Charlene Chu, China macrofinancial senior analyst at Autonomous Research, discusses the Evergrande liquidation order and says “the real question about the winding up petition is to what extent are the mainland authorities going to recognize what was decided in the Hong Kong courts.”

Got kids? Then, eventually, you’ll (most likely) also have college bills. And spoiler alert: They will be big. 

While it’s certainly not a parental requirement, footing the college bill (or any part of it) and allowing your kids to graduate debt-free is an enormous gift—one of the biggest you can give your children. Conventional savings vehicles, like 529s, are amazing tax-free-withdrawal vehicles, but they’re not the only way to get to the finish line. You can also use your real investing superpower to build the college trove, and you don’t need to have started saving in utero (although that always helps)

Here are two ways to fund college with real estate, whether you’re starting early or a little later.

1. Starting Early: Buy a Single-Family Home When They’re Born

Each kid “gets” their own home. Put 20% down, buy something reasonable and steady, and rent it out. This is base-hit, not home run time—you have almost 20 years for the thing to appreciate, after all. 

Then you can do one of two things: squirrel away the yearly cash flow (in a 529 or another tax-deferred vehicle) to pay for school, or keep (reinvest) the cash and, 18 years later, sell the house entirely and likely have more than enough to pay the bills and then some because of your smart focus on appreciation.

Even better (and more generous), use the cash flow you’ve socked away for two decades to fund college, then transfer ownership of the single-family home to your college kid when they graduate. Work with your legal team to buy it initially in a trust or an LLC where your kids are already named so you don’t pay a transfer tax. Now you’ve gifted them their first income stream before they even have their first W2.

Of course, you’ll teach them how to handle this revenue—how to save it or reinvest it—so your gift pays massive dividends. Do this for each kid, and you’ll set them up for massive success.

2. Starting Later: House Hack in Their College Town

You may need to rely on your 529 or other savings with this strategy to fund the first year of college since you probably won’t be able to predict where they’ll enroll in advance, but once they decide, turn on the house hack engine. 

Sometime during your kid’s first year, buy a duplex or house with multiple bedrooms in their college town. Make sure it’s someplace that college kids actually want to live, close to campus and amenities. (Your kid can help advise on this.) 

Then, when your kid is allowed to move out of the dorms, move them—and their (respectful, well-behaved) friends into the rental—one bedroom per kid. Collect reasonable rent from the friends and/or from the tenants in the other half of the duplex and enjoy free room and board for your kid while using the proceeds to pay the rest of those college bills.

Is your kid good at finding roommates and keeping an eye on repairs? Offer to provide them with a little spending money in exchange for basic property management. Some universities will eventually allow you to declare in-state residency after a bit (if they’re going to college out of state), which will save you even more on bills. Four years later, decide whether you want to keep the original college house or rinse and repeat wherever they’ve decided to go to graduate school.

What did we miss? How are you planning to use real estate specifically to fund your kids’ college education?

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Dave:
Hey, what’s up everyone? Welcome to On the Market. My name is Dave Meyer, your host. And today we’re going to be talking to one of the most well-respected and knowledgeable housing economist in the country. His name is Doug Duncan. He’s the senior vice president and chief economist at Fannie Mae. You’re probably aware Fannie Mae, one of the biggest government-backed entities that provides mortgages to the entire country. And so Doug and his team are really up on what’s going on with the housing market.
And today there are a couple things that I’m really excited to talk to him about. First and foremost, his team collects information and consumer sentiment, not just consumers, but home buyer sentiment. And so we’re going to talk about how people are feeling about the market, and not just how they’re feeling, but how their opinions of the market actually go on to influence behavior and actual results in the marketplace. And then, Doug has one of the most nuanced and most specific understandings and predictions about mortgage rates that you are likely to hear. So if you’re curious about where mortgage rates are heading this year and well beyond where you can expect mortgage rates to live over the next couple of years, you’re definitely going to want to stick around for this episode. So we are going to take a quick break and then we’ll bring on Doug Duncan from Fannie Mae.
Doug, thanks so much for joining us today.

Doug:
Happy to be here. Good to see you again.

Dave:
Likewise. Recently, Fannie Mae released an economic outlook and a national housing survey. So before we get into the outlook, I’m just curious a little bit about the sentiment. How are American consumers feeling about the housing market according to the data you’re collecting?

