Cash Flow in Environments of Rising Interest Rates

Cash Flow in Environments of Rising Interest Rates

On this Flash Back Friday episode Jason Hartman discusses how investors can cash flow even with increasing interest rates. Jason talks about 3 strategies investors can deploy to profit during these times. At the end of the show, Jason brings on podcast producer, Adam as they talk more about the lending environment.

Announcer 0:02
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on Now, here’s your host, Jason Hartman with the complete solution for real estate investors.

Jason Hartman 0:52
Welcome and thank you so much for joining me today. This is your host Jason Hartman with Episode 1064 1064 And I am coming to you today from my new office. Yes, I have adopted a new temporary office for a few hours a day every day this week. As you may know, I am in Aspen, Colorado, beautiful Aspen, Colorado. It’s just absolutely gorgeous here. The weather is nice. And you know, I discovered this little picnic table in the middle of a park. And I’m out here with my dog. And I’m out here with my friend leashes dog. So I’ve got two assistants with me, in addition to technology. And I’ve recorded several podcasts out here this week. Yes, it is an amazing time to be alive. The fact that you can do this much nicer than being indoors. I’ll tell you that. So I’m under some nice shady beautiful trees and maybe you’ll hear the leaves rustling when the wind picks up once in a while. Give you a little ambient background noise. Maybe it’ll make you a little jealous. Hey, usually I’m the one jealous with everybody else being outdoors and I’m cooped up inside. So this has been kind of fun this week doing this. So today, we are going to talk about how you can get good cash flow on properties with rising interest rates. As you probably know, amongst all the news, it has been a busy news week amongst all that news. The Fed has hiked the interest rates again. Now of course, mortgage rates did not go up they did not respond to that fed rate hike immediately. Remember, the Fed does not directly control mortgage rates However, they certainly influenced them no question about that. We’re going to talk about that today. And you know, several new things will come into the market and since I have been in the business for I don’t know I gotta go look at that. days between two dates website again, but I’ve been in the business a long time you heard me talk about that before I am claiming the the throne, the crown, the spot As the most experienced person, in this particular little niche of my industry, I believe I am the most experienced person. If anybody listening is more experienced than yours truly, please come forward and tell me I am wrong. But yes, I’ve been doing this what, maybe 1700 and 23 weeks now or something like that a long time. So I’ve been through a few cycles. And you know, it’s interesting. One of my friendly competitors was talking about how, you know, you really shouldn’t listen to or do business with people who haven’t been through a cycle yet. So many people started in this business in 2009, or 2010. And my friendly competitor said that they’d been in the business since 2004 2005. And I’m thinking you’re a baby. That’s like kindergarten.

