The impact of interest rates on a $200,000 loan

The interest rates for investment property ranged from around 7.75% to 18% my first three decades in the business. Let’s use a few rates to see the difference in monthly payments. Let’s assume you’re workin’ with a Net Operating Income (NOI) of roughly $19,000 or so.

• 7% —  $1,331/mo  –  $15,972/yr  $3,028 annual cash flow
• 8% —  $1,468/mo —  $17,616/yr  $1,384  annual cash flow
• 9% —  $1,609/mo —  $19,308/yr  (Oops) Almost break even cash flow.
• 10% — $1,755/mo —  $21,060/yr  (Bigger oops) No can do cash flow.

What the above numbers demonstrate is where one line — rates/payments — intersect with the line representing the investor’s comfort zone. We know the work we did with our own boots on the ground is reliable, in other words, the NOI is a real world number. However, it doesn’t factor in the #1 fact of life for real estate investors:

Murphy’s still alive, and he knows where all of us live. Oh, you haven’t heard of his Law? It says, more or less — If anything can go wrong, it will — and at the worst possible time.

Ever heard of O’Toole’s Corollary? Murphy was an optimist.

With those happy thoughts in mind, I always make it a point to tell investors that their spreadsheets, including mine, are fine as far as they go. The line items have all been vetted within an inch of their lives. They’re reliable — ’til they’re not. So what do we do? Well, keep on puttin’ your boots on the ground to ensure the credibility of your bottom line. Nobody wins with a fictional NOI. Still, regardless of how hard you or I worked on a particular spreadsheet, the resulting cash flow should only be viewed as the ‘classroom’ number. When figuring annual cash flow, eschew all the hard work you spent in the field, and simply divide the Gross Scheduled Income (GSI) by 2.

In this example that’d reduce the NOI to, give or take, just under $16,000. NOW look at the interest rates above and ask yourself when you’d pass up the investment due to the cash flow — or dearth of same. Seems around 7% is the red line. Yet according to a well prepared, boots on the ground spreadsheet, 9% would be just about a break even on cash flow. That is, as long as Murphy never showed up.

BawldGuy Axiom: Murphy always shows up — it’s only a matter of when, never if. At some point it will be your turn in his barrel. Real estate investors ignore that very real fact of life at their peril.

Now let’s take a look at today’s investor rates.

Single family is at — 4.625%

A 2-4 unit property is at — 4.5%

Let’s really bring home the impact interest rates have on real estate income properties. We’ll take the NOI we’ve been using, about $19,000, and apply it to a duplex loan of around $200,000 as we did for the higher rates, earlier.

$200,000 at 4.5% = $1,014/mo — $12,168/yr debt service.  That’s a cash flow of just over $6,800. Don’t forget to factor in Murphy. Doing that results in a cash flow of a tad over $3,800. (Remember: The ‘Murphy Factor’ means you simply divide the GSI by 2 to get your NOI.

What do all these numbers mean to the real estate investor in today’s market?

It means that at today’s rate of 4.5%, the investor generates more cash flow using the Murphy Factor than those who paid 7% decades ago did without invoking Murphy.

And that’s what I’m talkin’ about when referring to the impact of interest rates. Today’s interest rates will literally be the star of stories you’ll be tellin’ your kids — and their kids. That’s how low they are.

Get off the fence. Time ain’t your friend. These rates won’t last forever. The stories you’ll tell 20 years from now will either be about the low rates you paid ‘back in the day’, or about all the shoulda coulda woulda happy endings you never experienced. Your choice.

Gimme a call at 619 889-7100, and together we’ll figure out what’s up with your retirement Planning. If you’d rather write me, click the Contact BawldGuy button up top. Have a great weekend.

The rates have remained at the historic lows they hit last week. The ‘Perfect Storm’ for real estate investors, about which I’ve written many times, on these pages and elsewhere, is still at Force-5 strength. How long this window will remain open is anyone’s guess, as my crystal ball hasn’t emerged from the repair shop since the ’70s. The message there is to move it or lose it if you’re thinkin’ of employing real estate as part of your retirement income. This ain’t gonna last forever.