Doug:
Not very good. There’s been a little bit of an uptick recently in toward the positive direction as interest rates have started to come down a little bit, but in general, people don’t view it as a very good time to buy or frankly even to sell because affordability is really challenged. The pace at which prices rose in the 2020 to ’22 time period was very dramatic, much stronger than history would suggest. And then, even though interest rates were very low, which was one of the reasons for the price appreciation as people took advantage of those low interest rates, once interest rates rose, then the combination of high house prices and high interest rates really socked affordability significantly. It’s probably the worst it’s been for three decades or thereabouts, and people not very happy about that.

Dave:
Well, I appreciate your candor just saying not very good. That’s very blunt and appreciate it. How dramatic is it? Is it significantly worse than it’s been even after the ’08, ’09 era?

Doug:
Well, this is very different causes for the perspective. In the ’08, ’09 area, there was very weak or poor underwriting decisions made about credit qualifications and many loans made to people that really were realistically unable to sustain them. And as economic conditions changed, that proved out. There were huge levels of foreclosures. And so house price declines. Even with low interest rates during that time period did not lead to very happy consumers. And so we had to work through those foreclosures caused by that weak underwriting and the decline in the economy.
Today’s the basis for dissatisfaction is much more on the affordability side. Loan quality is very good. The number of delinquencies in the mortgage space are at very low levels, close to the lowest in history for Fannie Mae. And in part, that’s because in that 2020 to 2022 time period, a lot of people who already had mortgages refinanced them down to interest rates that are lifetime… It’ll be a once in a lifetime opportunity to lock in a 3% mortgage rate for a 30-year time period. So that side of things is very positive.
Our CEO called it a tail of two housing markets. If you’re in the market already and an owner, it was a great time to improve your position. You’ve seen that price decline, add equity to your household balance sheet. You’re in a really solid position. The problem is if you’re on the outside looking in trying to buy for the first time, high home prices and high interest rates are a toxic mix for you. In our sentiment survey, you do see a difference between current owners and those who are renters, and the owners are in a better position than the renters are.

Dave:
That makes sense. And what does this mean to you? Obviously, it’s interesting to see sentiment, but does it tell you anything about the housing market in the near future?

Doug:
Well, it says it’s going to be a gradual improvement, a slog, if you will, to get better. Our forecast is for home sales in 2024 to be around 4% higher than in 2023, but 2023 was a very low year historically. So it’s an improvement, but it’s certainly no gangbusters’ improvement. House prices are still, in our view, going to appreciate just because there’s such a lack of supply in the market and there’s still strong demand out there. Every increment that interest rates come down is going to put some pressure on activating that demand against that low level of supply and create upside risks in the house price area. And it’s really on the back of the builders to improve supply. But that’s going to take time.

Dave:
I guess one of the questions I’m continuously wondering and have been asking people is, as you said, lower rates and every time they tick down increases demand. But is there any chance that it will also increase supply because it improves those buying conditions for people who might now be willing to sell to buy into a slightly more favorable buying market?

Doug:
Well, at the margin, that’s possible. And if you look into the sentiment survey, you can see among the people who currently own a home, that their sentiment suggests it’s not a great time to sell a house because the combination of higher prices and interest rates reduces the group of people who could afford to buy that house. And so they don’t want to sell into a falling price market. So there’s a little bit of a give and take there with the improvement in affordability, and it really all comes back to revolve around supply.
So in order to make things return to more historically common relationship, you got to see one or a combination of up to three things change. One is there has to be some increase in supply. Some people are looking to that to the late life boomers releasing supply back into the market as one possibility. Obviously, the builders’ acceleration among the builders and adding supply to the market. The second thing is a rise in real household incomes. That’s important. If we see growing real household incomes, that helps. And a third thing is reduction in interest rates. So some combination of those three things is going to be required to return affordability to longer term, more average levels. And we don’t see that happening in 2024.
We see the Fed cutting rates four times in 2024. That’s what gets us to that 5.8% mortgage rate, which we think may occur in the fourth quarter of this year. So gradual improvement. We’ll see whether the bond market bears that out in 2025. We actually have another four rate cuts in our forecast, and so we see mortgage rates coming down into the mid-fives range.
When we are asked to think about what should people think of as a go forward mortgage rate, I take a look back at the history of the 30-year pick street mortgage. And from the post-World War II time period after the VA was in operation and employment stabilized shifting from the war footing of the economy, the average 30-year fixed rate mortgage from that time period up to the year 2000 is about 6%. During that time, the economy grew at about 3% annual even including recessions.
So if you think about that relationship and then think about the CBO today projects the potential growth of GDP going forward at about one and three quarters percent annually, and think about what would mortgage rates relative to that look like. What I tell mortgage lenders is I would be doing my planning on a interest rate path across the housing cycle of between four and a half and 6%, four and a half when we come out of recession. And so things are getting started again, the Fed has eased, rates have come down. Then across the expansion, you see rates gradually move up as incomes move up. And prior to Fed tightening on the other end of that expansion, mortgage rates probably hit around 6%. So the middle of that, it’s about five and a quarter percent mortgage.
It might be a little lower, depending on what you think about all of the treasury issuance that has to be done to fund the debt in the United States because that number is going to be bigger this year than last year and even bigger next year. So that underlying treasury issuance may put some up upper pressure on rates that would suggest it wouldn’t go as low as it might given the lower level of economic growth under which the housing market operated.

