’s something called the applicable federal rate that the IRS publishes every month,” Welch said. For October, the annual long-term rate is 4.46%.
Upsides: That figure is much lower than the average mortgage rate. At the same time, the parent — or other family member — gets a 4.46% return. That’s roughly the same as a saver might get in a high-yield savings account right now, but with the added benefit of helping a relative buy a home.
Downsides: “You have to be able to trust your kids, that they’re in the position to be able to honor their end of the bargain,” warns Welch. He adds that being a family member’s lender can also be anxiety-inducing. Parents who loan out a large amount of cash should truly be in a position not to need it, at least not as one lump sum, later in life.
Renovations
A close cousin to the parent loan — one idea financial advisers offered, for those fortunate enough — is renovating an existing family home to accommodate more people.
Upsides: Expanding an existing property can be a good way to put savings to use without the need to take on an expensive mortgage, 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 later inheriting the entire house as well.
Downsides: “You have to like your parents,” said Alan. They also have to live in an area close enough to the jobs and schools a younger family may need. Like building a house from scratch, renovations aren’t everyone’s idea of a good time. And zoning regulations may prevent expansions — or any significant change — so it’s important to check local laws first.
Moving Markets
While $1 million isn’t enough for a studio in parts of Manhattan, it would cover a five-bedroom with a pool in other cities. This tool can show you where your paycheck would go further in different parts of the country.
“With the availability of remote work, I think some folks are looking at other places that they may not have considered previously,” said Dan Herron, a financial adviser at Elemental Wealth Advisors in San Luis Obispo, California.
Upsides: There’s a good chance you could find a deal elsewhere. Buying a cheaper house 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. Payments, meanwhile, for a $500,000 home would be around $4,000.
Downsides: Saving money on a home is generally a good thing, but going too far can contradict a fundamental personal finance adage: Don’t buy what you don’t want. What’s more, lower salaries, taxes and transaction costs may make that low sticker price rise once everything is added up.
“My opinion on this has actually been changing,” said Welch of Newport Wealth, echoing many advisers who cautioned against ignoring quality of life issues in a housing search. Aside from possible ramifications for personal happiness, cheaper starter homes may be harder to sell down the road.
To contact the author of this story:
Charlie Wells in London at [email protected]
