To buy at 7% or not to buy? That is the question

Bismarck, North Dakota
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To buy at 7% or not to buy? That is the question

Cody LindstromPro Member
Investor · ND · Member since 2022 · 42 posts · 22 votes

Our HELOC on our primary finally came through and it appraised at the top of the market! We are pleased with that 1.25% minimum pmt at @7% interest, 10 year draw with a balloon at the end. We are excited but also nervous. I see the price cooling happening in our area, which is great, but our buying power has cooled as well. A couple years ago we could have bought in the 200K area, but that same money with today's rates has us looking at 140k properties. (based on Monthly holding costs). 140K properties need way more than cosmetics or they are barely larger than a doghouse, so we will burn our HELOC up like kindling .

So the big question is, do we wait until the home prices fall enough to catch up with the rising interest raises and level off?  Will they? Or do we jump in and hope the market reverses by the time we are ready to sell or refinance and move to the next property?  Who's buying in this market?   

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
4y
Quote from @Cody Lindstrom:

There's the rub. The majority of buyers today are making emotional purchases. They cashed out the equity on their primary home or an investment that gained a ton of equity through wild appreciation in the past two years. What do you think will happen if the market tanks and they lose the equity they've gained?

When others are greedy, be fearful. People are still over-paying for properties that don't cash flow. I've bought multiple properties every year for six years straight, but this year I can't find anything that makes sense. I've looked in 7-8 different states and it's the same story. I think it's a good time to hold tight and wait for the market to cool.

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  • Chris Webb
    Investor · Central Virginia · Member since 2020 · 394 posts · 253 votes
    4y

    I am. I am looking for deals with high DOM. I look at Cash on Cash return for buy-and-hold rentals. Financing is not a big deal for me as it must cash flow for me to even look at it. Deals are getting better from what I am seeing. One thing to consider, I would never bet on appreciation. Try watching some videos from Mike Zuber at One Rental at a Time or @Dion McNeeley like this one.

    4Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    4y
    Quote from @Cody Lindstrom:

    There's the rub. The majority of buyers today are making emotional purchases. They cashed out the equity on their primary home or an investment that gained a ton of equity through wild appreciation in the past two years. What do you think will happen if the market tanks and they lose the equity they've gained?

    When others are greedy, be fearful. People are still over-paying for properties that don't cash flow. I've bought multiple properties every year for six years straight, but this year I can't find anything that makes sense. I've looked in 7-8 different states and it's the same story. I think it's a good time to hold tight and wait for the market to cool.

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  • Cody LindstromPro Member
    OP
    Investor · ND · Member since 2022 · 42 posts · 22 votes
    4y

    Ok so we have one buying and one waiting.  I'm right in the middle here, I see the market falling, but I'm thinking it will fall lower, so I'm observing. 


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  • Chris Webb
    Investor · Central Virginia · Member since 2020 · 394 posts · 253 votes
    4y

    I would ask what are the supply and demand fundamentals telling you. In your market what does the supply look like? Demand might dry up a little, but it will not completely evaporate. What is the supply in your market? Oftentimes the media does not tell this, other, side of the equation. I see supply dropping, which will raise prices not the opposite. If you see supply increasing in your area and demand remains unchanged, then yes prices will drop. But look at the YoY stats for prices over the last 6 months. with decreasing transactions prices are going up! Why?

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  • Cody LindstromPro Member
    OP
    Investor · ND · Member since 2022 · 42 posts · 22 votes
    4y
    Quote from @Nathan Gesner:
    Quote from @Cody Lindstrom:

    I know what you are saying here. I'm not sure I'd go with greed, but more "timing" for me. However we see it, I know that the market will obviously cool, because that's what the FED is trying to do. I knew that those over inflated prices would come down and maybe be affordable once again. I also knew that appraisers go off data that is behind the market 6 months so I decided now or never for the HELOC. Turns out I timed that ok except for the interest rate, but my goal is not to use the HELOC longterm, so I'm not too worried about that 7%.

    I'm right in the middle really.  I agree with you here that prices are still too high, so I'm cautious to grab hold of a falling knife.  The right deal will come when the fear surpasses greed...major price drops are already happening


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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    4y

    The interest rate should have no impact on whether you buy. If rates go up, then you are great with an under market interest rate. If they go down, you refinance. 

