Mortgage Rates Effecting Long-Term Investments

[Michael Medeiros]

I have developed a growing conern related to inflation from the weak dollar. I have not been involved with Real Estate for a long period of time. However, I have been working as an Agent long enough to see major changes in the market.

Three years back, when I first started working in the field, it seemed rates averaged around six percent. As many probably noticed, as the rates fell sharply, inflation was evident in the Real Estate Market.

As time progressed, I began paying closer attention to the trend. The only effect the inflation played on buyers, for the most part, was an increased closing. Although the home or property was heavily inflated, the mortgage payments had balanced out (No or little change from the previous owner).

Basically, I chalked this off as the Federal Reserve circulating money. Sellers can obtain higher profits, while a buyers long-term liability remained the same.

This trend caused some concerns in regards to long-term investments (Rental Property, Duplex, Triplex, etc..). I have never witnessed the reverse effect of this trend. I wonder what the outcome may be, if I purchased a longterm investment and rates should increase.

I would love to hear some input on this issue from individuals who are more familiar with this trend. In addition, how others may feel towads investing. In this inflated market, is it wise to, "flip," properties and avoid longterm investments?

[Aldo]

The past two years has shown me the worst rental market I've seen in my 28 years in the biz. It is clearly due to the low mortgage interest rates. Even lower-middle income tenants can buy a home for payments less than rent. Adding fuel to the fire, many lenders are offering 'deals' to fend off competition. Two examples. 1) A local bank is offering $5000 to first-time buyers to be used for a downstroke and closing costs. 2) This one is scary. I know a mortgage broker who had the following mortgage applicant. A single white male in his early 20's. He is unemployed, but 'just started' his own business. He has two collections and a judgement on his credit report. He actually got a mortgage. Geez, I wouldn't even rent to the guy and he got a mortgage. How can we compete with that?

On the plus side of the ledger, rates are going up. Today they went up 1/4 point, making it a full point this year, to date. Rates are expected to go up another 1/4 point in December. My personal projection is that owner-occupied rates will be about 7% by Spring. That's when we'll see the rental market return to normal. That's also when property values will suffer due to the huge number of foreclosures on the horizon. I find this particularly ominous in CA and in the Northeast where prices have increased substantially more than in the rest of our great land.

My advice? Go with whatever flippers you can find, but don't buy anything for the long haul until after the market corrects itself.

[Dan Auito]

Generally I agree with our man Aldo. I would say in addition though, that if you can find multi-unit properties that are 20-30% below the value of surrounding good neighborhoods, that you might take a look at collecting a few of those while the rates are still low.

Flipping is a treadmill and the short term capital gains aren't very kind either, just be sure that there is demand for the rental types that you will be holding out, It's in the book Micheal I won't drone on here, you can always make money you just have to read the tea leaves and do the research. :icon_knab

[OKRICHLAND]

Aldo,
OKRICHLAND here.
Are you telling me that I am doing the wrong thing by buying up
these single family dwellings and wanting to hold them for 15 years or longer,
especially when my main goal is to get them paid off as soon as possible?
Let's say that I don't get them paid off.
Should I run around pulling my hair out trying to find houses to flip just so that I can turn around and throw my money to the wind in order that a few
bureaucrats who don't give a crap about me can funnel my hard earned money,
pay for shoddy highway crews keep the people at bay with broken promises
just long enough to serve there term limits in order to line there own pockets?
What I am doing is Buying low and trying to refinance as low as possible to
stay within a reasonable monthly pay schedule to the mortgage company.
I feel that early on, I may not make that $200.00 cash flow per month
but I am hoping that as time progresses and as I am steady paying on my principals when ever I get a chance that as the rent market begins to correct itself then I will have more equity in my homes several years from now to play with, along with the rising values of each of my properties.
I am weighing the pro's and con's of the multi-family units but I am stubborn.
I don't play well with vagabonds.
I just can't see anyone staying in an apartment for more then
one or two years and those are the nice ones.
At this time, the only multi's that I could afford would only house derlicks
or drunkards. Maybe one day I'll have it in me to get my toes wet, I hear that there's a lot of money to be made but for now, I like the small families with two or three kids and a picket fence.
Oh, don't let me forget the dog. :smile:
If this all sounds a little harsh, it's not meant to;
Actually, I'm learning every day from these boards.
Thanks for your seasoned input. :SM104:

[Dan Auito]

Dave it looks as though your playing it pretty safe with the direction your going by getting them cheap and putting in the work to make them better. Renting to families with the kids and the dog will tend to lock them in longer and open up the market to you as other landlords don't often prefer that.