Jason Hartman 3:56
Compared to me, so yeah, anyway, Just kind of funny. They’re just kind of funny, but But yeah, so here are a few new things based on my excessive amount of experience. Here are a few things that I believe will come back into the market. Number one is one that I coined the term for back in 2004. I was doing my conferences and seminars and I coined the phrase, deferred downpayment. Many of you haven’t heard me talk about that in many, many years, because there’s been no reason to. However, I think we are going to be talking about the deferred downpayment again. Yes, Jason Hartman is phrased for downpayment. I think that is coming back. So look for that on future episodes. We will also see I believe, a little bit of a resurgence of adjustable rate mortgages. I think the adjustable rate market will come back a little bit, not in a hugely significant way. But we are seeing rates in For sure, that will mean that the adjustable rate mortgage, the A RM or the variable rate, mortgage, whatever you want to call it, is going to make a reappearance. It really hasn’t been very wanted or needed in the marketplace with these financial repression, low interest rates that we’ve had for so many years. And they really are, you know, it’s good and bad. I mean, of course, if you’re getting a new loan, you want very low rates. But for lots of parts of the economy, low rates are a pretty bad thing. They are part of the financial repression scheme that many of us have talked about. So look for those two things. And But wait, there’s more. One more thing. I want you to look for the reemergence of the buy down the buy down mortgage now, as you know, because you’ve been listening to my show, and I’ve taught you so many things. Yes, pat myself on the back. Hey, I get to do this a little bit because I got a birthday coming up. This week and with that in mind, I’ll be a little bratty Okay, don’t you get to be a little bratty on your birthday? I think it’s, it’s earned. Especially at my age, you know, hairs thinning out. Beard is turning gray hairs not turning gray. funny though. Well, there’s a little bit of gray in there, which I don’t mind the gray. I think gray is kind of cool looking, actually. But yeah, the thinning, not so much. If anybody has a suggestion for that, or a cure or something, you’ve done this work, because they’ve been promising a cure for hair loss for forever. And I’ve been waiting. No, I’m not taking any pills. And no, I’m not getting any surgery. But isn’t there supposed to be something that like, it’s an amazing time to be alive, right? It’s supposed to turn your genes back on and make those follicles work better? Yeah. Well, you know, they keep talking about it. But the FDA has held it up. They say they’re on the verge. They’re on the verge, but it’s not here yet. So anyway, yes, we will see these three things or these things come back right and the buy down. That’s what I was going to do. plane down to you. So when you get a mortgage, there are these, you know, two major components to the cost of that mortgage. One is, of course the interest rate. That’s the one most people talk about and think about. But the other component of that is the prepaid interest, the prepaid interest. See, when you get a mortgage, sometimes you pay interest in advance. And the name for that is called points, points loan points. A point is 1% of the loan amount. And what that really is, is nothing more than prepaid interest, and you can elect to have more or less prepaid interest. I’ve owned a few mortgage companies over the years and had a few different mortgage arrangements over the years. I’m not in love with that business. So I’m not in it now. But if you were pricing a mortgage, you know, let’s look at it from the side of the mortgage company. Okay when they price a mortgage When they tell you, hey, you’re gonna pay five and a quarter percent, and you got to pay me one point to get that loan, they could also price it at par, meaning they could price it with zero points and tell you, you have to pay 5.75% interest, or they could price it with two points and tell you that you could get a rate of 5% or maybe 4.75 with two and a half points or something like that. So you see, this pricing has nothing more than a scale, they can price it higher or lower on the interest rate. If you’re willing to pay more or less pre paid interest in the form of points. And when you buy alone down, that simply means that you’re paying more points upfront to get a lower rate in the long term. And that can be a very wise deal can be a very good deal to buy down the rate. Because the idea if you’re a long term investor is that you’ll hold that loan for many, many years, and get the benefit of that lower rate, which the buy down will pay for itself. So paying a little more upfront, can be well worth it. And what you need to do here is get a little spreadsheet out and calculate the time horizon, the time horizon for the break even point. And usually you’re going to find that time horizon is somewhere in the neighborhood of three years, give or take. So if you’re gonna own the property longer than three years, it’s usually worth buying the rate down. Now, the buy down isn’t a question of, yes, you’re going to buy it down or no, you’re not going to buy it down. It’s a question of how much you’re going to buy it down or how much you’re not going to buy it down. These are all things that you can talk to our lender network and our investment counselors about we’ll be happy to help you with this in more detail. Of course that’s what we’re here for. Now. cup Other things. Let’s talk a little bit about what went on last week. So new home sales were up last month, we talked about that before two months of declines. However, increasing costs of borrowing we just been talking about that. Could temper that a little bit. But remember, the way it works first is there’s an increase in buying. And then ultimately, you know, higher rates will temper the home sales rate pending home sales. Were down slightly in August for the fourth month in a row, tight inventory. That’s definitely the biggest issue, rising rates, a secondary issue to that and increase prices. Of course making affordability very, very difficult for people, especially in the high end markets. The cyclical markets, the markets, we don’t really like okay, but home prices are still rising, they’re going up, even though the pace is a little slower. Of course, the Case Shiller index told you about the flaws with the Case Shiller index many times over the years Rose 6% For the annual number in July down from 6.2%, in June, okay, or that’s the other way around, you know what I mean? You know what I mean? Okay, Fed is expected to hike policy rates again in December, and three more times in 2019. Wow. And as I’ve said before, can you hear that when it is windy here? Wow. This is the most transparent Federal Reserve in my lifetime for sure. They say that increasing inflation and very strong employment rates, support rate hikes. Okay. So that’s kind of the update on a few things there. I also want to give you a little self management update from our client and somewhat becoming frequent guest on the show. And that is Drew Baker, and he left me a message that I thought I should share with you about salt Management. So hear that is and then we will get to our mortgage guests today and talk about mortgage rates and how you can keep your cash flow good, even in a rising rate environment.

Drew Baker 12:12
Hey Jason, I’ve little self management update for you that I think is kind of fun that you might appreciate. So I had a property that I haven’t had a chance to get into for years, and I lost the rent ready photos, because it’s been probably five years or more. The tenants have been in there and they it’s been like crickets for a while. So I wanted to get in there, see what was going on. And so I had my tenant handyman, go over there. And the biggest problem lately is

Jason Hartman 12:40
now keep in mind, he’s talking about a property in Indianapolis or Memphis, I know he owns in two markets, and he lives in Southern California. So just understand that when he’s in the context of what he’s saying here.

