Strategies with high interest rates
Investor · Jacksonville, FL · Member since 2019 · 135 posts · 106 votes
Strategies with high interest rates
Most Popular Reply
Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes@Drew C Grossman thanks for posting! I started my investing career in Florida and still have property in Jacksonville.
So what you are asking is what some of us have been talking about for many years - cash flow not being that important. Now, in addition to that, higher rates means less competition. Less competition means not as many buyers. Few buyers means sellers are more desperate than they were before. And that's what we are seeing right now - sellers are willing to negotiate. Remember what it was like when rates were really low? It was very difficult to find a deal because everything was going for MAXIMUM price and even over! So now, you have a lot more leverage than you did before. A lot! So you should be getting better deals than you were.
On the other side of this higher rates means less cash flow. And sometimes even NO CASHFLOW. So should you even buy right now? Two things I will say on this subject:
1. Cashflow - If you were expecting $200 per month in cash flow and you have $0 now...well, $200 per month = $2400 per year. So make your offer $5,000 less to accommodate for it. Oh, you want to make it even lower? Fine by me! I feel a lot better about properties when I buy them for less money. That's the mentality to have right now. You have more leverage now than you did before. And as the post above mentions...rates are decreasing. So that leverage might be going away in a hurry! Act now! Just make aggressive offers. Keep in mind that you will be increasing your rents next year...and the year after...and so forth. You will be cash flow positive down the line.
2. Appreciation - Appreciate has outpaced cashflow for at least a decade at this point. So that $200 per month? That's $12,000 over a 5 year period. Your property will earn you $100,000 in equity if you work the BRRRR method halfway correct. So who cares if my cashflow is $0 when I'm making $100,000 per year on my properties? (You can read more on this strategy HERE) Now this runs COUNTER to some "gurus" out there that talk about buying into their program and sitting back and collecting "mailbox" money and living off the cash flow. Investing in real estate has NEVER been about that....well, unless you are a multi-millionaire already. Maybe it works that way for that type of a person. But for the rest of us, we have to work REALLY hard. We have to LEVERAGE our properties. It takes TIME and ENERGY. So to me, the higher rates really show flaws in some of these "guru" teaching methods. I have always preached keeping your day job and investing in real estate part time. It's not as sexy as some "other" techniques out there - but it works.
Anyways, I hope all of that makes sense. Thanks!
46 Replies
- 3yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Things have reversed quite a bit over the past month or so, rates have dropped quite a bit. Seeing a lot of people have success being aggressive on offers and staying flexible above all else
Harpoon Capital512 Reviews - 3yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Drew C Grossman thanks for posting! I started my investing career in Florida and still have property in Jacksonville.
So what you are asking is what some of us have been talking about for many years - cash flow not being that important. Now, in addition to that, higher rates means less competition. Less competition means not as many buyers. Few buyers means sellers are more desperate than they were before. And that's what we are seeing right now - sellers are willing to negotiate. Remember what it was like when rates were really low? It was very difficult to find a deal because everything was going for MAXIMUM price and even over! So now, you have a lot more leverage than you did before. A lot! So you should be getting better deals than you were.
On the other side of this higher rates means less cash flow. And sometimes even NO CASHFLOW. So should you even buy right now? Two things I will say on this subject:
1. Cashflow - If you were expecting $200 per month in cash flow and you have $0 now...well, $200 per month = $2400 per year. So make your offer $5,000 less to accommodate for it. Oh, you want to make it even lower? Fine by me! I feel a lot better about properties when I buy them for less money. That's the mentality to have right now. You have more leverage now than you did before. And as the post above mentions...rates are decreasing. So that leverage might be going away in a hurry! Act now! Just make aggressive offers. Keep in mind that you will be increasing your rents next year...and the year after...and so forth. You will be cash flow positive down the line.
2. Appreciation - Appreciate has outpaced cashflow for at least a decade at this point. So that $200 per month? That's $12,000 over a 5 year period. Your property will earn you $100,000 in equity if you work the BRRRR method halfway correct. So who cares if my cashflow is $0 when I'm making $100,000 per year on my properties? (You can read more on this strategy HERE) Now this runs COUNTER to some "gurus" out there that talk about buying into their program and sitting back and collecting "mailbox" money and living off the cash flow. Investing in real estate has NEVER been about that....well, unless you are a multi-millionaire already. Maybe it works that way for that type of a person. But for the rest of us, we have to work REALLY hard. We have to LEVERAGE our properties. It takes TIME and ENERGY. So to me, the higher rates really show flaws in some of these "guru" teaching methods. I have always preached keeping your day job and investing in real estate part time. It's not as sexy as some "other" techniques out there - but it works.
