Interest rate hikes - buy now or later?

Question

What approach are you taking with impending interest hikes?

-Buy now for a higher price but lower interest rates

-Wait for prices to go down if interest rates go up (decreased demand) and deal with higher monthly payments

Especially curious to hear from long time investors who have been through or studied how these scenarios played out in the 70s/ 80s

Joe Splitrock · Answer

Buy now without paying points to pay down rate and refinance in the future. Anyone who purchased in the 70's, 80's just refinanced when rates came down. I purchased in 2018 for 4.8% and refinanced into 2.89% last year. Again, don't pay down the rate with extra points. Paying points is rarely a good idea, because it is a sunk cost. Rates will come down in the future, because it is how the Fed manipulates the economy. When (not if) we enter a recession and housing slows down, they will stimulate with lower rates. That may be a year from now or three from now, who knows. Just make sure the investment today covers the payment. Between rent appreciation and future refinancing, you will come out fine in the long run.

The reason you don't want to wait for rates to come down is because prices will be higher and you will lose any benefit of waiting.

James Hamling · Answer

@Stephanie Mccolaugh the entire talk and consideration people are having today on what should one do because of the interest rate stepping up, to be honest, is laughable.

Why is it laughable? Because we are talking going from insanely low interest rates too really low interest rates. Or "oh my gosh" what if the interest rates go all the way up to normalized levels. Yeah, it's just ridiculous talk, yet again driven by those who produce content for income and thus they need to constantly have something of shock to sell and doom & gloom sells like hot-cakes, so it's all about finding any way to sell the fear.

Talk with investors from the 80's, they laugh, hard, when asking about interest rate impact. Generally the statement is being it up when it actually matters, like 8%+. They will have stories of what it was like in a 14+ environment, and guess what, they sky didn't fall then either.

But hey, who am I to interrupt someone's panic induced melt-down, right, someone's gotta support Zoloft sales cause it sure ain't me.

To answer, what approach am I and my investors taking with impending interest rate hikes, which are measured in fractions of a percentage? We change our analysis numbers from 4.5% too 4.75% on origination interest rate. Seriously, that's the grand total impact of it for us. AND we are buying every good deal we can get our hand's on.

How about this counter item, what are you doing about the impact of the appreciation rate of rents? Or the profitable margin between the two (interest rate vs rental rate incomes).

For those waiting for median home prices to go down, lol, hope ya got a few decades handy for that because your gonna need it. Look, I can site a multitude of data based reasons for this but let's take the simplest of them all, inflation. Inflation alone is now coming home to roost AND by every law of economics it does not happen quickly, this is a cycle thing, 4X to be exact, before stability is realized or I should say CAN be realized. So this is the beginning of the beginning for inflation. We are starting to see cycle 2 kicking off for inflation and that is when it is first realized in wages inflation. Now as wages have to increase guess what that does to the cost of goods, yup, they go up MORE. And this cycles goes in waves until things start to settle. And that is if we don't have a few trillion more dumped into existence which so far it seems like it's a spending spree.

And if anyone wants to talk about BIG interest rate increases, well just do some simple math and answer at what interest rate % the U.S. debt becomes immediately unserviceable, because that's the cap on interest rates folks, unless a Dollar Default seems a good idea. And you may be shocked to find how small that # is for a hard cap, it's far FAR lower then rates of the 80's. So we are either in this world of inflation too address inflation, letting inflation run, or end the dollar.

So yeah, what is there to wait for? Higher prices?

Theresa Harris · Answer

You have no idea if the prices will go down.  If you are looking for a long term investment, buy now.  Find a place where the numbers work and get started.

David Garner · Answer

Hey Stephanie - While I can't speak to the 60 or 70's markets, I have been investing steadily for the pat 10 years, with 104 doors acquired in the past 5.

For me, I am buying. Primarily because my own model involves finding discounted houses off-market and adding value. So I'm not concerned with a dip in the market. Also, I buy C Class and focus on both asset and tenant quality, so my portfolio tends to be pretty resilient in terms of income consistency. We did OK through covid as an example.

As I use private money to buy most of my houses, and then refi later with commercial lenders, I'm not too concerned. I think rent inflation will offset interest rate rises for the vast majority of properties in my portfolio right now, and for future purchases too.

Also... always my perspective is to buy as much as I can while money is still historically the cheapest its ever been, and lock in those rates for as long as possible. House prices and rents always rise given enough time, so if you lock in a cheap rate your profits just go up and up over time.

Good luck!

DG

Joe Splitrock · Answer

100% agree. I bought my first home in 1999 and we locked into 7 7/8th interest rate. We were super excited because we locked in under 8% at a time when rates were moving up. Up until ten years ago, the 30 year mortgage was never below 5%. It was only after the housing crash and the Feds efforts to stimulate real estate that we landed in these ridiculously low rates. So rates today are actually good if you view them in a 20 year perspective and excellent if you view them in a 50 year perspective. Instead people are comparing today to rates during a housing crash and during a global pandemic. That is not a realistic comparison for "good", but it does show what will happen our economy goes bad. You can predict interest rate stimulation from the Fed.

Scott E. · Answer

I'm another investor who is taking both approaches.

-Buying now at low rates.

-Will be buying in 6 months regardless of where rates are at

-Will be buying in 2 years regardless of where rates are at.

What is important is that you are buying with a solid short term and long term plan. Look for value add deals, always consider location location location, have multiple exit strategies in the event your initial plan doesn't work out, and make sure you have some cash reserves set aside to weather a storm.

Nick Barlow · Answer

@Stephanie Mccolaugh I would buy if I found a deal that makes sense with some pressure testing, ie, would work if rents dropped 10-15%.

You’ve got a lot of comments on interest rates being insanely low compared to “historical”, which is usually the 70s - 80s as the comparator.

I would recommend googling “The total return of everything” from the San Francisco Fed (https://www.frbsf.org/economic-research/files/wp2017-25.pdf), where they cite average safe return (bonds) of 1-3%….since 1870.

My point is that the hyperinflation of the 70s-80s is actually the historical aberration.

I wouldn’t think we go much higher than that 1-3% range, with a 1% short term guess, giving the feds plan of rate hikes in .25% increments.

Cheers

Interest rate hikes - buy now or later?

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