Drew Baker 12:53
I’ve had to use the 13 year old son of these tenants to translate back and forth because they don’t speak English. So what’s nice is my tenant, the other tenant that’s doing the maintenance on on these properties that’s helping me out. He’s speak Spanish. And he went over there and said, Hey, Andrew, I’m here, just want to touch base with you. And I said, Hey, call me on FaceTime. So he called me on FaceTime, turned the camera around and showed me everything in the house. And I said, Hey, I think of, you know, a ceiling fan with the remote would look nice there. And well, maybe the chandelier is a little bit off from the table. So maybe we get a chandelier that’s a little higher up and let’s go around the house and count all the dome lights that might need to be replaced. It was really nice because I got a chance to kind of see the floor plan.

Jason Hartman 13:39
Now, if you’ve listened to the other episodes, you know that Drew’s philosophy is he’s trying to really improve his properties. And he’s doing it so inexpensively buying incredibly inexpensive stuff at Costco, okay or online. And just having it sent to the property. He’s got one of his tenants basically acting as a handyman for the rest of his properties. He’s, he’s still ahead with all the money he saved on property management fees. He’s got much happier tenants. He’s got higher rent, he’s improving cash flow. And he’s improving his properties all at the same time. He’s doing all these things concurrently, and coming out ahead financially by self managing, really just an awesome deal

Drew Baker 14:26
in 3d and make some design decisions there. What was interesting was, you know, ask them about the appliances and he’s my maintenance guys translating to the woman who’s living there. And she said, Oh, yeah, the property management company. We told them that the stove went out, but they never came to fix it and ignored our service requests. So we got this cheap, free stove that we put in place, but then the burners stopped working. So they’ve been renting a house without like a properly working stove. I guess it doesn’t regulate the temperature. You’re well enough,

Jason Hartman 15:00
another crappy property manager, right? Imagine that. a property manager that doesn’t do their job yet keeps taking your money.

Drew Baker 15:09
Imagine that.

Jason Hartman 15:11
You can tell, like I say, a booming economy does not make for good morality and good business ethics. In fact, it does the exact opposite. Because people become very overconfident. They all think they’re doing great work when they’re not, because they can get away with it because the rising tide floats all the ships. You know, it’s like Napoleon’s famous quote that I always try to remember the most dangerous moment comes with victory. That’s when we become complacent, cocky, and the downfall is right around the corner. So yeah, this is just great what he’s doing. I mean, he’s really doing a good job here. And we’ve recommended it talked about it a lot on the show. So let’s listen to the rest of his message.

Drew Baker 15:56
Well, that’s ridiculous. You know, you can’t live in a house without you know, appliances. So, I said, Hey, you know what? I’m going to go and find something as a placeholder to put in there temporarily. So I went on Craigslist in Indianapolis, I found a nice electric stove that someone is moving, so they needed to sell it. It was $150. And the funny thing is, is my maintenance handyman is a truck driver. So I said, hey, go over there and pick up the stove and put it in the house. He said, Well, I can’t do it till Monday. So I called the people on Craigslist and said, Hey, can you go deliver the stove? I’ll pay you an extra $25. They said, Sure. So I told the tenant, these people are going to come drop off the stove, please pay them $150 and I’ll take it off your rent, and you have a nice stove that matches the appliance suite that’s already there. Same brand, you know, and fits in nicely. So it was kind of it was a little bit of legwork, but it was nice to have these people Get a stove the next day that matches what they already have. Have a translator. And then the funny little tip of the hat at the end was the son texted me and who’s you know, the one that speaks English and said, Oh, my parents are so happy. Thank you so much. We really like the fan, the new fan that you put in with the remote and the stove and all that stuff. And they said, Hey, if you ever need a painter, my dad is a professional painter. And, you know, it’s funny because when I looked around FaceTime, my tenant said, the maintenance tenant guy said, Hey, The place looks like they really.

Jason Hartman 17:33
So you know, if you didn’t catch what he’s doing here, right? He got a walkthrough of his house, from what 2000 miles away on FaceTime video.

Drew Baker 17:42
It’s great condition with it. And the walls are all painted nicely and everything. So the wife told me that they’ve really kept the place up while they’ve been living here. And so I thought it was funny that, you know, maybe one of my tenants might be my painters, my painter in the future. So, you know, it kind of made me realize that people people that were renting to, in these neighborhoods have service related jobs. And you know, maybe it’s a little bit, you don’t want to totally, you know, eat from the same place you are renting from necessarily, but in terms of, you know, you want to be careful not to cross the line and alienate people if they don’t do good work, but seems like the proof is in the pudding, you can see the paint job in the house. And so start off small and work your way up. But I thought that was kind of a fun little social experiment that ended up working out well, and I could do it remotely. And everyone’s happy. You know, it’ll be a place that the last day.