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  • Cody LindstromPro Member
    OP
    Investor · ND · Member since 2022 · 42 posts · 22 votes
    4y
    Quote from @Chris Webb:

    I would ask what are the supply and demand fundamentals telling you. In your market what does the supply look like? Demand might dry up a little, but it will not completely evaporate. What is the supply in your market? Oftentimes the media does not tell this, other, side of the equation. I see supply dropping, which will raise prices not the opposite. If you see supply increasing in your area and demand remains unchanged, then yes prices will drop. But look at the YoY stats for prices over the last 6 months. with decreasing transactions prices are going up! Why?

    Good point.  This is a tertiary effect of rate increases, sellers may wait it out too and therefore decrease supply once again haha. hadnt thought of that one yet.  I was just excited to see some decreases in prices for the properties already on the market.  damned if you do...... 
    1Reply
  • Cody LindstromPro Member
    OP
    Investor · ND · Member since 2022 · 42 posts · 22 votes
    4y
    Quote from @Cody Lindstrom:
    Quote from @Chris Webb:

    I would ask what are the supply and demand fundamentals telling you. In your market what does the supply look like? Demand might dry up a little, but it will not completely evaporate. What is the supply in your market? Oftentimes the media does not tell this, other, side of the equation. I see supply dropping, which will raise prices not the opposite. If you see supply increasing in your area and demand remains unchanged, then yes prices will drop. But look at the YoY stats for prices over the last 6 months. with decreasing transactions prices are going up! Why?

    Good point.  This is a tertiary effect of rate increases, sellers may wait it out too and therefore decrease supply once again haha. hadnt thought of that one yet.  I was just excited to see some decreases in prices for the properties already on the market.  damned if you do...... 

     Oh, also, there's no way I would sell my primary home right now with a 2.25% loan.  If I did, i'd see if the bank would allow assumptions and then UP the price due to the high demand for my incredible rate. something to also think about I suppose. 

    1Reply
  • Ke Nan Wang
    Developer · St. Augustine, FL · Member since 2018 · 311 posts · 384 votes
    4y

    Our model has been buying lots and build new constructions. Much less competition on the vacant land market and you can always pick up deals when the market cools because land owners are eager to cashout the land that's purely a liability to them and they have no intention to build in the near future. 

    New construction is better than remodel because much less surprise when doing the work and you get a brand new house with almost no maintenance and best insurance premium for the next 10 years. Then you sell the house at year 10 and repeat. 

    1Reply
  • Paul Garwol
    Lender · Nationwide · Member since 2022 · 46 posts · 28 votes
    4y
    Quote from @Russell Brazil:

    The interest rate should have no impact on whether you buy. If rates go up, then you are great with an under market interest rate. If they go down, you refinance. 


     Great advice. It's impossible to time the market. There is an upside and downside to every season of the Real Estate market.

    2Reply
  • Chris Webb
    Investor · Central Virginia · Member since 2020 · 394 posts · 253 votes
    4y
    Quote from @Cody Lindstrom:
    Quote from @Cody Lindstrom:
    Quote from @Chris Webb:

    I would ask what are the supply and demand fundamentals telling you. In your market what does the supply look like? Demand might dry up a little, but it will not completely evaporate. What is the supply in your market? Oftentimes the media does not tell this, other, side of the equation. I see supply dropping, which will raise prices not the opposite. If you see supply increasing in your area and demand remains unchanged, then yes prices will drop. But look at the YoY stats for prices over the last 6 months. with decreasing transactions prices are going up! Why?

    Good point.  This is a tertiary effect of rate increases, sellers may wait it out too and therefore decrease supply once again haha. hadnt thought of that one yet.  I was just excited to see some decreases in prices for the properties already on the market.  damned if you do...... 

     Oh, also, there's no way I would sell my primary home right now with a 2.25% loan.  If I did, i'd see if the bank would allow assumptions and then UP the price due to the high demand for my incredible rate. something to also think about I suppose. 


