Interest Rate Question
I have only been in the RE business during the current period of low interest rates. I am attempting to prepare for the inevitable rising rates. Could someone that has seen the ups and downs provide quidance concerning the effect rising rates has upon your business. Thank you.
run the #'s your self, if you have adjustable rates, get a loan & payment table.
you can see what your payments will be, then add taxes and insurance if not done already.
know in advance, many will get caught with the old britches down, when rates go back up.
should be some nice properties then
You have more people who will have to rent. Of course, as interrest rates increase, so do your costs.
If you buy a property cheap enough and can turn a profit, what differrence does the interest rate matter?
Actuallly as long as you keep your credit clean, don't overspend, live within your means. The Interest rates doesn't matter you will always qualify for the best. In the 16 years interest rates has changed drastically, but I haven't. That is the key to success and interest rates. Investing whether it be in real estate, stocks, bonds, ect. all depend on what you are doing with you life and your financial situation. If you live paycheck to paycheck you probably will have a problem when they go back up.
Good Luck
Lori
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Most people like me are not good in market timing. My boss thinks real estate market is crazy, has been for years, so he sold his NYC apartment about 2 years ago and is now renting. Last year he told me rising rates will pop the RE bubble and he will buy back at a lower price. The unit he sold might have appreciated another 50% since he sold. Can it come down so much he can buy back at a lower price? Who knows?
I have fixed rates on my own home and all rental properties I own. So, I don't worry about rising rates. I still have my IRA in stocks. I will put that in a self-directed IRA to invest in RE when rates rise. Rising rates would take prices down and some people who bought using ARMs may lose their homes. It will depend on how far the rates rise. Some people are indebted upto their nose. If higher rates increase unemployement (coupled with outsourcing) RE can get hit, single-family houses may lose value in areas where prices have risen the most, multi-families can still be in demand because there will be more tenants. Again, it all depends on how bad things turn, which no one can predict.
When rates go up, it will have an effect on prices, but not by what one would think. The low rates have created a real bubble in prices, as we always focus on the "monthly payment" instead of the price. Look at car ads. How often do they focus on the price of the car? They focus on the monthly payment or lease payment.
With houses, once the rates rise, the same monthly payment that a buyer has will finance a lower principal amount. When a homeowner wants to sell his or her house at the price they thought they could get, they will find that the house will sit and sit and sit. With many homeowners having refied at the lower rates and then spending the money, they may not have enough equity to cover selling the house at a lower price, especially after accounting for the 6% RE commission, their share of the transfer tax and other closing fees. Thus, the house will sit with no movement and eventually be taken off he market. The good thing is that this will keep the comps from going way down. If you own property with an ARM, you need to make sure that your rents will cover the sure-to-happen increase in your monthly payment, or else you will have a lot of negative cash flow. If you are buying a rental property, get a fixed rate so you can lock in a known payment. Think of it as insurance - you will pay more now in the short term, but you will not suffer when the rates to go up. We all know what happens to positive cash flow - it gets spent. Negative cash flow however, is a drain on your finances. This drain will lead to quite a few properties being dumped on the market from landlords whose payments won't keep pace with the increased mortgage payments.
Speaking of this, if you are going to buy Sub2 and plan on renting it out, you need to thoroughly understand the mortgage you are taking over. What happens if you take over the property, rent it out, then the rates go up and your payment jumps to where the rent does not cover the payment? Are you going to eat the difference or "dump" the property back to the poor original owner?
Hopefully this gives you something to ponder.
Thank you very much for the insight of more experienced investors. I am preparing to close on a multi-family and the ARM is obviously attractive but a fixed known payment appears to be the choice of some investors. I may need to post another question to get a response but I would love to know what the seasoned professionals are doing . (fixed vs ARM)
Thanks!
Quote:
Thanks!
On 2004-04-12 18:06, rainmaker49 wrote:
Thank you very much for the insight of more experienced investors. I am preparing to close on a multi-family and the ARM is obviously attractive but a fixed known payment appears to be the choice of some investors. I may need to post another question to get a response but I would love to know what the seasoned professionals are doing . (fixed vs ARM)
I have all fixed rates. That is one reason the market doesn't bother me. I only take out loans for the amount of time I will continue working. I want to be completely Mtg. free when I retire.
Lori
Lori
[addsig]
The bottom line is: rising rates may be on the horizon. We may have seen the lows, rates will be higher as economy improves and inflation fears grow.
I used ARM to buy first and the second houses. There are all sorts of programs that one can choose from. That was the only way I could afford the house I wanted. I switched to fixed rates later. I am risk averse but I don't mind taking a calculated risk if benefits make it worth my while.
As long as your ARM product has a rate cap you can live with, you should be OK.
I have several properties with ARMs, some I have had for several years. In these days of low interest rates, a 30 year product and the 5/1 ARM seem to give about the same interest rate for investor loans. If this is also the case in your market, then it makes sense to lock in the fixed rate loan.