The Rates

If you’re purchasing a SFR your rate, with a 20% down payment, will be 4.75%.

Prefer 2-4 units? At 25% down, you’ll be able to benefit from a 4.625% interest rate.

Let’s talk, OK? Gimme a call at 619 889-7100, and together we’ll make it happen. If you like email better, go up top and click on the Contact BawldGuy button. Have a great weekend.

The Rates

As of today the rates for real estate investment properties — 1-4 units specifically — are as follows:

Single family units — 4.75% — assumes 20% down payment.

2-4 unit properties — 4.625% — assumes 25% down payment.

NOTE: The above mentioned down payments will rise 5% each once the investor/borrower has four (4) such loans in place. In other words, the single family loan would then require 25% down, and the 2-4 unit loan would require 30% down.

Meanwhile, back at BawldGuy Ranch, BawldOperators are waiting for your call. 619 889-7100 will find me. You many send me a note, no matter how long or short, by clicking Contact BawldGuy up top. Have a good one.

today will be a brief update.  Not a whole lotta activity eco-wise at the Wall today, except for typical buying and selling of stocks and bonds.  Kind of ho hum, but I ain’t complaining, it’s allowing me to play catch up.  Been out of office for almost a week, much to the chagrin of the BawldGuy I’m sure :)  but it was all business and no pleasure unfortunately.   

Anyhow, let’s take quick peek at what’s coming next week.  

Tuesday will be the release of new home sales figures, which will give us a small inkling of how good or bad the economy is as far as home sales are concerned. But the big news will be on Wednesday, when the Federal Opem Market Committee will release its post meeting statements, followed thereafter by the Fed’s official economic forecast. They will conclude with ‘Big Ben’ (Fed chairman Ben Bernanke) and his press conference.  The following day (Thursday) will bring the intial jobless report that will also be anxiously awaited by traders to see if the economy is cooling off again, or showing signs of life.  Be prepared for volatile trading and fast moving market conditions on Wednesday and Thursday that could move rates either way.

Also next week, Uncle Sam will have a garage sale to the tune of $99 billion over 3 part auctions.  $35 billion of 2-year Treasury Notes on Tuesday, $35 billion of 5-year notes on Wednesday, and $29 billion of 7-year notes on Thursday.  If you believe what the forecasters predict, potentially higher rates starting next week, midweek sometime.  You’ve been warned, whether or not it will actually happen is anyone’s guess.

Hey, speaking of rates, let’s get right to it:

Single Family Investment Property can be had for 20% down, and leveraged at 4.875%. 

2-4 unit properties can be had for 25% down at 4.75%.

Everyone have a super weekend, and enjoy the great weather.

Mortgage rates and the Fed

The past couple days, have been slow steady improvement for mortgage rates and the bond market, but today was a very good day, given the non-farms report. The Fed rang the bell and closed shop at noon eastern today, but not before the non-farms sent investors scurrying for bonds and mbs at the expense of stocks. Non-farms showed an increase of 120,000 which was far below economists’ expectation of 200,000 more jobs created than lost. Also, the unemployment rate is at 8.2, still extremely high.

Investors are probably figuring that the Federal Reserve may have to rethink exiting the direct purchase arena. We will see. My opinion is Big Ben will probably continue the Fed’s attempt at stimulating the economy through direct purchase of treasuries and mortgage backed securities. But we will have to wait it out until at least June.

Europe

The other news that caused the ‘spike’ in the bond market today is what is going on across the pond in Europe. It is becoming even more evident that they are slipping back into a recession, which will only help to stall our economy here in the states, along with everyone else, and during uncertain times, the dollar-denominated assets like bonds and MBS are the safest bet.

OK, saved the best for last.