Jason Hartman 18:38
I love that story. I love it. I love his whole story, his whole diary on self management that he has been sharing with us. So Drew, thank you for that all of our listeners really appreciate it. Look, folks, we offer property managers and property management referrals Of course, and some of them are great, and others start out great and become less than great. You Say later and we end up firing them. And we, you know, we help our clients get new managers when needed and things like that. But the best thing, my best hope for all of you listening, whether or not you actually self manage your properties is that you are able to do it that you are empowered investors. Remember, that’s a core idea. It’s a core philosophy of mine and my companies is to create an army of empowered investors. That’s our slogan, right? We provide the complete solution for real estate investors. And one of the best things to do is to make you empowered, so you don’t have to rely on anybody else. And when you do rely on someone else, you can choose to rely on them. And you can also call them out when you know you’re getting a story and you’re not getting a fair shake. So that’s the best thing we can offer you. Hey, learn more about this in Hawaii at our profits and paradise event. We’ve got a fantastic event coming up. It’s going to be really fun. Educational, just some great people coming. So we’ve still got tickets for that. Still got early bird pricing, what are we about six weeks out, maybe five weeks out, go to Jason hartman.com. Get your tickets for profits in paradise. And we’ve got a few new guests joining us for the venture Alliance component following that event in Hawaii. So we’ve got Waikiki Beach and then Hawaii for venture Alliance retreat. And you can join us for both of those things. Jason hartman.com for more info, and here is Adam with your mortgage update.

Adam 20:41
Welcome to the mortgage minutes for October 2018. We just had the FOMC meeting end and they raise rates from 2% to two and a quarter. And we’re here talking with the lender from Jason Hartman’s network. How are you today?

Adam 20:55
Good, Sir, how are you? Thank you for inviting me to the call.

Adam 20:57
Absolutely. Now, the Fed raised rates from two to two and a quarter percent, many people expected them to raise rates because, well, they said they were going to. And so Was this the rate hike everybody was expecting? Or was it a little bit bigger than expected?

Adam 21:13
No, this is what was expected and to be quite honest, was most likely priced into the market. So as we were looking at rates for the past number of weeks months, the anticipation of this fed rate hike coming through had already been kind of absorbed by the market. And it was totally expected sometimes when the Fed acts outside of what’s expected are the norm. So for example, if they had raised half a point instead of a quarter, then that would have created a ripple in the marketplace and would have had a reaction where rates would have moved one way or the other.

Adam 21:47
Okay. Now, as the Fed has stated, they’re going to keep raising rates and I think last I read, they’re looking to get up into three, three and a half percent for the Fed rate, which is still a huge jump from where it is now. Now is the market the Morgan Market already pricing that in completely? Or do they do it kind of meeting by meeting?

Adam 22:05
No, I think they’re probably not pricing the full extent of that into the market right now, but certainly would have anticipation for another quarter point hike, maybe by the end of the year, at least indicated by the Fed. So I think then once we see if inflation is a concern in the market, then our mortgage rates might continue to move higher with the Fed. Although the next hike might be anticipated at a quarter point. Beyond that, it’s hard to say if they will continue in that trend. Now, what kind of impact does

Adam 22:37
as December approaches and they look at their next meeting? What kind of impact will the quarter point create to investors? Should we look for our rates to increase a quarter as well? Or kind of what are we looking at?

Adam 22:51
Well, I think you got to look at a couple of things in tandem, you know, if the stock market continues to rise, you know, then then money flows out of the bond market into The stock market in a very general sense. So that will have an impact on mortgage rates considering that mortgage rates are tied to the bond market, if the stock market continues to strengthen and the bond market continues to weaken, then mortgage rates will continue to weaken and rise and they in return. So, you know, there are a lot of other factors that go into, you know, how lenders price mortgage rates, but a good indicator of that is where the 10 year Treasury yield is at today. So as that continues to rise, mortgage rates will continue to rise, regardless of what the Fed does.

Adam 23:32
Okay, now, let’s talk about rates. What rates are you seeing right now we’re gonna assume somebody has a pretty decent credit score, what rates are you seeing for people who put down 25% and 20%? What’s kind of the range that we’re looking at this month?