Anyways, I hope all of that makes sense. Thanks!
- Investor · Boulder, CO · Member since 2017 · 304 posts · 347 votes3y
@Drew C Grossman I'm seeing retail buyers pull back. Sales, DOM and all that are not pulling back/lengthening as much as I would have thought however. Our market is about even with the number of solds being about the same as new listings. Many listings are still closing at list price, some all cash. But I live in an area that always defies gravity in relation to "the national market." We have a housing cap on SFHs.
My investor clients are poking around but most are still waiting for a bottom. And are interested in learning about creative financing. I personally, just started my marketing engine up for sandwich lease options. This was a no money down strategy that I used when I first started 20+ years ago and the market is, once again, ripe for these creative deals. I am about to go meet with a seller in a tertiary market I like. I'll ramp up more marketing in the new year. Cheers and happy holidays!
- 3yAdam BartomeoBusiness MemberReal Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
With rising interest rates we will often see a reduction in sales price (and we are). The monthly payment will normally counterbalance itself between high rate and lower price. The question is if rents will rise which will create more revenue and cashflow for rentals. Here in SWFL the rents are going gang busters. Year over Year there has been about 15% - 40% increase. Demand is high and inventory is low. I am continuing to purchase rentals!
Bartomeo Property Management4.7150 Reviews - Investor · Jacksonville, FL · Member since 2019 · 135 posts · 106 votes3y
Quote from @Adam Bartomeo:
With rising interest rates we will often see a reduction in sales price (and we are). The monthly payment will normally counterbalance itself between high rate and lower price. The question is if rents will rise which will create more revenue and cashflow for rentals. Here in SWFL the rents are going gang busters. Year over Year there has been about 15% - 40% increase. Demand is high and inventory is low. I am continuing to purchase rentals!
@Adam Bartomeo to your first point, using LA for example, prices would have to come down 35% to match mortgage debt service when we were in the sub 3% interest rates environment at record prices (2021/2022) …Very interesting!
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
@Drew C Grossman
We are in an adjustment period which I think will go on for several years. Interest rates shot il and real estate is illiquid and lags other types of investments.
This does not mean I am predicting an all out crash but both buyers and sellers have pivoted and over time we will see where things fix if layoffs continue and more money is removed from the supply side then that will put downward pressure on prices.
7e investments53 Reviews - 3yJared HottleBusiness MemberReal Estate Agent · Cedar falls IA Waterloo, IA · Member since 2020 · 902 posts · 549 votes
I think aggressive on offers and I am seeing an influx of buyers trying for seller financing or subject-to.
Jared Hottle Real Estate59 Reviews - Investor · Pawtucket, RI · Member since 2016 · 58 posts · 20 votes3y
From a Buy and Hold standpoint if cash flow is $500, has indicators for future appreciation, and I can pull on the equity in the future to scale I'm buying it. That does not mean I won't be taking full advantage of this soon to come buyer advantage. I'm currently just preparing for when the market goes down and I'm going to target small multi-family properties that landlords don't want to manage anymore. I'll also be looking for value add into my property purchase to add some sweat equity into the deal.
- 3yAdam BartomeoBusiness MemberReal Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
@Drew C Grossman I guess you know what pricing you need to prepare for... LOL.
Bartomeo Property Management4.7150 Reviews - 3yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
As an investor, there are a number of factors that you should consider when you're developing your investment strategy. Although they may not seem as important, interest rates should be one of those considerations. Not only do they affect the cost of borrowing, but they also have a big impact on how your investments perform.
- Interest rates should be a factor that investors should consider when crafting or readjusting their portfolios.
- Investing in rising interest rates can be done by investing in banks and brokerage firms, tech and health care stocks, and companies that have a large cash balance.
- You can capitalize on higher rates by buying real estate and selling off unneeded assets.
- Short-term and floating rate bonds are also good investments during rising rates as they reduce portfolio volatility.