Dave:
Okay. But it sounds like given what you’re saying about the range, and if the Fed you believe long-term tightens around six, gets back down to four and a half, does that mean you think the reason it’s going to take a few years to get back down to maybe low fives is because we’re going to be in a extended period of slow economic growth or perhaps even a recession?

Doug:
Well, we flipped our forecast in December. We still had a mild recession in the first half of 2024, but we’re just not seeing the weight of change resulting in that at this point in time. We’re still monitoring a series of things that are highly correlated with recession that are still indicating recession. But one of the reasons we felt the recession would be mild was because of the supply demand imbalance within housing. That certainly has played out to be true. That part of the forecast we absolutely got right. But housing now starting to improve would suggest it may actually keep us from going into recession and lead the way to, if not strong growth, at least slow growth. And our forecast does reflect slow growth over the next couple of years. So that slow growth suggests that the Fed will continue to bring rates down and move mortgage rates back to that low to mid-fives range.

Dave:
I want to get back to something you said earlier, Doug, about supply and where it comes from. And it sounds like you’re of the belief that I think is shared by a lot of experts in the housing market that affordability long-term does need to return to more historical averages, but it doesn’t need to happen quickly, and it could happen over the next few years as the combination of variables, you said, take effect. You said basically real wage growth that for our listeners means inflation adjusted wage growth, perhaps more building, lowering interest rates. Is that how you see the housing market operating over the next few years?

Doug:
Yeah, we don’t see the supply problem going away immediately. That’s a longer term challenge, and there’s been a lot of analysts that have run their forecast ship on the ground expecting some sort of a catastrophic decline in house prices because of a demographic shift. We don’t see that.
Most recently, there was an article written about who’s going to buy all these big suburban homes now that the boomers are empty nesters. Well, the shift toward work from home suggests even if you have a smaller family, now you need at least one office and maybe two if you’re a two income household. And so that’s going to absorb some of those extra bedrooms that were considered to be the risk. And so once again, the shift in economics and demographics has suggested there’s not waiting out there some catastrophic decline in house prices. And in fact, gen X population group, depending on the years that you calculate, is actually larger than the boomers, and they’re still a pretty significant group at the tail end of that age group. And the uncertainty is we don’t know how much immigration is going to backfill behind that. So predicting some sort of a dramatic drop-off in house price has been a fraught area to be in, and we’re not in that area.

Dave:
Yeah. Yeah. I’m with you there. The last question, Doug, before we let you go is you mentioned something about construction and that it would take a really long time. This is a question we get a lot here on the show. What would it take for construction to bail us out of the supply problem?

Doug:
Well, you’d have to see a continued acceleration of acquiring resources by builders in order to push that forward. People talk about the three Ls or the five Ls. Land, labor and lumber being the three Ls, and they’re still in the builder community surveys. You will still see that one of the constraints that they recognize is the lack of skilled labor. It’s not basic labor carrying bags of cement or blocks or whatever, but it’s people who are really good at drywall and finishing products and things like… Some of that takes time to build. And if everyone’s trying to expand, it’s reasonable that you would see in their surveys that is a problem for them. If everybody’s trying to hire skilled labor at the same time, there’s going to be, in the surveys, a reflection of that as a challenge for them.
You would say, okay, we’ll just raise their wage rates and you’ll get more. Okay. They still need to make a profit. If you raise the cost of labor, then the question is, what happens to the cost of materials? Well, the cost of material has been going up as well. Okay, well, then what happens with the cost of land? Well, the cost of land has been going up as well. So it’s a gradual process and they expand according to the pace at which real incomes will allow households who would like to buy a new home to be able to purchase it. So there’s a simultaneous change of economic factors that needs to take place, and that will be gradual, not sudden.