You keep hearing about how tight the lending market is right now, but the word on the street is the banks and other investors are considering the prospects of allowing purchase of single-family investment properties with less capital out of pocket. Many are considering a 15% investment with the hopes that mortgage insurance companies allowing MI on SFR Investment Properties. Not everyone is on board yet, but it’s definitely positive chatter for investors. Stay tuned . . .

On to the rates:

20% down on SFR Investment properties and you can get 4.875% Fixed for 30-years

25% down on 2-4 unit properties and you can get the same 4.875% Fixed for 30-years

Everyone and a safe and enjoyable Holiday weekend, and we’ll talk again next week.

A rather subdued day at the ‘Wall’. As I write this, stocks on the big board are up 15 ticks with the NAZ up 16. Bonds are up as well, about 6/32. Could have been worse, but the eco news came in pretty close to the consensus. So the job market is starting to slowly, but surely grind forward, which is welcome news for Big Ben at the FED. Next week is the Fed Open Market Committee meeting and more than likely in light of unemployment at it’s lowest level in 3 years at 8.3, and the slow steady growth over the past several months, and payrolls up slightly, it is unlikely that they will decide to launch any resemblance of QE III.

Greece averted total financial ruin, just barely, which of course is eco positive, through the help of private investors. However, how long this will last is anyone’s guess. But for now they are still a part of the European union.

The above will likely cause mortgage rates to creep up slightly, though I don’t see anything major happening yet. Speaking of mortgage rates, let’s get to the rate report, before people start their ‘Spring Break’ early today:

Leveraging 80% on a SFR Investment property will give you an interest rate of: 5.125%

Leveraging 75% on a 2-4 Investment property will give you an interest rate of: 4.875%

Have a safe, enjoyable weekend, and if you are taking a Spring Break, enjoy it so you can hit it hard when you get back!

As I have a quick break in the action here, I wanted to update you all with a quick yet informative update. OK, today’s news; new home sales (SFR-Single-Family Residences), fell .9%, however, the previous months revision upward, painted a picture that could appear to many economists that the slumping housing market may have found a bottom. The supply of new homes available for sale, slid to a record low of $151,000 — or 5.6% — the lowest amount of inventory since 2006!

This is promising for the economy. While this is encouraging news, the pace of new home sales is still extremely sluggish. Don’t think of this as bad news, think of it as good news as far as mortgage rates are concerned, because this will help to support the low level of mortgage rates. Sluggish economy equals low rates.

Many “experts” are still anticipating a period starting in April, lasting through July 4th holiday, of slumping stock prices. Only time will tell on this scenario, but I don’t need to tell you what that means for mortgage rates. Last time I checked, investors don’t put their capital into depreciating assets, they go where the money is. Most strategists say that bonds and mortgage backed securities is where the money will be at this time.

Enough of that for now, onto the rates:

30-yr. Fixed Rates at 20% down for SFR is at 5.0-5.125%

30-yr. Fixed Rates at 25% down for 2-4 Units at 4.875%

Everyone have a great weekend, rest up, and get ready for another busy week!

Bonds

This week, bonds took a bit of a beating, largely due to events overseas, and even internal info coming out of the economic sector back here in the States. First off, Greece is adamant about their claims of having reached an agreement with the Euro Nations on their ‘bailout’. It appears that this agreement should be in place by the end of the day, Monday the 20th. While I’m still skeptical, it appears that this might actually happen this time — no, really. If that’s the case, expect a little flurry of investors to start investing some capital into stocks, and thus liquidating some of their safer assets like bonds and mortgage backed securities. This could put a little pressure on the price of bonds and thus raise rates slightly.

