Real Estate Investment Mortgage Rate Update — Plus — How 14 Months Is Your Friend

Rates have been very kind to traditional owner-occupied type homebuyers lately. Today they’re just a tick above 3.5%, which will always take me back to my first days, um years, uh, I mean decades in the business. It took me over 30 years to see an interest rate for 30 year fixed rate financing starting with a number lower than 7. Even the rates for real estate investment property remains in the 4-4.75% range. Dad was right. Stay in a business long enough and you might not see everything, but you’ll see plenty.

A quick piece of advice on interest rates and loan terms.

A few times every month somebody asks me why I don’t push 15 year loans vs 30 year loans, cuz the rates are lower. Since the rates are lower and the loan gets paid off in half the time, why wouldn’t I be screamin’ from the mountaintop for investors to take advantage of those two benefits? So glad you asked.

BawldGuy Axiom: With rare exceptions, real estate investors should avoid strategies which severely limit future options and/or flexibility. As a rule, those with the most options at crunch time, tend to win.

In the last 43 years I’ve seen far too many recessions. Then there are the lender crises of one sort or another. Sometimes, a particular local market becomes temporarily overbuilt, causing vacancy rates to rise while rents fall — simultaneously — which is always fun . . . not. There are all sorts of reasons your Net Operating Income (NOI) might fall, even if only for a short while. Problem is, ‘temporary’ and ‘short while’ are sometimes defined as a year or two.

For example, if your fourplex is cruising down the road like a well tuned Corvette, cash flowing like a champ, one of the aforementioned ‘temporary’ hiccups can become problematic. If you have a 15 year fully amortized loan at a 4% rate, with a beginning balance of $300,000 — your monthly payments would be $2,219/mo ($26,630/yr). That works fine as wine when your NOI remains in the range you’ve been used to for years — say $30,000/yr, give or take.

Then it happens

It doesn’t matter why things change, it matters that they can and do.

Due to negative changes in your market, rents fall 20%, faster than you can watch it happen. If that’s not bad enough, vacancy rates go from 5% to 15% at the same velocity, as if Murphy himself synchronized it. Your NOI plummets, as leases expire and new tenants come in at lowered rents. Your NOI stops its free fall when it reaches around $23,000 or so. Due to the 15 year loan, your cash flowing property is now costing you roughly $300 a month to keep it afloat. However, the guy who owns the fourplex just like yours down the street, is still cash flowing — about $350 monthly.

His loan was for the same $300,000, but for 30 years with a 4.75% interest rate. He’d been adding to his monthly payment regularly, but stopped when the downturn hit. You? Well, your options are to either A) Grit your teeth and eat the $300 a month ’til things return to normal. B) Give up and lose the property — not freakin’ likely, right? Or C) Refinance with the same loan your buddy down the street enjoys — IF you can.

All you had to do was figure the difference in payments between the two loans. In other words, get the 30 year loan with the higher interest, and lower payment, but pay it using the same payment you woulda had with the 15 year loan. If you did that without pause ’til the loan was paid off, it would take just 14 months longer than 15 years. Meanwhile, you’ve kept the options on your side of the table in case things change for the worse.

Imagine how many investors have gone through who knows how much emotional turmoil in order to save a lousy 14 months. Isn’t 14 extra months worth eliminating countless sleepless nights? Recent super scientific surveys say it is. :) As usual, it’s about having a Plan and executing it on Purpose.

The Rates

Single Family Residence: 20% down’ll get ya 4.75%.  25% down gets ya 4%. Don’t ask, that spread makes no sense to me either.

2-4 units: 25% down results in a 4.5% rate.

Notice there’s never been a 15 year rate quote here? :)

It’s one thing to strategically keep your options active. It’s quite another to know what all your options are. Call me at 619 889-7100 and find out. Wanna write and not talk? Easy — click on Contact BawldGuy and make it happen. Have a spectacular weekend.

 

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About BawldGuy

I'm second generation real estate, first licensed in fall of 1969. Having been mentored by several iconic brokers, I'm also CCIM trained, having completed all 200 hours back in 1980. Have successfully executed well over 200 tax deferred exchanges, many of which have been multi-state in nature. Strong points are analysis and the creation and real world application of Purposeful Plans employing several strategies synergistically. The idea is to arrive at retirement with the most after tax income possible, backed by the largest net worth.

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9 thoughts on “Real Estate Investment Mortgage Rate Update — Plus — How 14 Months Is Your Friend

  1. Greg

    I closed on my first two properties at 4.75%. Chad said the rates for the next two would be lower due to the 25% down requirement. Cue <>.

    The mobile notary that came to my house to sign everything said she travels all the time, and has seen a lot of primary residence closings lately. I mentioned I was looking into refinancing, and she said she has been seeing 3% or 3.25% on first homes. Cue <>!

    This really is the perfect storm. For those too emotionally stuck to not get off the sidelines and act, well, they already have my pity that will happen when 10 years from now, they realize how much they missed. (Okay, maybe they don’t have my pity. I was just being nice.)

    Have a good one Jeff!

    Reply
    1. Greg

      That was supposed to be “cue (double take)” and “cue (picking up the phone)”.

      As a computer geek, I should have known that angled brackets would get eaten by your blog site. Duh!

      Reply
  2. Joe O.

    Brilliantly put. I only get 30-year mortgages. I find myself explaining over and over why. Now I can just link them to this post.

    Flexibility is the name of the game.

    (Of course my other reason, that I want to lock in these rates for a long, long time is a good one too. Think you’ll want to be prepaying a mortgage at 3.5% when CD rates are back up to 6%+ and other investments like real estate are way higher? No way. In 15 years I bet I’ll be happy to still have 15 more years on my super low interest loan.)

    Reply
    1. BawldGuy Post author

      Hey Joe — It’s so simple, but the so-called ‘experts’ out there have convinced much of the public that 15 year loans are superior. You said it about being flexible, as there’s no substitute.

      Reply
      1. Greg

        15 years seems the perfect solution…if your problem is how to get our of home debt as fast as stinking possible. I have heard that people that take out a 30 year mortgage, vowing to pay it off in 15, rarely do. But…if that even the right problem to solve? Heck no! You may retire debt free, but probably asset poor. Sitting in a paid off house with a lousy $100,000 in your 401K is no great accomplishment.

        The financial problem I want to solve it where can I get the most amount of money, for the longest time frame at such low rates? A 30 year mortgage!!! Duh!

        Reply
  3. Jay T

    Great post! Love the informative simplicity of it. Duh! Kept popping into my head, wander why I never thought of it that way. New to your blog, love it already :)

    Reply
    1. BawldGuy Post author

      Welcome, Jay — When I was a lot younger and learnin’ this stuff, Duh! was always poppin’ into my head too. Thanks for comin’ over. Don’t be a stranger.

      Reply

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