Dave:
That’s a very good explanation. Thank you. I think we were all hoping it will happen, but obviously there’s some barriers to that just picking up overnight.

Doug:
Yeah, that’s right.

Dave:
Well, Doug, thank you so much for joining us. We really appreciate your time.

Doug:
You bet. Good to be with you.

Dave:
Another big thanks to Doug for joining us today. I hope you all enjoyed it. I think Doug is one of the most knowledgeable guys out there and really shared some really helpful information. For me, I find the range that he provided about mortgage rates to be one of the more useful tidbits and stats that I’ve heard in a long time because, frankly, people guess where rates are going to be in the end of 2024. But for me as an investor, it is more important to me what the range is going to be going forward because that actually allows me to make more long-term decisions. Like, do I want to do a rate buydown? How much debt do I want to put on? Should I refinance this year? Rates are going to be lower. And I generally think that his analysis of the range of rates is good.
It sounds like we need another year to at least get into that range of six to 4.5%. And I agree with Doug. I personally don’t see it going. I think it will probably stay in the sixes for most of ’24, maybe dip into the fives. But I do think we have a ways to go with mortgage rates. But it’s helpful still to just understand that not likely to get down into 3% again, probably not even into the low fours anytime soon, maybe not even in our lifetimes. And so that will hopefully get people selling when they realize this. And as an investor, that hopefully helps you make decisions about what you’re going to purchase, when you’re going to purchase and your financing strategy.
So hope you learn something. I appreciate you all for listening. If you did learn something and you liked it, share it with a friend or leave us a five star review on whatever platform you’re listening on. Thanks again. We’ll see you next time.
On The Market was created by me, Dave Meyer, and Kailyn Bennett. The show is produced by Kailyn Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Ankur Jain, Bilt Rewards founder and CEO, and Ken Chenault, General Catalyst chairman and managing director and Bilt Rewards board chairman, join ‘Squawk Box’ to discuss the company’s rewards program, how Bilt partners with real estate owners and allows its users to earn points when paying their rent, and more.

This article is presented by Ignite Funding. Read our editorial guidelines for more information.

As an investor, you have many options when it comes to where you put your money. Day after day, whether you are driving to work or watching your favorite reality TV show, you’ll see advertisements telling you to invest in gold, stocks, digital currency, mutual funds, etc. 

And because of those ads, people have become familiar with those types of investments. But very few people are familiar with trust deed investing, although it’s a form of investing as old as money itself. 

What is Trust Deed Investing?

A trust deed investment is when a lender (you) lends money to a borrower (homebuilder/developer) that is secured/collateralized by real estate. Trust deeds allow investors to get a passive introduction to investing in real estate without the need for large capital outlays. 

Investing in trust deeds means you are loaning your money against collateral. The collateral—real estate/land, in this case—serves to protect the lender’s investment.

This leads us to one of the most important considerations in trust deed investing: the true value of the collateral. It’s especially important that trust deed investors consider the size of the loan they are making in relationship to the real estate collateralizing the loan. This is why a detailed underwriting process is helpful to justify the value of the property, evaluate each piece of collateral at hand, and ensure the borrower is accountable for what they are borrowing. 

Before investing in any trust deed, ensure you are provided the following: 

• Location
• Type of loan
• Terms and funding date
• Interest schedule
• APNs or property address
• Collateral history, if applicable
• Property details
• Borrower use of proceeds

As an investor, you get to choose which projects you invest in, as well as which borrowers your funds are lent to.

Why Trust Deed Investing?

A loan made via a trust deed is similar to a mortgage. The basic difference is that there are three parties in a trust deed: the borrower, the lender, and the trustee. 

The trustee holds the deed while the loan is being paid. Also, there is a signed promissory “note” that defines all the terms of the loan. If the borrower defaults on the loan, the trustee starts the foreclosure process. In a mortgage, the lender has to go to court to get the foreclosure started. 

Trust deed investing is so popular because it pays a comparably high rate of return, and the investments are secured by real estate, while other investments like stocks, bonds, and mutual funds don’t provide investors with collateral. Further, once the loan has been made, the rate of return associated with the trust deed is fixed and does not change throughout the duration of the loan. 

Trust Deed Investment Best Practices and Considerations

Before choosing a company to invest with, always research the company. As with all investments, there are inherent risks. It is highly recommended that consideration and proper due diligence be given to the company you are entrusting with managing your real estate portfolio. 

