biden tax changes impact on real estate investors

Interest rate hikes loom on the horizon… but how will they impact you as a real estate investor and landlord?

Deni & Brian walk through five ways that rising interest rates will affect real estate investors, from buyers to sellers to landlords.

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Resources Mentioned in This Podcast & Video:

What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

live off rents podcast transcript

Deni: Welcome to Spark Rental’s, Facebook Live and podcast. Tell us where you’re joining us from, just throw it in the chat. We are going to do a pretty good, I think, a pretty good topic last week we talked about how to rent hard to felt, how to rent hard to fill vacant units. And that does seem to be an issue coming up lately for some. And this week, we’re going to be talking all about how rising interest rates are going to impact real estate investors. And let’s face it, it could have good, and it can have bad, so.

Brian: And they’re definitely coming. They’re certainly going.

Deni: Hopefully, it brings down the prices. So, with that being said again, please tell us where you’re tuning in from. If you have any questions at all, please just pop it right in. Don’t even worry about when. And it doesn’t even have to be on this topic. If you have another question, just, you know, put it in the chat. I also want to let you guys know that we are giving another prop stream subscription. This one’s six months and it’s free, and all you have to do is go to Trustpilot and review us.

Brian: Five-star review.

Deni: Well, preferably, yeah. And I’m going to put that in. Hello, Tim Dooley. Hopefully, you’ll win this time.

Brian: Yeah, so next Tuesday, we will be drawing the winner of that giveaway. And by the way, the odds of winning these drawings are really high because not that many people ever participate because everyone has that mentality of, oh, you know, I never win these drawings, you know, I never win raffles or whatever. But seriously, sometimes only five or 10 people actually put their name in for these things. And the membership that we’re giving away the six-month membership to prop stream, they charge over $100 a month for questioning. It’s super expensive and incredibly valuable. That’s a great way to find distressed properties. You know, people who are undergoing mortgage or foreclosure or getting divorced or who have tax liens or judgments. So, you can really find great deals on properties and distressed sales with prop stream.

Deni: Up, Tara said, there is, two. Sorry, guys.

Brian: Well, we’re drawing one next week. The next one, we’re drawing a little later.

Deni: Yeah. So, Tara’s confusing me. We also are. And it’s been a bit since we have, but we’re going to be doing a webinar next Wednesday all about creative financing, which we’re going to need if they raise those rates. Seven ways to buy properties with other people’s money. Every time I hear that I think of that song or is it opp? Yes, yes. So, I’m going to put the link in. If you guys want to join that, it should be a pretty good, informative time. We’re not selling or pushing anything. It’s just information.

Brian: Yeah, and that’s next Wednesday, the 23rd at 1:00 p.m. Eastern. 10:00 a.m. Pacific. Once again, creative financing seven ways to buy properties with other people’s money, which, you know. Let’s face it, if we hear one question more than any other in our Facebook groups and from our audience, it’s How do I not have to put any money down when I buy rental properties or investment properties in general. So, we’re going to go all through that next Wednesday, and this will actually be a shorter webinar than usual. It’s going to be very quick and punchy, so it’ll be a good one. Don’t miss that one.

Deni: And as usual, very interactive. So, it’s not going to be us talking at you.

Brian: That’s right.

Deni: So, with all of that, said. Brian, why don’t you talk to us about ways that these rising interest rates are going to impact US real estate investors.

Brian: Sure. First a little context. Interest rates have been extremely low for this entire century, basically. If you rewind the clock to the 20th century, people paid much higher interest rates on average than they have over the last 20 years. So, you know, for example, in the early 80s, in 1982, people were paying seventeen and a half percent interest.

Deni: It’s not crazy that even.

Brian: Yeah, and that was for home mortgages and home mortgages are the cheapest way that you can possibly borrow money. It just goes to it put it in perspective a little bit that even though interest rates are going to be rising over the course of the next year and possibly beyond, they’re still not going to get anywhere near what they were 30, 40, 50 years ago. So, with that being said, let’s dive in and talk about five ways that rising interest rates will impact you as a real estate investor, as a landlord. So, the first one, we’re just going to start super obvious here. Higher borrowing costs? Right? I mean, if you know, speaking of using other people’s money to buy your properties, if you take out a rental property loan or a hard money loan or any other kind of financing to purchase your next property, it’s going to cost you more on a monthly basis, right? And that’s going to impact your cash flow. So, we’ll add a link here in the comments to our free rental property cash flow calculator. So yeah, it’s going to cost you more to finance the same price property and that’s going to hurt your bottom line in your monthly cash flow and your annual yield.