    That is the exact reason why I see prices going up in my market. Sellers cannot sell due to interest rates unless they sell at a high price. If they do not get the price, they will take it off the market. Limiting supply and then raising the prices again. Take a look at a video I did on this exact subject if you get a chance where I show graphically how this looks. Search " Supply and Demand of Housing - Invest LYH - Lynchburg Virginia Real estate Investing" on YouTube and it should come up. I am pretty sure I cannot share the video here because I am the content creator and BP does not allow it. Take a look and let me know what you think. Chris

    1Reply
  • Cody LindstromPro Member
    OP
    Investor · ND · Member since 2022 · 42 posts · 22 votes
    4y
    Quote from @Ke Nan Wang:

    Our model has been buying lots and build new constructions. Much less competition on the vacant land market and you can always pick up deals when the market cools because land owners are eager to cashout the land that's purely a liability to them and they have no intention to build in the near future. 

    New construction is better than remodel because much less surprise when doing the work and you get a brand new house with almost no maintenance and best insurance premium for the next 10 years. Then you sell the house at year 10 and repeat. 


     We've talked about doing this.  If the cost of rehab is about the same then we may as well build new construction 3 plex or 4 plex's 

    0Reply
  • Allan C.
    Rental Property Investor · Member since 2018 · 829 posts · 811 votes
    4y

    @Cody Lindstrom have you considered the impact of pre-productive capital deployment during the long build process? I suggest performing an IRR or NPV calculation to determine if this is the right strategy. Zero cash flow for the first 1-2 yrs had a very large impact to investment economics.

    2Reply
  • Sam YinPro Member
    Los Angeles, CA · Member since 2021 · 584 posts · 738 votes
    4y

    @Allan C. A very good point.

    I think each market is unique as each investor and their personal life/goal is unique. Some believe only in cash flow and will buy anytime and anywhere that exists. Some believe predominantly in appreciation and are convinced it's the only path to wealth. Others try for a balance of both. But everyone's risk tolerance is different because of their experience and needs.

    I believed you need cash flow for a successful business. I also believe that appreciation does allow for quicker growth. But if you are a die hard buy and hold, than it's a moot point because appreciation is only valued at time of sale or equity extraction. Then there is the concept of opportunity costs from lost of capital or lack of cash flow.

    My personal business model was to achieve FIRE quickly through real estate. That could not happen with appreciation alone because it would take a long time. Therefore I went with cash flow. However, I capitalize on appreciation for quicker growth. I always buy knowing I can hold forever if I needed to, but I do not hold because it want to scale up.

    If the property underwrites within my buy box, I buy... in the past, now, and in the future. I try to make a few reasonable offers a week based on what I have, what I can raise, and where it makes sense. We are on a down trending market with rising rates. If you can purchase an investment today that returns 3, 5, 8, 10%, or more COC, why would you not buy it? Does the rate and trend really matter? If you waited 10 months looking for that 8 to 10% CoC, did you just mess up by passing on the 3-5% with upside?

    I guess if you are a hobby investor, the answers vary. I wanted to transition out of W2, so I treated REI as a business. I'm still learning everyday and my strategies continue to evolve. What I have come to realize quickly is that people who follow different podcasts, books, and idols are most times folks working W2 and did not yet transition from worker mindset to investor mindset. Nothing wrong with it. It's just differing mindsets coming together in the forum. Some are open to others and some are not.

    Buy if it makes sense. Buy if it is not negative cash flow. Buy in your buy box. Buy when ever that works, regardless of rates or trends. That's my motto.

    But for the majority, buy if it make you happy and not broke. You will gain something from that purchase.

    2Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    4y

    7% interest rates make less deals work than before (or more accurately, you need a bigger margin). But if the deal still works at 7%, it still works. I don't think you should stop buying, you just need to sharpen your pencil and make sure the deals you do buy work in this new economy.

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  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    4y

    Don't try to catch a falling knife. Be conservative with your numbers and if the cash in hand is going to land you killer deals then do it! 

    1Reply
  • Heath Watson
    Member since 2022 · 43 posts · 9 votes
    4y
    I found a duplex off market in my area for only 100k, one bed one bath units one side done other needs work. rents are probably only 550-650. Lender said it would be 15% down with a 7.6 interest rate, but she told me points were so high so closing cost would be really expensive.
    1Reply
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