- Hedge your bets by investing in inflation-proof investments and those with credit-based yields.
Read this article for more information https://www.investopedia.com/a...
All the best!
NETWORTH BUILDERS5236 Reviews - Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
Eating, buying more deals than ever. Seeing a lot more subto opportunities, people who overpaid but have locked in a good interest rate.
- 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Drew C Grossman:
Quote from @Adam Bartomeo:
With rising interest rates we will often see a reduction in sales price (and we are). The monthly payment will normally counterbalance itself between high rate and lower price. The question is if rents will rise which will create more revenue and cashflow for rentals. Here in SWFL the rents are going gang busters. Year over Year there has been about 15% - 40% increase. Demand is high and inventory is low. I am continuing to purchase rentals!
@Adam Bartomeo to your first point, using LA for example, prices would have to come down 35% to match mortgage debt service when we were in the sub 3% interest rates environment at record prices (2021/2022) …Very interesting!
It won't come down 35% in LA. You're going to see prices come down a bit, as rent goes up. House price: rent ratio is what will get tighter.
- 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Wale Lawal:
As an investor, there are a number of factors that you should consider when you're developing your investment strategy. Although they may not seem as important, interest rates should be one of those considerations. Not only do they affect the cost of borrowing, but they also have a big impact on how your investments perform.
- Interest rates should be a factor that investors should consider when crafting or readjusting their portfolios.
- Investing in rising interest rates can be done by investing in banks and brokerage firms, tech and health care stocks, and companies that have a large cash balance.
- You can capitalize on higher rates by buying real estate and selling off unneeded assets.
- Short-term and floating rate bonds are also good investments during rising rates as they reduce portfolio volatility.
- Hedge your bets by investing in inflation-proof investments and those with credit-based yields.
Read this article for more information https://www.investopedia.com/a...
All the best!
Sounds like a copy & paste that really isn't applicable to real estate. Invest in tech in a rising interest rate environment? Sure if you're holding for the long term, but that applies to really any industry. Otherwise that's the quickest way to lose money in the short term.
We've been in more of a stagflation based economy the last 6-9 months, and will be going forward. These cookie cutter points you're making really don't make much sense. I think we need to be careful about asset swaps, I get it we are on a RE forum, but not all assets are worth the swap for RE.
- 3yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
Here are some ways to make money with high interest rates.
If you expect interest rates to remain high, for properties to not appreciate much in the next year, and for rents to be flat, then:
- Consider buying with all cash - if the interest rate is higher than the CoC ROI, the "negative leverage" actually adds risk and hurts returns.
- Consider private lending - if the interest rate is greater than the CoC ROI, then lending is a higher return and lower risk.
- Consider "Preferred Equity" - a codename for what is really a form of secondary/mezzanine debt, this might generate a preferred 8-10% return, and gets paid before equity holders.
- If using debt, consider subject 2 or assumable mortgages (if house-hacking). Taking over someone else's mortgage payments at a low interest rate might be a way better alternative than getting new financing, and will allow you to pay a higher purchase price for the property.
- Avoid putting yourself into a situation where time can work against you. Hard money loans, variable interest rates, etc. all can create time pressure that might compound, creating more and more stress on your business and life over the next few years.
Hope this helps!
- 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Jared Hottle:
I think aggressive on offers and I am seeing an influx of buyers trying for seller financing or subject-to.
Have other real estate agents noticed this too?
I'm going to aggressively do this here shortly, also, as a buyer. It'll be my first, second, and third option. Then my 4th will be a lowball offer conventional financing. If I'm wrong, cool, means my own houses gone up in value too.
- 3yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
- 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
@Drew C Grossman
I’m a buy n hold investor in the Dallas area and can’t cash flow with these current interest rates the traditional way. Prices have come down a little, but mortgage payments are too high to cash flow. So my last two properties I bought (Oct and Dec), I’m renting out by the room to be able to cash flow. The one I bought in Oct nets me $1800/month and the one I’m buying tomorrow should net me $1200/month. Otherwise, I’d just be breaking even if I rented them to one family.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
@Drew C Grossman
I don’t consider interest rates high I would say they are back to normal and recommend people
Underwrite based on rates hovering around 5 (+\- 10%) for a long period of time.
