Will Mortgage Interest Rates Help or Hurt Me as a New Real Estate Investor?

At the time of this blog post, Interest Rates are a hot topic. They've been high for a while and now it looks like they might be coming down. 

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Will mortgage interest rates help or hurt me as a new real estate investor?

So there's a lot to talk about here, but we're gonna talk specifically with new real estate investors, with interest rates, with the changes in interest rates. And what we've seen is interest rates are starting to fall, and we think those interest rates will continue to fall. The Federal Reserves came out and said we're planning on lowering interest rates. What we're seeing at the moment is banks are starting to and and lending institutions are starting to lower it early to try and capture market share and make a little less money in anticipation that those rates will be coming down based upon what the Federal Reserve has been saying. Here's what's interesting with the interest rates.

Typically, what happens is the lower interest rates go, prices go up.

So if rates are down, prices typically go up. And and why is this? It has to do with affordability.

Okay? If I can spend two thousand dollars a month on a house payment, if interest rates are eight percent versus five percent, it makes a massive difference in what purchase price I I can actually get based upon my budget. Let me show you what I mean by that. So if we come over here and we look at mortgage calculator.

So let's let's take a look at this. If interest rates are at eight percent and, I can go a little bit higher on my purchase price.

If my budget so let's call it two sixty.

So, basically, two hundred and sixty thousand is what I can afford. If my monthly payment I can afford is two thousand dollars a month, at an eight percent interest rate, I can afford a two hundred and sixty thousand dollar house. But watch this. If interest rates are at five percent, I can afford a two hundred and sixty.

K.

I can afford two hundred three hundred forty thousand.

So I can get eighty thousand dollars more in purchasing power because the interest rates have gone down, which means I can go up more in my price, and I may be a little less picky because it's a good deal, which typically brings prices up. So that's something that's something to be aware of, that typically when rates go down, prices typically go up because the buying power increases. Now as a new real estate investor, one of the things to keep in mind is looking at strategies for cash flow.

So we're gonna talk about a couple things here. We're gonna talk about cash flow, and we're gonna talk about fix and flip and how that will affect you as a new real estate investor. So, first off, there's a couple of investment strategies. Okay? So some of these you may be familiar with. Some of them you may not be.

So one strategy is land flipping.

Another strategy is wholesale.

Another strategy is fix and flip.

Another strategy is fix and hold, also known as, like, a BRRRR type strategy. Okay? So you've got land flipping, wholesaling, fix and flipping, and then your long term BRRRR, which this could be you could be doing this as a long term rental, or you could be doing this type of thing as a, nightly rental.

So those are basically your different investment strategies as we're talking about single family houses up to fourplexes.

So I can flip land, raw land. Now I can flip raw land regardless of my credit, regardless of my background, regardless of my experience. Same with wholesaling. Wholesaling is I get a property in our contract, and I sell that contract to someone else for money, and then they go and close. Now when we talk about fix and flip, you're gonna have to get a hard money loan, which is actually easy to get, but it's based upon the hard asset, not happy money, hard money.

You'd have to get a hard money loan on that, which means you can't have collections and judgments and some of those things. But, otherwise, it's really easy to get. Now when we get into the fix and hold or long term rentals, you're getting a hard money loan to do the fix up, and then you're doing a refinance, also a DSCR, in most cases, loan in order to go into your long term, which takes you from a short term, like a six month loan, into, like, a thirty year loan. And as a matter of fact, on some of the DSCRs, you can go to a forty year loan, which makes it so you can cash flow even better on those types of things.

Okay? So how do interest rates affect these things? Well, let's talk about it. If you're flipping raw land, if it's a lower interest rate, it may give a potential new buyer that you're selling to the ability to pay more money for the land because their cost of funds is gonna be less to build the property that they want.

So that's something to that's something to consider there.

When you're wholesaling, I don't know how much the interest rates because typically, you're either wholesaling to somebody that is a landlord that's doing that or you're wholesaling somebody that's gonna do a fix and flip. So if they're landlording it, then the lower interest rate means they're gonna have better cash flow, which means you can probably get a little bit better of a price.