At Home

The news on the home front was positive and for the most part in line with the numbers expected. There was a .9% rise in gasoline prices here in the states for January that contributed to pushing the Consumer Price Index to it’s highest level in 4 months. If you take out the more volatile food and energy and look at the core rate of inflation, it rose in line with the experts expectations. One thing definitely worth noting is the core rate of inflation has climbed over the past 12 months, signaling that the rate of inflation may be waking from it’s slumber. Remember, Big Ben has been desperately anticipating inflation to increase, so he may finally get his wish. It is still way too early to tell. This is important to note though, as it may cause the Fed to hold off on moving forward with Quantitative Easing part III, or as we’ll title it QE III — the Fed’s direct purchase of the longer term bonds and mortgage backed securities. If inflation is starting to increase, and it is consistently increasing, there will be no need to enact such a measure.

On to next week. It would be a shortened week for investors at the Wall, starting with Tuesday Wednesday and Thursday, the Fed will be looking to sell off $99 billion in 2, 5 and 7 year notes. If the auctions go well, expect mortgage rates to remain steady, whereby poorly bid auctions could send rates upwards.

We will also get January’s report for existing home sales Wednesday, and on Friday the government will release data for new home sales.

Current Rates:

30-YR. FIXED RATE FOR SFR WITH 20% DOWN WILL GET YOU 5.125%

30-YR. FIXED RATE FOR 2-4 UNITS WITH 25% DOWN WILL GET YOU 4.875 – 5.0%

Everyone have a safe and enjoyable 3-day weekend for those lucky enough to have Monday off.

Now let’s back up a little bit.

So why does this have an impact on mortgage rates you ask? Again, this is a situation that wreaks havoc on our economy. Economically, this is bad news for Europe and for the US economy, as well as all other global economies. Nobody gains any benefit from a country defaulting. This is an extremely uncertain time right now for investors to gauge. And in uncertain times where do investors like to put their money? You guessed it, the safe assets like bonds and mortgage-backed securities. We’re not seeing a huge increase in the price of MBS right now because the price of the mortgage-backed security keeps bumping it’s head on the proverbial “glass ceiling”. The MBS has never been higher, and when you reach the pinnacle, ultimately you are going to have a little resistance. If Greece continues to struggle in their bailout pleas, we may break through this ceiling and we could potentially see rates dip a little more. Time will tell.

I would like to report what Warren Buffet thinks is the right move right now, as he knows a thing or two about this stuff.

“Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.”

In other words, lock ‘em if you got ‘em, or buy now as rates ain’t gonna get a whole lot better. Whomever you decide to believe, I’m following Warren on this one. I’ve said it before and I’ll say it again, “Hogs get fat, pigs get slaughtered!” Get in while the getting’s good!

Ok, on to the important stuff.

Today’s Rates:

Single-family Residence 4.875% with 20% down

2-4 units, are 4.75% with 25% down

Everyone have a great weekend, and we’ll see how this ‘Euro’ thing shakes out next week.

BawldGuy Here: A factoid we shouldn’t ignore is that in this report, about 1.2 million Americans gave up lookin’ for work, and therefore, weren’t including in the stats. That tends to skew the numbers. Geez, ya think?

This is an important time to keep an eye on stocks and just overall activity on Wall Street as yes, the economy is showing signs of life, but look out for the follow up to a 1-2 punch; they are still trying to work out a deal over in Greece to prevent a complete default. I no longer thing it is possible, it is probably quite probable. Inevitably they will strike a deal to bail out Greece and when they do, it will be another shot in the arm for the stock market.

The sky is not falling and I’m not saying we’re going to see rates skyrocket, just thought you need to keep your eyes and ears open to what’s going on right now.

On to the rates:

Assuming 20% down for SFR, and 25% down for 2-4 units

30-yr. Fixed Rate mortgage can be leveraged at 5% for SFR

30-yr. Fixed Rate mortgage can be leveraged at 4.875% for 2-4 units

That’s it from me, now go out there and enjoy your weekend, and if time permits, give myself or the Bawldguy a fix! We love this stuff!

Oh yeah, if you’re a football fan, like I am, I heard there’s a big game on this Weekend. Enjoy responsibly and be safe!