7e investments53 Reviews - Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 796 votes3y
I'm using my Heloc as the rate appears to be about 1/2 point to 1 point lower than traditional bank financing. I don't know why that is but it's helping me out with a current deal I am working on. Other than that you just have to make lower offers in some cases to make the math work.
- Member since 2017 · 1 post · 0 votes3y
@John Morgan hello from Corpus Christi. I'm currently considering renting rooms out. Any drama issues with the tenants so far?Also can you recommend some vetting procedures for screening the tenants? Thanks
- Lender · Charlotte, NC · Member since 2020 · 224 posts · 221 votes3y
Hey Drew,
Use seller credits to your advantage (as much as you can get) and buy down your interest rate with a temporary rate buy-down.
This is different than a permanent rate buy-down, because you get more buying power to achieve a lower rate.
The goal would be to refinance after 2 years (which rates should decrease in that time period if you bought today).
This strategy is used for traditional financing, but obviously you can to do "sub-to or seller finance" to achieve great results as well.
Great Question!
- 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Jon Puente:
Hey Drew,
Use seller credits to your advantage (as much as you can get) and buy down your interest rate with a temporary rate buy-down.
This is different than a permanent rate buy-down, because you get more buying power to achieve a lower rate.
The goal would be to refinance after 2 years (which rates should decrease in that time period if you bought today).
This strategy is used for traditional financing, but obviously you can to do "sub-to or seller finance" to achieve great results as well.
Great Question!
You're just speculating on the 2 year part. That's the problem. There's no given that it lasts just 1 year or two years. Not saying you're wrong, just saying you don't know if you're right.
I think prices will reflect the consumer sentiment. Ultimately, buyers don't go into the bank looking for a loan size but a monthly payment that reflects their financial situation. No one goes in saying, okay yeah cool give me $500k loan. They go in saying, ok I can make this work at a $3,000 monthly mortgage amount. That can be whatever rate it needs to be, but the leveraged amount must fit it. I'm already seeing prices lowered in almost city I look at, and quite drastically.
Pick a few market's you're looking at, and filter "price reduced" and see how often it's going down. Rocket Mortgage has already put out some really interesting incentive programs, that makes me think they clearly are ahead of the curve here and that would not surprise me. They're offering 1% buydowns in year 1, and offered to lower the rates in the first 3 years if they did go down at no cost(this was back around Labor Day). I am not sure if it's still offered. I'm watching them and my markets pretty often, I'd also point out the # of listings that have "price reduced" has increased daily. I do a filter for that, within last 14 days, and update it to within a day daily and track.
- Investor · Brooklyn, NY · Member since 2022 · 158 posts · 118 votes3yFinding any strategy to deal with increased interest rates, other than paying less money for properties, is in essence a gamble that interest rates will soon come down.
I've heard people talk about paying cash for properties as a solution. But if you use cash to buy, say, a 5 cap and interest rates don't come back to 4%, then you overpaid.
- Lender · Charlotte, NC · Member since 2020 · 224 posts · 221 votes3y
Quote from @V.G Jason:
Quote from @Jon Puente:
Hey Drew,
Use seller credits to your advantage (as much as you can get) and buy down your interest rate with a temporary rate buy-down.
This is different than a permanent rate buy-down, because you get more buying power to achieve a lower rate.
The goal would be to refinance after 2 years (which rates should decrease in that time period if you bought today).
This strategy is used for traditional financing, but obviously you can to do "sub-to or seller finance" to achieve great results as well.
Great Question!
You're just speculating on the 2 year part. That's the problem. There's no given that it lasts just 1 year or two years. Not saying you're wrong, just saying you don't know if you're right.
I think prices will reflect the consumer sentiment. Ultimately, buyers don't go into the bank looking for a loan size but a monthly payment that reflects their financial situation. No one goes in saying, okay yeah cool give me $500k loan. They go in saying, ok I can make this work at a $3,000 monthly mortgage amount. That can be whatever rate it needs to be, but the leveraged amount must fit it. I'm already seeing prices lowered in almost city I look at, and quite drastically.