Brian: Now that being said, the same principle applies to homeowners and to your competitors. So, when it costs more for people to buy the same-priced property, that slows down the housing markets in general, and it cools the housing markets because people tend to buy real estate based on what they can afford each month. So, when interest rates go up, buyers have to pay more money for fewer houses, basically. So that cools down housing markets. It cools down prices that may come in the form of slower appreciation, or it can even cause properties to go down in value, which I know no one in real estate thinks that prices ever go down, but they do occasionally, and rising interest rates can contribute to that. So that’s the second way that rising interest rates will impact you as a real estate investor. It will cool down housing markets across the country, leading to either slower appreciation or maybe even a slight dip in home prices.

Deni: And I never thought I would say this, but that might not be a bad thing for all around. I mean, except for people who want to sell their houses, right?

Brian: It’s not good.

Deni: No, I mean, there are a ton of buyers right now that there’s no inventory. And you know, we’re oh, it’s crazy, crazy out there.

Brian: Yeah, it’s been a seller’s market since actually even before the pandemic began, but it has been a seller’s market for a while now. And you know, when you bump up interest rates and borrowing costs that you know, that will cool housing markets and potentially help buyers that way. So, it’s not all doom and gloom for buyers here, right? All right. Third way that rising interest rates will impact you as an investor in landlord. This can lead to potentially higher demand for rentals because some would be homebuyers end up sticking around their rental properties longer. Because when interest rates go up and borrowing costs increase, it can make it that much less affordable for first time home buyers to buy a home, right? Because they’re going to have to pay more on a monthly basis for the same price house. So that can keep people in the rental market as tenants longer than they would otherwise. So that can help you as a landlord by bumping up that demand for rentals. Now, the fourth way this impacts you higher interest rates are going to impact you is the combination of those the combination of downward pressure on home prices and potentially upward pressure on rents because of the higher demand for rental housing that can improve your cap rates as a rental investor.

Brian: Because remember, cap rates don’t include borrowing costs. Cap rates are just the ratio of the rental income to the home prices. So, this can actually help you as a landlord and rental investor, we might see some higher cap rates. Cap rates have been going down across the country because it’s been we’ve seen such high appreciation rates around the country. Home prices, you know, tenants have been complaining, of course, for that over the last year, rents have been going up and they have been going up fast. But guess what’s been going up faster is home prices. Yes, so cap rates have been going down. So even though rents have been going up, home prices have been going up way faster. So that’s made it hard to find good deals. As a rental investor around the country,

Deni: We do have a quick question or a comment. Tim says why not go with it and arm and then refi when the market settles?

Brian: Well with an arm? If interest rates are going up, then you know, once the introductory fixed interest period in your arm ends, then you’re looking at paying significantly higher interest. So, here’s the other problem with you.

Deni: You have costs of refinancing. So, I mean.

Brian: Exactly. So refinancing is very expensive. I mean, you’re talking about thousands and thousands of dollars in closing costs every time you refinance. Plus, you have to. Restart your amortization schedule from scratch, which is a whole another conversation in itself, but you don’t want to do that. You know you want to get one very good loan at once and never touch it again. You don’t want to refinance it and pay thousands of dollars in closing costs. You don’t want to have to restart the amortization schedule and go back to having most of your monthly payment go to interest instead of principal. So. And Christina says she says OMG, a financial trusted friend told me yesterday to prepare for doomsday. You know, not a doomsday scenario here by any stretch, but rising interest rates are going to have an impact on you as a real estate investor. So, you know, on that note, let’s move on to the fifth way that they will impact you as an investor, as a real estate investor. And that is that cash buyers are going to be stronger than ever in this environment where it costs more to borrow. For years now, borrowing has been so cheap that you know, it has not hurt your cash flow as much to take out a loan, a rental property mortgage.