I think by buying low, improving and carefully selecting good tenants while getting low interest loans and not expecting huge cashflows to start is a very safe bet, the other plus you have going is that you can fix things and will actively manage the assets yourself.

Go with what you're comfortable with and enjoy most! Learn as you go while maintaining the prudent position you have laid out. GO FOR IT! :SM128:

[Aldo]

The first thing I have to say is that if this is working for you, you are clearly doing the right thing. In my local market, I doubt that your plan would work, in part because I do multi-family props rather than SFH's. Currently (local) it's difficult to find a multi that will cash flow, much less a SFH.

My previous reply was, at least, partially based on the poor rental market in most of the country and it's entirely possible that you are in one of the few areas that are unaffected. If so, I envy you. I'm currently operating with a 24% vacancy rate.

Unless you are in a low-income area, I disagree with your expectation of a 1-2 year tenancy. I'm mostly in lower-middle income areas and about 1/2 of my tenants have been with me for over 5 years and a few over 10 years. You appear to prefer SHF's and I appear to pefer multi's. Each of us is right for our own reasons.

Just as points of interest - Last year a tenant moved into 'assisted living' after living in the same apartment for 62 (yes, 62) years. This year I had another move to a nursing home after 37 years in the same apartment. I'm down to two tenants with at least 25 years of 'seniority'.

The bottom line is that I wanted to ensure you know and understand that market conditions are going to change substantially during the next 6-8 months. Though it may be different in your area, much of the country will see improvements in the rental market and just the opposite in the RE market. Whatever you choose to do, I wish you well.

[OKRICHLAND]

Thanks for your replies.
At this time I have someone trying to sell me a upper and lower duplex.
The price that there asking is just under market value by about $5,000.00.
The outside is brick and in perfect shape.
Brand new roof and decking.
Needs some repairs.
Both units are on the same meters.
I just might take it.

[Dan Auito]

write up an offer that is even $5,000 lower than what you where thinking of paying and walk away giving them 5 business days to consider your offer. Give this offer on Monday and have it expire at 5pm Friday. Try it Dave. Part of your education my man. Don't ask questions! :SM110:

I'll tell you the justification behind the move after you test it. Dan

[OKRICHLAND]

Well Dan,
I've been hearing you and others talking so much about multi-families
these past few days, especially yesterday, so I went ahead and bought
a two story duplex this morning. (It was a purely justified impulse). :smile:
Although my previous message may have sounded a little harsh
I was still listening and soaking it all up.
That's what I've been doing all my life and that's why I am here today.
I had to snag this one when I did without standing on any offers because
there were many other people who were making verbal offers.
Someone was fixing to sign papers at any time.
I know that the seller made $7,00.00 profit but that's OK.
They'll have there's spent up in two weeks.
My profits from this deal will last into the next 45 years, day in and day out.
You must understand one thing Dan;
The buying houses industry has become a deluge.
Imagine 90% of all the media billboard signs in the metro location of a large city being bought up by; "we Buy Houses".
There isn't a lot of time to play the old (let them sweat it out game).
I don't mind paying a few thousand more today, in order to snag the deal
because I know that I will have plenty of security in the future,
Besides, I can spend three hundred dollars in a day just snacking.
:SM039: Ya Baby, Ya Baby..

[Dan Auito]

I hear what you're saying Dave. when the competition is fierce you often must move if you really want it. It didn't seem at the time that you wanted it that bad so why pay any extra if you couldn't get it on your terms. Well your in for a penny and in for a pound now Dave so get the cosmetology kit out and make the place shine. Keep us posted on your progress. Dan