Adam 23:46
So from an investment property standpoint, if you take an average purchase price, let’s say of 125,000, and you put 20% down with a good credit score, and a good credit score will be anything over 742 Today I’m seeing 5.75% of for a 30 year fixed with no points. And then if you were to put 25% down, we’re likely going to get that rate down to about 5.25%. With no points.

Adam 24:12
Right now, are you finding at this time that many investors that points are making sense or points not really making sense right now,

Adam 24:21
you know, for investors who are in the market to put 20% down and, you know, are looking to grow their portfolio, I would say, you know, they’re retaining that other 5% to apply towards a future acquisition, you know, or for another property. But having said that, some investors will look at the 20% down interest rate at 5.75 and say, Okay, if I can pay a half a point or if I can pay another point, and the point is 1% of your loan amount. So if you put another 1% in one point into buying down the range, you can likely get the rate down to the 25% level, like you can get it down down to like 5.25, or maybe even 5.375. So some investors like that, because ultimately they’re really putting 21% into the deal rather, and then getting the benefit of the 25% down raise. So some investors are looking at paying that one point, when they’re in the market, let’s say just to put the 20% minimum down, those investors that we work with that are coming to the table with the 25% down, generally are happy with that rate without points. So we are seeing both sides of it, though, but like I said, those folks that want to put 20% down and maybe pay a point, are getting the benefit of the lower 25% down similar interest rates. So that’s attractive for them.

Adam 25:42
Okay. Now, there’s a lot of political stuff going on that’s impacting our economy in general. What things do you see coming in to the economy that might impact the mortgage rates in the next month or two? Is there anything going on that you think might have a significant impact one way or another

Adam 25:59
Oh, I mean, any any geopolitical event that occurs can have a big impact on mortgage rates. You know, let’s say there is some global trouble, for example, with Iran, okay, or continued sanctions on China and other countries, those could have a big impact on how the stock market reacts. And if the stock market does take a turn from recent highs, then obviously money would flow back into bonds and our rates could improve. But anytime you see some geopolitical activities, such as any kind of strife or war, threat of danger to the US economy, then generally speaking, that’s money flowing out of the stock market back into bonds.

Adam 26:39
But you haven’t seen anything in particular that you are worried about happening over the next month or two,

Adam 26:44
not necessarily No, not seeing anything other than, you know, the continued improvement in the market and the stock market, which is weakening our rates, you know, or weakening the bond market. So,

Adam 26:54
now, where do you expect if the Fed gets all the way up to their stated goal of You know, in the threes, where would you expect interest rates to be around that time?

Adam 27:04
Well as it relates specifically to an investor, you know, I think your 20% down interest rate today at 5.75 could end up around six and a quarter, maybe six and a half, which would correlate to a primary own interest rates, you know, the equivalent being around 5%, you know, your primary home interest rate today, is it still very good in the mid 40s? You know, it’s about 4.5 4.375, with excellent credit scores on a similar downpayment. So as a relates to our investor community, at a worst case scenario, I probably seeing it plateau in the low to mid 60s.

Adam 27:39
So whenever the December meeting comes along, and they raise it a quarter percent, should we just expect there’s gonna be a quarter percent bump in our rate as well?

Adam 27:48
No, not necessarily, you know, again, that could already be priced in or it could be priced in over the course of the next couple of months. So if they do move it again in December, and we have similar rates today, then I I really don’t see that being the indicator of why rates would go higher. I think the stronger the economy is stronger the stock market reacts to that the weaker our rates will be or the higher rates will go.

Adam 28:10
Okay. Now, is there anything I haven’t so you think is important for the investor. Now,

Adam 28:14
you know, I think what’s really important outside of rates for investors is what we’re seeing across the nation as a national lender, and an expert in the investment property, kind of niche financing world inventory. You know, I think most turnkey partners that we work with, are struggling with inventory or the inventory that they do have in flying off the shelf pretty quickly. So I think from a financing perspective to some of our clients who are in the market, looking to grow their portfolio, you know, try and find those properties through the investment property counselors and jump on them as quickly as you can.

Adam 28:50
All right. Well, thank you very much for your time. I appreciate it and

Adam 28:54
hope you have a good one. Absolutely. Thank you very much.

Jason Hartman 29:05
I’m Jason Hartman and I’d like to invite you to our very first two day conference in beautiful Hawaii. Many of our attendees are making a vacation out of this event, you will learn the most innovative strategies for real estate investing available today. We have helped thousands of people invest in properties around the US, and we can help you do it too. So I hope you’ll join us and happy investing.

Jason Hartman 29:44
Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website Hartman media.com. For appropriate disclaimers and Terms of Service. Remember that guest opinions Are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.

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