All Forum Posts by: Joe Splitrock

 So you think it would affect low price markets before high price markets? I would think the buying power aspect would be more noticeable in higher priced markets. Say you are buying an owner occupied home. At 2.5% on a 30 year loan a P&I payment of $3950 would buy you a $1,000,000 house. If you bump that rate to 4% on a 30 year loan at the same payment of $3950, you are buying an $830,000 house. If that buyer wanted to buy a $1,000,000 home at 4% they would have a $4800 payment. Owner occupied get approval based on payment amount, so it seems this would have a more noticeable effect on more expensive homes. 

I guess with enough demand and continued supply issues, this may just force buyers into different price points. They are still buyers, just shopping different price levels. 

 I agree, the rate change may thin the herd a little bit, but not enough to be significant. Rates were approaching 5% for investment properties back in 2018 and things were heating up then. The issue, in my opinion, is the Fed should have never taken action to push housing rates low. The housing market would have been fine through COVID at the higher rates. Even if there is a cool off, it will happen over a long period of time. Probably years for inventory to build up.

I have heard many different opinions on the subject. Some people strongly believe that higher interest rates will have no effect on housing sales or prices. Others believe it will drive down demand and cause prices to flatten or drop. Some even predict a crash, which I don't think makes sense. Here are my thoughts, but I am interested in what all of you think.

- The reason the Fed is taking action to drive up interest rates is to cool down the economy. This point alone indicates that (at least the Fed) believes higher interest rates will slow down inflation and cool off the housing market.

- Demand is demand. If someone wants to buy a rental property and it makes sense at 4% or 5%, it will not deter someone from buying at the higher rate. Of course more cash flow is better, but people were already buying based on future expected cash flow. Of course higher rates mean higher payments, so at some point it affects the math too much to ignore. At that point it would put pressure on the sales price or pressure on rents.

- Most people refinance investment properties over time, so even if you were lucky enough to lock into a sub-3% rate, you will probably end up refinancing out of it. If you are stuck in a 5.5% rate, odds are good you will be able to refinance into the 4% within the next couple years. That means in many cases your acquisition rate is really temporary.

- There is a psychological effect that can't be underestimated. I see posts (here or on Facebook) every day from investors who are shocked to be quoted 5% or higher on an investment property, when they expected something in the 3's. Some people even say, "I am not paying that much interest". It seems there is a point where investors will say pass. Is that 5.5% or 6% or 7%? 

- Speaking strictly of owner occupied housing, interest rates probably matter less. First of all, they pay a lower rate than investors. Secondly, they are comparing their payment to what it would cost to rent. Maybe one effect of higher rates is it opens opportunity for owner occupied buyers to start winning more deals.

- There are barriers to how high rates are likely to go. As rates climb, it can reduce the number of loans written. At the same time, higher rates make the underlying investment better. Whether that loan is bundled into a mortgage backed security or held by a bank, higher rates will open new interest. Instead of relying on the Fed to artificially stimulate demand and hold prices down, the lending market will find it's own equilibrium. 

Inflation is actually it's own market equalizer. If gas doubles in price, people reconsider long road trips. They buy fuel efficient cars. They take steps to reduce consumption. Increasing the cost of lending could actually fuel inflation in the end. If a business is trying to expand capacity and needs a loan, they will pay more money. That cost is passed to end consumers. If an investor has added interest expense, they will pass that along to the renter. When you think about it, both inflation and increased interest rates will mostly only reduce discretionary spending. People will reconsider taking that vacations or buying a boat. Food, rent and even gas are necessary expenses for most everyone. 

Share your thoughts!

 This prediction aged badly. Eleven days later and Russia has invaded Ukraine, asking them to lay down arms and surrender. Hard to say where this goes, but the immediate impact on the energy sector will have global ramifications. Everything we consume has energy costs built into it. Saudi Arabia has made strategic agreements with Russia and refuses to increase oil output. China is giving a nod to Russia, probably because they see opportunity to move into Taiwan. I agree real estate is local, but our economy is global. 

Our lease states wherever the term "Landlord" is used it can mean manager, owner or agent. We are the owner manager of the property. Some people suggest not telling the tenant you are the owner and instead saying you are the property manager. This is mostly pointless and can even be deceptive if the tenant specifically asks "are you the owner". When I first got into the business, I didn't tell my tenant I was the owner. They found out anyways and it was just awkward and embarrassing. There is no reason to hide from ownership and being the owner is actually more empowering. The reason people hide behind property manager is because they fear confrontation or don't want to be the "bad guy" saying no. If you are going to self manage, you need to overcome these fears. Be fair, honest and direct with customers. If the answer is no, just say no. You want a relationship built on honesty, so you must be honest with your tenants.

 Only if you have business income to write the expense off against. For example if you are a realtor, own rental property or flip houses, etc. If you are still in the education phase and have no income, then there is nothing to write the expense off against or valid business expense.

I also should mention that an ex-military on disability should be given special consideration. Many of our veterans sacrificed their health, their marriage and their mental well being to serve our country. Show proper respect and help if you can. 

@Alicia Marks and @Alexandra Hughes Pailet I booked my hotel! My wife is actually coming this year. It looks like BP finally picked a destination that caught her interest, haha. That hotel is in an awesome location. Nice choice!

 100% using a property manager allows you to fall under their brand and systems. A good PM can increase the value of your property in the market. It also provides owner anonymity. If someone is scared to show a tenant their ID, maybe they shouldn't be self managing?

 I think the answer in that case is, if you are not going to live there a year, don't refinance until you move out. The lender should also alert any borrower to not write any other loans until after closing. At least not without checking with the lender. No refinances, no car loans, don't even open credit cards. My lender tells me that every time we start the loan process. You can sometimes do things concurrently, but always check with your lender instead of surprising your lender.