While trust deeds provide a sense of security through the collateral of the property, they are not entirely risk-free. Economic downturns, changes in real estate values, or defaults can impact the return on investment. 

Trust deed investments also lack liquidity, something most investors have become accustomed to, specifically in the stock market. Selling or exiting a trust deed investment may take more time and effort compared to selling stocks, as the terms and conditions may not allow an investor to prematurely exit the investment without penalty, if at all. 

Defaults are always a possibility for anyone lending or investing in real estate. How the default situation is handled can be detrimental to the return on your initial principal investment. The default process can be overwhelming for investors who have never taken property back through foreclosure, which is why it is important you work with a reputable and experienced loan servicer. 

So when is a good time to invest in trust deeds? The simple answer is now. 

Trust deeds don’t follow the volatility of the stock market. They more or less beat to the sound of their own drum. They also provide investors with instant diversification through different geographic locations and phases of real estate (acquisition, development, and construction). Depending on your investing time horizon and risk tolerance, where you invest your money can make a big difference in your financial future. 

In each example in the chart, if you invested $100,000 over five years with annual compounding in each of these investment vehicles, the results vary significantly based on the potential performance:

Every investor deserves to have a reliable source of passive income in their portfolio. Had you invested a portion of your portfolio in 2023 in trust deeds, you could have made a consistent 10% annualized return on your investment. 

This being said, Trust Deeds are not meant to be the “grand slam” investment of your portfolio. They are meant to provide passive, fixed income that diversifies you from other investment types but still allows you to have control in terms of selecting where you want your funds to be invested. 

If this type of investment intrigues you at all or you would like to speak to someone about questions you may have about getting started, check out the Ignite Funding website or call us at 702-761-0000.

This article is presented by Ignite Funding

Ignite Funding offers real estate investments backed by collateral. More specifically, we provide an alternative investment option that matches quality real estate Borrowers with Investors seeking capital preservation in collateralized turn-key real estate investments while earning a 10% to 12% annualized return. Since 2011, Ignite Funding has funded over $1.5B in loans with Investor capital.

Ignite Funding, LLC | 6700 Via Austi Parkway, Suite 300, Las Vegas, NV 89119 | P 702.739.9053 | T 877.739.9094 | F 702.922.6700 | NVMBL #311 | AZ CMB-0932150 | | Money invested through a mortgage broker is not guaranteed to earn any interest and is not insured. Prior to investing, investors must be provided applicable disclosure documents.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

As part of its goal to increase affordable mortgage access for homebuyers in the United States, Fannie Mae announced in December that it would accept attorney-opinion letters (AOLs) in place of title insurance with more mortgages. While AOLs have been allowed by the government-sponsored enterprise on select mortgages since 2022, the decision expands eligible mortgages to include condo units and properties with homeowners association (HOA) restrictions, potentially assisting more first-time homebuyers with the high costs of homeownership by trimming about $1,000 off their mortgage closing costs. 

The Community Home Lenders of America expressed support for the alternative as a way to tackle homeownership affordability challenges. But the American Land Title Association (ALTA), the nation’s largest title insurance trade organization, has consistently pushed back against attempts to allow title insurance alternatives, citing gaps in protection for homeowners and lenders. 

The association joined lawmakers from both political parties in criticizing an earlier pilot program that may have eliminated the title insurance requirement altogether on select mortgages. Fannie Mae abandoned the pilot program last year based on guidance from the Federal Housing Finance Agency (FHFA). 

Though AOLs will now be an option for lenders originating many government-backed mortgages, critics claim lenders will need to sacrifice essential protections to make the alternative available to borrowers, which may limit the impact of Fannie Mae’s decision. 

What Is Title Insurance?

First, it’s helpful to understand what title insurance is. This type of insurance protects against defects in the title that were present before the home sale but may threaten the buyer’s ownership rights or cause monetary losses in the future. 

The vast majority of mortgage lenders require borrowers to purchase a lender’s title insurance policy with a limit that covers the mortgage principal. This means buyers must pay a sizable one-time premium at closing, which provides coverage until the mortgage is fully paid or the home is sold. 

If issues with the title arise that challenge the buyer’s right to ownership, such as boundary disputes, unpaid real estate taxes, contractor claims, errors in property records, or fraud, these issues could put the lender’s security interest in the property at risk. The lender’s title insurance policy protects the lender against monetary losses in the event a third party successfully claims ownership of the buyer’s home. It does not cover the buyer’s legal fees or protect their home equity. 

