Mon, 4 July 2022
Your Financial Independence Day happens when your residual income stream amount exceeds your basic monthly expenses.
Rental demand is high for three big reasons: rates are rising, stringent mortgage qualification standards, housing undersupply.
I answer three listener questions: Should I make a big down payment? Is borrowing at lower than inflation profitable? What about prepayment penalties?
Ridge Lending Group President Caeli Ridge joins us to discuss today’s mortgage lending landscape.
Today, are ARMs beginning to make more sense than fixed-rate mortgages? We explore.
Learn about the cash-out refinance climate. Second mortgages on income properties are still limited.
Does it ever make sense to refinance to a higher mortgage interest rate? We discuss.
Caeli Ridge thinks mortgage rates will keep rising.
Get mortgage loans for investment property:
RidgeLendingGroup.com or call 855-74-RIDGE
or e-mail: info@RidgeLendingGroup.com
Freddie Mac Includes On-Time Rent Payments Into Underwriting:
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Welcome to GRE! I’m your host, Keith Weinhold. Happy Financial Independence Day on American Independence Day.
I answer some of your most burning listener questions today.
Shifts in the mortgage market could now change your strategy.
Does a cashout refinance to a higher mortgage rate make sense or not?
Is an adjustable rate mortgage actually feasible for you now and lots more… on Get Rich Education.
Hey, welcome in to GRE. From San Luis Obispo, CA to Saint Louis, Missouri and across 188 nations worldwide, you’re back in that abundant place.
And you’ve got to lead with an abundance mentality around here. How many places can you do that when the scarcity mentality is abundant and the abundance mentality is scarce.
I’m Keith Weinhold. This is Get Rich Education. Though it’s American Independence Day… is it your financial independence day.
Are you drawing closer to that day… as you add income streams in your life.
With 8.6% government-admitted inflation and stagnant wages and a higher cost of living… has there EVER been a more important time in your entire life to add an income stream through real estate?
You can make the case that this is the most important time for you to do that.
I am about to answer your listener questions here on July 4th. It’s also Episode 404. There’s no chance that this becomes an error 404. Some dorky humor there.
Freddie Mac is going to include on-time rent payments into underwriting. Yes! This starts next week.
This is a good thing for you. This incentivizes renters to make on-time payments to you if they ever want to become homeowners.
Airbnb enacts a permanent ban on parties. They & VRBO have long struggled with what to do about parties.
I just shared those stories with you in Friday’s newsletter. If you didn’t see them, they’re in the Show Notes of today’s episode.
Be sure to get our free “Don’t Quit Your Daydream” newsletter.
We’ve been really informing you about so much in the real estate world there. We’ve also been telling you about our webinars. I know that some of you enjoyed last week’s Texas properties webinar.
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Now, let me tell you. Back in the year 2004, eighteen years ago. Yes, I was an active REI then. My tenants were increasingly leaving. They were vacating my property and I had to find a new renter.
This was increasingly happening for a few reasons:
#1 is that mortgage rates were falling then.
But secondly, and really the big reason is that anyone could qualify for a loan. Mortgage underwriting standards were so lax that nearly any human could get a loan, even if they had zero income. So… loans were too easy to get.
Then the third reason that my tenants seemed to be vacating is that there was ample supply - and an oversupply of properties - first-time homes - for them to move into.
Well, today, all THREE of those criteria are flip-flopped.
First, mortgage rates are rising.
Second, mortgage qualification standards are tough. Tougher than Kevlar.
And thirdly, there’s an undersupply of homes, especially these entry-level homes that make the best FTHB places.
That’s precisely why rental demand is sky high today, tenants are not fleeing to become homeowners, rental occupancy is close to 100% in many markets, and rents are rising multiples faster than historic norms.
These phenomena can move you closer to you financial independence day.
I had a group of financing-themed listener questions come in recently, so I want to get to three of those before we talk more about today’s lending landscape later.
The first question comes from Dave in Bellingham, Washington.
“Keith, I thought it was good to make a big down payment on a property. That way, I’d have not only less debt, but I’d have the benefit of having a smaller mortgage payment over time.
This means I’d pay less interest over the life of the loan too. Can you tell me more about how FF beats DF?”
That’s from Dave.
Good question, Dave. Common question. In fact, there was a time in my life, before I ever owned any real estate where that same line of thinking made complete sense to me.
I even thought, “If I could be mortgage-free and own a property, I’d have it made.”
Dave, let me answer this in a somewhat different way than I’ve answered it before for other listeners’ benefit.
One probably can.
The riskiest thing that a lot of people do by making a big down payment is now they don’t have much liquidity. If the cash is already in the home, then that borrower might worry about not having much cash for other disruptions or expenses that come up in life.
The worst one could be, “What if you lose your job and your job was, say, 70 to 100% of your income?”
Now that cash is trapped in the home as equity… and you can better believe that today, banks aren’t going to let you access your equity if you don’t have a job.
The best way to keep equity separated from your home is to make sure it never goes in there.
The other reality too, is that the more than you borrow, the more you make use of OPM.
So the great question to ask yourself, Dave, is “How big of a real estate portfolio could I ever build if I limit myself to only using my own money… and NOT other people’s money?”
We’re going to discuss this more later in the show today… but that should provide some sufficient context and food for thought to your question, Dave. Thanks for writing in.
You, the listener, can always contact us with any questions at GetRichEducation.com/Contact
Andrew from New York state had a question through our Contact Page.
Andrew’s been an avid listener for quite a while. I remember your name, Andrew. You’re a veterinarian from New York state. I hope that we can meet sometime in the future. Andrew asks:
“Is it a true statement to think that even in today's High "er" interest rate environment any mortgage rate under the rate of inflation roughly 8% is a bargain??