Pick a few market's you're looking at, and filter "price reduced" and see how often it's going down. Rocket Mortgage has already put out some really interesting incentive programs, that makes me think they clearly are ahead of the curve here and that would not surprise me. They're offering 1% buydowns in year 1, and offered to lower the rates in the first 3 years if they did go down at no cost(this was back around Labor Day). I am not sure if it's still offered. I'm watching them and my markets pretty often, I'd also point out the # of listings that have "price reduced" has increased daily. I do a filter for that, within last 14 days, and update it to within a day daily and track.
I am 100% certain that rates will be not be 6-7% for longer than 36 months. Using a 2-1 buy-down is exactly how to get a better payment, just like you are saying, for the first 2 years of your loan. Why wouldn't you do this, especially if it's the seller paying for it?
Oh btw, you have to qualify the loan on the note rate anyways, so its not like they wouldn't be able to afford it at the highest note rate (with current lending guidelines).
Rocket Mortgage is putting out really aggressive incentives because they have the highest rates of anyone lol. Their retail channel charges an absurd amount of fees & points on every loan. You can't watch a sports game without seeing their commercial almost every break, how do you think they pay for it?
Sorry, but I have done enough research to know that rates will drop sooner rather than later, from real economists. 6-7% is not sustainable in the economy longterm.
- 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Jon Puente:
Quote from @V.G Jason:
Quote from @Jon Puente:
Hey Drew,
Use seller credits to your advantage (as much as you can get) and buy down your interest rate with a temporary rate buy-down.
This is different than a permanent rate buy-down, because you get more buying power to achieve a lower rate.
The goal would be to refinance after 2 years (which rates should decrease in that time period if you bought today).
This strategy is used for traditional financing, but obviously you can to do "sub-to or seller finance" to achieve great results as well.
Great Question!
You're just speculating on the 2 year part. That's the problem. There's no given that it lasts just 1 year or two years. Not saying you're wrong, just saying you don't know if you're right.
I think prices will reflect the consumer sentiment. Ultimately, buyers don't go into the bank looking for a loan size but a monthly payment that reflects their financial situation. No one goes in saying, okay yeah cool give me $500k loan. They go in saying, ok I can make this work at a $3,000 monthly mortgage amount. That can be whatever rate it needs to be, but the leveraged amount must fit it. I'm already seeing prices lowered in almost city I look at, and quite drastically.
Pick a few market's you're looking at, and filter "price reduced" and see how often it's going down. Rocket Mortgage has already put out some really interesting incentive programs, that makes me think they clearly are ahead of the curve here and that would not surprise me. They're offering 1% buydowns in year 1, and offered to lower the rates in the first 3 years if they did go down at no cost(this was back around Labor Day). I am not sure if it's still offered. I'm watching them and my markets pretty often, I'd also point out the # of listings that have "price reduced" has increased daily. I do a filter for that, within last 14 days, and update it to within a day daily and track.
I am 100% certain that rates will be not be 6-7% for longer than 36 months. Using a 2-1 buy-down is exactly how to get a better payment, just like you are saying, for the first 2 years of your loan. Why wouldn't you do this, especially if it's the seller paying for it?
Oh btw, you have to qualify the loan on the note rate anyways, so its not like they wouldn't be able to afford it at the highest note rate (with current lending guidelines).
Rocket Mortgage is putting out really aggressive incentives because they have the highest rates of anyone lol. Their retail channel charges an absurd amount of fees & points on every loan. You can't watch a sports game without seeing their commercial almost every break, how do you think they pay for it?
Sorry, but I have done enough research to know that rates will drop sooner rather than later, from real economists. 6-7% is not sustainable in the economy longterm.
Long-term is subjective, and go ahead and use real economists that have always been wrong. Rates can't stay high long due to debt, we already know that. You're not some genius thinking he's found the missing ticket in life.
But exactly when no one knows, there's no saying they don't shoot up then back down like Papa Powell suggested they could do, rather than sit on it. And if hyperinflation comes from that due to dropping it too low too quick, we'd know about 4-6 months after that happens then yes in the 30-36 month timeline we'll be back here. We don't really know what the fed is going to do long term, or how things sit. Real economists and banks have been terribly wrong. There's also no saying when you re-finance you aren't already underwater as is. You're trying to time stuff, that's not going to always work.
Temporary buydowns are happening, sure, and for sure take if the deal makes sense and it's being offered. But it's not moving the needle in most deals. Buy intrinsic or ATM and ask for incentives, that's far more prudent.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.