If you're wholesale somebody's doing a fix and flip, if that holds true where it goes up, values go up because the the costs go down of the interest rates, so the buying power increases, then, yes, potentially, you can get a higher price because the fix and flipper is gonna anticipate getting a higher price, when they go to sell the property as well. And this has to do with the interest rates. So when we're talking about this, this is what it has to do. Now as far as cash flow, this is one of the things that's really interesting. Right now, interest rates are somewhere around six percent, but if you're dealing with an investment property, they're probably six point seven five. Okay? So here's what then is interesting.

If you can buy a property and break even on that property, okay, in in rent and then refinance this property later, let's say rents or let's say it goes down a full point, you're going from a payment of six point seven five, twenty three seventy eight down to twenty one sixty eight. Okay? So you're two hundred and let's call it, two hundred fifteen dollars extra just by simply the market going down by that one percentage point. Okay?

So this can get really exciting if you're able to buy a property at a lower price because interest rates aren't all the way down yet, and then refinance in the future at a lower interest rate, you have built in cash flow. Now one of the things I wanna make sure is that you need to be able to cover your taxes, your insurance, some of your improvements that we've done to the property, some reserves. I typically do reserves for repairs. I do reserves for capital improvements, and I do repairs for reserves for vacancy.

When I first started, I did a higher amount. Now I do five percent for vacancy, five percent for capital improvements, and five percent for repairs. So that's fifteen percent off the top of the rent that I take off to put in reserve so I can pay for those things as they come up. Then I take my taxes, my in insurance, those types of things, and my payment.

And then if I can at least break even, great, because I'm anticipating interest rates to come down, and then I can refinance, and then I can actually establish that cash flow. But I'm trying to hit it just perfect. K? Because I'm trying to buy this property at a good price while interest rates are higher than what I think they're going to be in the future.

What if I'm wrong? Okay? What if I'm wrong? What if interest rates don't go down? Well, then I'm still at a break even based upon where I'm at right now, and I have a thirty year fixed rate.

So even if rates went up, my rate's not gonna go up because I have a thirty year fixed. And I know with time, real estate values in the long run go up and rental prices in the long run go up. So as long as I'm at breakeven, having my repairs, having all of that built into it I'll show you this. My my capital improvements, my repairs, and my vacancy built into it, I'm at a breakeven, and I have a fixed thirty year rate.

And I'm at a breakeven point, I'm okay. Because if you look here, median house prices go up over time. Right? So every ten years, they're going up eighty percent or doubling or you know, you can do the math on this if you wanna get really technical, but it's it's a graph that shows you even in the two thousand eight worst times, we're bounced back within, four years to where the prices were even before two thousand eight.

So, you see that that happens. The other thing and you can check this stuff out on our website as well.

The other thing that you can look at is rents. Rents just go up over time, guys. They're just going to go up. So I know that a few years from now, my rent is gonna go up. So even if interest rates get worse, I'm still protected.

What if interest rates get better? Well, if they get better, I can do a refinance. Now you may say, well, there's a cost to the refinance. Lots of times you can do a no cost refinance where the lender's paying those things.

Yes. They give you a little bit higher rate, or maybe it's worth it for you to pay a little bit and have a lower rate over the long duration, especially if you're talking about doing these types of deals and holding them for a long, long time. If you're planning on keeping this property for thirty years, sixty years, or for the next couple of generations, having this, and having that as a fixed rate, you can refinance down in the future as well. So maybe putting some money towards getting that rate lower may make sense as well.

So as we talk about interest rates and how it affects things, it's gonna affect your ability to buy, which is why one of the things with some of these rental properties, maybe we buy now before rates come all the way down and hopefully get a better price from buying now and then refinance later. So that's one thing. It also is going to increase the buying power of people because they're going to be able to afford more, which typically brings house values up when we're selling it, which also kind of means we may be paying more when we're buying for these properties as well when we're buying from a wholesaler or direct from a seller.

We may be paying more for those because of the interest rate factor that goes into this. Now this isn't always the case, but it typically has this inverse relationship as interest rates go down, prices go up. And as price as interest rates go up, prices go down. That's kind of the pendulum that we continue to see. So this, is just a recap on how mortgage interest rates will affect you as a brand new real estate investor.

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