That’s why most attorneys recommend that buyers purchase an owner’s title insurance policy as well. These are often sold as a package. The owner’s title insurance policy typically covers the homeowner as long as they own the home. 

Is Title Insurance Necessary?

Title insurance critics contend that attorney-opinion letters, which are now allowed on many mortgages backed by Fannie Mae and, in more limited circumstances, Freddie Mac, provide sufficient protection against title risks.

According to Fannie Mae’s guidance, attorneys issuing the letters must have errors and omissions insurance, which can protect against losses the lender incurs due to attorney negligence during the title examination. For example, SingleSource, which provides services to mortgage originators, now offers an Attorney Conclusion of Title that includes a transactional liability insurance policy that lists the lender as a third-party beneficiary and covers the loan principal for the length of the loan. 

But if the buyer discovers title issues that are not due to attorney negligence, any resulting losses may not be covered. And foreclosure may need to occur before even filing a claim. It’s also not clear whether the buyer’s or lender’s legal fees would be covered in a title dispute or whether an AOL provides any protection against title issues related to fraud, according to ALTA. 

For these reasons, lenders and buyers may opt for title insurance to get access to broader coverage for a wider range of title defects, even if a cheaper alternative is available. Some members of Congress have expressed concern about how AOLs will be marketed to homeowners and have asked the FHFA for clarification on what disclosures will be required to prevent consumer protection violations. Without proper education on the differences between title insurance and AOLs, homebuyers might not understand the protections they’re giving up to save money on closing costs. 

That said, title issues are relatively rare. In fact, of the more than 10,000 AOL-supported mortgages that Fannie Mae has purchased since 2009, none have resulted in losses for the mortgage company. While title defects have caused homeowners to lose their properties in rare cases, mechanics’ liens are more common and not as catastrophic, according to the Urban Institute. 

Reducing Title Insurance Costs

Despite the broad coverage that title insurance policies provide, many people criticize the high costs to consumers and how that money is spent. With most insurance products, providers spend about 70% or more of the premium dollars they collect paying out claims to policyholders. Title insurers, by contrast, only put about 5% of premiums toward covering losses. 

Title insurance agents retain about 70% of buyers’ premiums, according to a report from the U.S. Government Accountability Office (GAO). While the role of the title insurance agent is sometimes labor intensive, in other instances, it can be mostly automated, with the title search and examination taking as little as 60 seconds. 

The Consumer Financial Protection Bureau encourages homebuyers to shop around for a title insurance company since research shows comparison shopping can save consumers as much as $500 on title insurance. However, some people question whether real estate brokers or lenders may be steering homebuyers toward title companies with which they have Affiliate Business Arrangements (ABAs) that provide financial incentives. 

For example, The Denver Post investigated 2,200 home sales for which real estate brokers had profitable partnerships with title companies and found that most homeowners chose the title insurance company that financially benefited their broker. Agents are required to register ABAs with the state of Colorado and disclose those relationships with homebuyers, but the investigation revealed at least three dozen agents with unregistered ABAs. 

And there was evidence to suggest that even some brokers with registered ABAs weren’t giving their clients options. For example, 100% of three brokers’ home sales used their affiliate title insurance company. If brokers had provided homebuyers with three options to compare with each other, as industry protocol suggests, that outcome would be highly unlikely. 

Title insurance typically costs about 0.5% of a home’s purchase price, which is more than $2,000 on a median-priced home. Even in the absence of affordable alternatives that provide sufficient protection for homeowners, the Urban Institute notes there are ways to control excessive costs. Self-insurance by secondary market entities, like the pilot program Fannie Mae dropped after backlash from the title insurance industry, could be one potential strategy. 

State regulations can also make an impact. For example, the state of Iowa, which prohibits the sale of commercial title insurance, operates Iowa Title Guaranty, which provides similar coverage as a commercial title insurance policy to both the lender and the owner at a flat fee of $175 for properties that sell for $750,000 or less. Any surplus profits go toward Iowa’s housing program fund. 

Iowa’s homebuyers are also required to pay for an attorney-abstract opinion, but they still pay far less than the typical title insurance premium in other states. Additionally, Iowa Title Guaranty won’t insure titles that haven’t been thoroughly examined by an attorney. Because this system has been in place for decades, the state is well known for its clean titles. 