Brian: Whereas when borrowing costs go up, as we talked about earlier, higher borrowing costs mean worse cash flow, lower cash flow for you as a landlord. So, you know, the old expression cash is king. That has been true forever, but it’s going to be even more true when borrowing costs go up. Right? Because cash buyers are totally unaffected by that. All right. So, for them, remember, we might be seeing higher cap rates because of the downward pressure on prices and the upward pressure on rents. That is all upside for cash buyers. For those who have to finance their rental properties that you know, having to pay that extra interest and have those higher borrowing costs, you know, that’s a downside for them. But this is all upside for cash buyers and potentially they’ll see less competition because that reduced cash flow for buyers who are taking out loans and financing that might drive them out of the market. They may look for other places to put their money entirely. They may invest in real estate crowdfunding investments or in the stock market or in REITs. So that might drive them away, leaving less competition for the cash buyers. And that goes for homebuyers, not just real estate investors.

Brian: So, there will just be that many fewer would-be investors who are out there, you know, slinging cheap money or, you know, grabbing that cheap financing to cover their purchases. So quick recap here. Five ways that rising interest rates may impact you as a real estate investor in a landlord. One Higher borrowing cost it’s going to impact your cash flow. It’s going to hurt your cash flow. Two higher borrowing costs cool down housing markets that can lead to slower appreciation. It can lead to even dips in pricing because it costs more to buy the same price home. Three, you’re looking at potentially stronger demand for renters because some would be homebuyers are going to end up having to wait longer to buy a home. So, this can keep people in the rental market as opposed to going out and buying. Four, this can lead to higher cap rates, downward pressure on prices, upward pressure on rents. That is good news for rental investors, and five, cash buyers are going to be in a stronger position than ever because they’re unaffected by those higher borrowing costs and we’ll potentially have less competition. Deni is there anything else that you want to touch on here before we wrap up this episode?

Deni: Well, Christine has even talked about getting a home equity line of credit. Christina, you should join. There’s a link about our webinar, which is going to talk about financing and home equity line of credit, but there are costs to getting a home equity line of credit too. So, you have to figure all that in.

Brian: But at least you can reuse it right. You only have to pay the closing costs once and then you can keep reusing it over and over and over again. Great source for down payments. Great source for renovation funds, anyway. Don’t want to go down that rabbit hole yet?

Deni: No, no. It should be interesting, I think, and I always, you know, there’s always where there is a will, there is a way. And you know, no matter what this market brings us, you know, there are always like we always say, there are always deals out there and there are always ways to purchase.

Brian: Yeah. And if you use prop stream, you can find those deals even easier. Like, tie that back in.

Deni: It’s so funny because I had a friend of mine who was driving around. He saw a property that looked kind of beat up and he’s been looking for something to flip, and he asked me if I could check it because he knows I have prospects.

Brian: Yeah, yeah. So, the bottom line here is with rising rate hikes, honestly, don’t worry, don’t fixate too much on the rising rate hikes. Focus more on where the economy at large is headed because you know, that is really what is going to drive rents and home prices more than interest rates. You know, the Fed raising interest rates to cool down inflation. You know, that’s because they think the economy can take it and because the economy is actually overheating right now. So, they’re trying to cool that down. But ultimately, that’s a sign of confidence in the U.S. economy. So, you know, this is not all doom and gloom. Don’t freak out as a real estate investor and don’t expect interest rates to go back to 20th-century levels, either. We are not anywhere close to looking at those seventeen and a half percent interest rates for mortgages. I mean, that’s those days are just gone. The government can’t afford to pay high-interest rates anywhere near that on the U.S. debt levels, federal debt. So even with rates going up, they’re still going to be pretty low by historical standards. So, you know, take this all with a grain of salt, basically.

Deni: Absolutely. So, for all those who are joining us, if you again have any questions after we and you can always email us at [email protected] and we will be here again next week. And if you have any ideas for topics, please send them our way. We actually used a topic that came from Tim last week. And we yeah, we. This is about you guys. So yeah.

Brian: Absolutely. And as a reminder, enter for the prop stream giveaway, the six-month subscription to Prop Stream. You can enter that by leaving us a five-star review on Trustpilot. We put the comment or the link in the comments there. And next. Wednesday, February 23rd, 1:00 p.m. Eastern 10:00 a.m. Pacific Free Webinar seven creative financing ideas to buy rental properties with other people’s money. Note we’ll see you next week. Stay in touch.

Deni: Have a great day, guys.

Brian: Bye now.

 

 

 

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