Today ..I am not getting great cash flow...$100/month or break even..on new builds...but still see the upside in RE investing due to its inflationary hedge.” Alright, thanks for that Andrew.
With the first question, is any mortgage rate under the 8% inflation rate a bargain. Well, it could be. Many think that the real rate of inflation - the true diminished PP of the dollar is 15%.
But let’s just stick with 8%. Yes, if you get a mortgage at 6 or 7% today, you are effectively being paid to borrow.
That is because with the money that you’ve borrowed from the bank, over time, you get to repay the bank with dollars that debase on the bank faster than THEIR interest can accrue on you.
That’s how it can stealthily build wealth.
The risk associated with that is - besides being most attentive to your personal cash flows, Andrew - is that at some point over your loan term, there’s a good chance that inflation will duck back below mortgage interest rates.
We’re in this inversion now where the opposite is true. So, enjoy it while it lasts. I’d think of your interest rate being lower than inflation as a short-to-medium term tailwind.
Your second question was about how today, you’re not getting great cash flow when you buy a new-build rental property. It might be positive $100 or just a break even. But you still like investing in RE for the inflation hedge.
First, I think of RE as more of an inflation-profiting center than a mere inflation-hedging vehicle. I take you point though… and then…
Yeah, a lower $100 positive cash flow or less on new-builds is lower than what we’ve all been used to in recent years.
There’s a chance that this will widen - certainly no guarantee.
It like how I described a couple weeks ago that we think of the housing market in two waves. First the housing price increase wave hit hard, then there’s a trough, then later the rent increase wave hits. The trough between waves is when cash flow is lowest.
Though you can’t absolutely count on it, rents are increasing torridly. Andrew, I can tell that you’re a close listener just by the words and concepts that you’re thinking over in your questions. I love that. Thanks for you longtime following.
The third question comes from JW. This question came from our YouTube Channel so I don’t know where you’re from JW. But you ask:
Keith, what are your views on PPPs on commercial loans?
On my current 8-unit property I am pursuing, I am getting financing offers that all have PPPs.
OK, thanks for the question JW. I think one reason that I chose your question is because I, myself, have owned an 8-unit apartment building that had a 5-year PPP attached to it.
First of all, let me tell you what a PPP is. And it’s funny. I have been at RE meeting in the past and some people that have never heard of them seem incredulous that a PPP even exists.
A prepayment penalty is a fee that some lenders charge if you pay off all or part of your mortgage early. If you have a prepayment penalty, you would have agreed to this when you closed on your home.
Now, in my experience, you don’t often see these on loans for 1-4 unit properties.
I commonly see PPPs on 5+ unit apartment buildings and other commercial loan types.
The way that it often works is that your penalty is less severe as each of the five years transpires. It fades.
For example, you’d have a higher penalty if you pay it off in 2 years than the lower penalty would be if you pay it off in 4 years.
Then with a 5-year PPP, that means that your penalty disappears completely if you pay it off AFTER five years.
PPP loans can obviously be a poor choice if you, say, want to add value to a distressed apartment building and do a cash-out refinance in, say two years.
So, therefore, for long-term buy-and-hold strategies, 5-year PPPs often fit.
I’ve had 5-year PPPs on numerous occasions on my own apartment buildings, and I have never paid any penalty because I have only accepted those penalty conditions when I plan to hold for more than 5 years.
Now that you know about cases when you do and don’t want these as part of your loan, maybe you’re wondering why banks have PPPs at all.
Lenders charge prepayment penalties to provide a borrower with a disincentive for paying off a loan ahead of time… because that causes lenders to lose out on interest income. Lenders have to commit considerable time to evaluate a borrower and underwrite the loan in the first place.
That’s how PPPs work. Thanks for the question, JW.
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It can help bring you closer to your financial independence day.
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Yeah, concise, updated intell from Caeli, as always.
All these markets are constantly changing:
Working within them can help get you closer to your Financial Independence Day - that day that your real estate income meets or exceeds all of your basic living expenses.
Underwriting guidelines are staying tight, just like they have for more than 10 years now. Dodd-Frank and consumers proving that they have the ability to repay a loan has really helped with that. That’s a big reason that the mortgage delinquency rate has fallen to ALL-TIME lows.
In fact, that update on second mortgages on rental properties demonstrates that the market still has a pretty limited appetite for that product.
You might want it but it still comes with low LTVs if you can get them at all.
Some brighter new is that ARMs - Adjustable Rate Mortgages - are making more sense than they used to - when compared to your more typical long-term FRM.
There are both risks and rewards to compare there. I like that the good people over there at Ridge help you with decisions like those.
So many great & important shows coming up here on GRE - the return of Tax Advisor Tom Wheelwright, a 2-person housing market panel comprised of Kathy Fettke and I… and… oh geez, the return of Chris Voss - the hostage negotiator from Masterclass.
Remember when I mock negotiated him for a fourplex building last year right here on the show & I lost… to perhaps the world’s top negotiator?
Well, here we go, Chris Voss is returning here to discuss how to negotiate in a housing market when the odds are against you.
What do you think? Should I mock negotiate him again… I don’t know. That’s awfully entertaining for you but I don’t know how many losses I can take publicly like that.
Big thanks to Caeli Ridge today. It’s where I go for my own income property loans. You can too, I’m happy to share that with you at RidgeLendingGroup.com
Until next week, I’m your host, Keith Weinhold. Happy Financial Independence Day! Though you might quit your day job, don’t quit your day dream!