The Bottom Line

While $1,000 in savings may seem minor relative to the cost of buying a home, homebuyers today need any edge they can get. Research shows that even an extra mortgage payment’s worth of post-closing reserves can dramatically decrease the risk of default. 

The FHFA requires Fannie Mae to make efforts toward advancing housing finance equity, which is a challenging task given high mortgage rates and high housing prices. Expanded acceptance of AOLs in place of title insurance is one aspect of Fannie Mae’s plan, but in some situations, forgoing title insurance could leave homeowners vulnerable to unaffordable costs down the road. Lawmakers and title industry advocates have been vocal about their concerns, and their criticism may impact lenders’ decision to allow the alternative. 

Real estate investors may also continue to purchase title insurance, even if more affordable alternatives are available, in order to secure the broadest possible protection for their investments. But regardless of the impact of Fannie Mae’s decision, there may be room for further innovation and cost control measures related to title insurance.

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Choosing between commercial and residential real estate is a big decision for investors. If you choose the wrong strategy, you could be in over your head and potentially lose money. 

We’ve created an investing in commercial real estate for beginners guide to help you understand what it means to invest in commercial real estate and what it requires.

Understanding Commercial vs. Residential Real Estate

When you think of commercial real estate, you likely think of retail stores, office spaces, and medical facilities. It can also include properties with more than five units, such as apartment complexes and hotels. 

Residential real estate refers to properties strictly for living in. This includes any buildings with fewer than five units, such as single-family homes, condos, and duplexes.

Commercial and residential real estate may both earn landlords rent and require property owners to manage and maintain them, but the similarities end there.

Key differences

Knowing the key differences between residential and commercial real estate can help determine which investment strategy is right for you.

• Types of tenants: Commercial real estate tenants have specific needs. For example, you may get retail tenants, medical practitioners, or tenants needing office space. Residential real estate tenants strictly need a place to live. There is generally a larger pool of residential real estate tenants.
• Lease terms: Commercial real estate has much longer lease terms than residential leases typically have. Most residential leases are for one year or less, making the income less consistent and risking a higher vacancy rate than commercial real estate, which usually has leases ranging from three to 10 years.
• Income potential: Commercial real estate typically offers higher and more stable income because tenants sign longer leases. The risk of vacancy with residential properties makes the income more volatile, and rent prices are typically lower.
• Regulations: Commercial real estate faces much strict zoning and use guidelines. This may narrow your pool of available tenants. Residential properties have a single use: a place for tenants to reside.
• Initial investment requirement: Investors need much less capital to invest in residential real estate than in commercial real estate. This can sometimes be a barrier to entry for beginners in commercial real estate.
• Volatility: Commercial real estate is more prone to market downturns because businesses are usually the first to struggle when the economy struggles. On the other hand, everyone needs a place to live, so residential real estate isn’t as volatile.

Benefits of Investing in Commercial Real Estate

When investing in commercial real estate, it’s important to consider the benefits of choosing it. Like any investment, commercial real estate can be a solid choice when things go well.

Here are some of the benefits investors enjoy:

• Higher income: Commercial real estate rent prices are usually much higher than residential rent, so investors have higher monthly cash flow.
• Longer lease agreements: The peace of mind that comes with a commercial property lease can be worth its weight in gold. Knowing you have a tenant for the next 10 years versus one year can make investing much less stressful.
• Triple net leases: Under a triple net lease, commercial tenants pay real estate taxes, insurance, and maintenance plus rent. This lowers the investor’s costs in owning the property and increases potential profits.
• Diversification: Putting all your money into one investment is never a good idea, so diversifying into commercial real estate ensures you get the best of both markets when they do well and have each market to back up the losses when one market struggles.

Risks Associated With Commercial Real Estate

All investments have risks, and the higher the risk, the greater the potential returns. Here are some of the most common risks to be aware of before choosing to invest in commercial real estate for beginners:

• Market sensitivity: When there is a market downturn, businesses can be the first to struggle, especially those in nonessential industries. Lower sales can mean missed rent or broken leases.
• Property management challenges: Commercial real estate investments typically require hiring reputable property management companies. Hiring a deceptive property management company can cause you to lose tenants and money.
• Higher initial investment: Commercial properties require 30% to 40% down payments and have much higher price points. This can mean you need hundreds of thousands of dollars for the down payment.
• Liquidity issues: Residential real estate is much easier to sell when needed, and often at a price close to or higher than what you invested. Commercial real estate doesn’t have the same benefit. It’s often much harder to sell quickly, and you likely won’t get what you paid for it, depending on the current values and economic cycle.

Beginner Steps to Get Started With Commercial Real Estate Investing

Investing in commercial real estate for beginners requires several steps to ensure you get started on the right foot.

Market research

Before investing in commercial real estate, market research is essential, as is knowing the economic and employment health of the area. Not all commercial properties will be profitable. It depends on the health of the overall area and the demand for the type of commercial property you’re considering.

Assemble a team of experts

Investing in commercial real estate requires a solid team of experts who are there for you every step of the process. This team includes real estate agents, lenders, accountants, property managers, contractors, and lawyers. The right team will oversee purchasing and managing commercial real estate to help you earn profits.

Financial analysis and budgeting

A property financial analysis is the key to ensuring you make a solid commercial real estate investment. Like residential real estate, consider the rent history, property management expenses, taxes, and insurance. But you must also consider the number of units, vacancy history, zoning regulations, the property’s net operating income, and cash flow.

You must also determine your personal budget and if you’ll qualify for financing. This requires an extensive down payment and the ongoing funds to operate and manage the property.

Secure financing

Securing financing for commercial properties differs from residential investment financing. As mentioned, you’ll need a larger down payment, but you must also show you have the experience and knowledge to manage a profitable commercial real estate investment.

In addition to standard financial documents required for residential real estate investments, you must prove you have the experience necessary to run a commercial real estate investment with documented proof, such as profit & loss statements.

Due diligence

Research is the key to successfully investing in commercial real estate. Consider the property’s cap rate, cash-on-cash return, and net operating income. Compare these numbers to your overall investment plan to see how they fit.

Common Strategies for Investing in Commercial Real Estate

Investing in commercial real estate for beginners offers many options, from direct investment to crowdfunding; there are opportunities at every income level.

Direct investment

Most people think of direct investment when investing in commercial real estate. This means purchasing a commercial property and renting it to tenants. This requires large down payments, qualifying for financing, and understanding how to manage the property for the duration of ownership.

REITs

Real estate investment trusts (REITs) are real estate holding companies that purchase commercial real estate properties and sell shares of their companies to investors. The investors become real estate investors by default and earn a prorated amount of the portfolio’s return. This is a hands-off approach to real estate investing.

Real estate syndication

If investing in commercial real estate alone seems overwhelming, you can join a real estate syndication, a group of real estate investors who pool their assets and resources to invest in real estate properties. This gives you more power than investing in REITs and decreases the capital required and your overall risk. The profits, appreciation, and ownership percentages directly correlate to the size of your investment.

Crowdfunding platforms

Crowdfunding real estate platforms make commercial real estate investing possible for more investors. Some crowdfunding platforms have low investment requirements—as low as $100. This commercial real estate investment strategy is 100% passive, meaning you don’t have to do any work to manage the property. You invest money and collect your portion of the profits as they occur.

Managing Your Commercial Real Estate Investment

A major component of investing in commercial real estate is managing it. Consider these factors when deciding if commercial real estate investments are right for you.

Property management

When investing in commercial real estate, you must determine whether to manage the property yourself or hire a professional property manager. 

Property management includes running the day-to-day operations of owning commercial real estate, managing the property’s maintenance plan, tenant management, handling vacancies, collecting rent, and budgeting and reporting.

Hiring a property management company increases your expenses but decreases the time and effort you must use to manage the property.

Improving and upgrading properties

Improvements and upgrades can help you save money in the long run and earn higher rents. Tenants are always looking for upgraded spaces with the latest amenities. Upgrading commercial spaces also decreases repair costs and makes the property last longer.

Handling tenant relations

The most significant part of commercial real estate investing is developing tenant relationships. You’ll negotiate lease and lease renewals, collect rent, discuss rent increases as allowed in the lease agreement, and handle any tenant needs within the lease agreement.

Legal & Tax Considerations

Taxes and legal considerations are significant in commercial or residential real estate investing. 

Generally, residential real estate properties have lower property tax rates than commercial, but commercial real estate properties have shorter depreciation periods than residential properties (27.5 years versus 39 years).

It’s vital to have a powerful real estate team to ensure you understand your legal and tax requirements, both before choosing a real estate investment and while owning it.

Final Thoughts

Investing in commercial real estate for beginners requires a strategic plan, due diligence, and a solid real estate team. With the right people by your side and adequate research, you can diversify your real estate investment portfolio to include residential and commercial real estate investments.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.