I'm about to make a move with my rental properties but is this the right time?

Question

I had a post up a few months ago (can't find it now) where I described my situation with four fully paid-for rental properties. My next move is to sell one of them and buy a multi-family. I ran the numbers, came up with a budget that works, was able to find a lender that would give me a loan, and so on. Right now, I know the general area where I want to buy and know what type of deals I am after, and they seem to be out there, not super often, but often enough.

And then I began thinking... Perhaps this is a challenging time to take a loan against the house because the interest rate is high (above 8%), and even though the rental income will be higher than the loan payment with some margin, it does seem like there is more uncertainty in the near future than before. I am wondering what everyone thinks will happen, if at all, with the housing market and/or interest rates? I know no one knows, and everything is possible, but I do wonder what other people think, and perhaps someone has some reasoning I can relate to. I keep hearing the rates will go up as high as needed and get reminded from time to time about the close to 20% rates in the 80's. However, I don't see the Fed being that aggressive this time around.

The other question is... let's say that eventually the interest rate will drop, which I imagine would allow more people to sell properties, and perhaps prices will fall, at least to some degree. Other than possibly missing out on this opportunity, how might something like this affect my 30-year loan for the multi-family property, if at all?

Henry Clark · Answer

Do in reverse.  If interest rates go down you just refinance.

If interest rates go up, your existing property values go up due to inflation.

Your first question you don’t have any numbers, so it is hard to respond.  So I will toss out concepts.

1031 exchange.   Loss harvesting or upgrading properties.

Do ADU’s on the existing properties.

Can you subdivide and sell a lot of the existing?     Sell your house and live in one of the others.  Cascade and use the primary residence 2 out of 5 year rule and get tax free gains.  Every two years switch houses and sell the one you just lived in.     REI is about leverage.  Moving cash from one house to the next MFH isn’t very good use if leverage.  Use one of your current house to leverage your next MFH even at 7 or 8% then you have zero cash down.      Key is to run the numbers.  Congratulations on your success.

Alex Olson · Answer

@Tom Stern The greatest wealth building you can do is buy a fourplex, rent out 3 of the 4 units, manage yourself, and rent out your bedrooms as room rentals. Then repeat a year later - continue to do this until you can not stand having roomates and sharing walls and then exchange your fourplexes for a large cash flowing complex.

Theresa Harris · Answer

If you were to take a loan out on one of your existing rentals rather than sell it, what would the numbers look like?  You could use that money to buy the multifamily.

Interest rates right now are more normal than they have been.  The 2% rates were artificially low and low for too long (yes it was great, but not normal). I wouldn't have problems buying a place now if the numbers looked good.  Cash flow may not be as high at the start, but rent goes up each year.

Account Closed · Answer

I am wondering what everyone thinks will happen, if at all, with the housing market and/or interest rates?

You gave yourself the best answer to that one when you said- I know no one knows, and everything is possible

If macro forcasting were actually a thing, you'd see someone do it effectively, repeatedly, and get rich in the process. The closest guy to that is probably Ray Dalio, and he can't get as close a shave as you are asking on the matter.

If your deal pencils under conservative underwriting (have another set of eyes look at it too, and pick someone you know that is critical), and you have reserves to weather a storm, thats about as good as it's gonna get for you in reality.

No one else operates with the surety of the future under their belts, even if they think they do.

Jeff S. · Answer

@Tom Stern the increase in rates should be reflected in a reduction of value. If it hasn't happened yet it should down the road. Make offers accordingly.

Henry Clark · Answer

You would not lose the cash flow.  You still get the same.  But you get to leverage it to do the downpayment cash free and also use your equity to get a 2% point reduction in your interest rate.

You said a 2% discount.   I’m saying a 2 % point interest rate reduction.  Say 5% versus 7%.   Making sure we are talking the same.

The benefit to the lender is they get more collateral.

Tom Stern · Answer

Lenders I've talked with would normally agree to do 70% of the appraisal. In my case that would barely be enough to cover the down payment of 25% of the new MFH. So if I do this, I am tying down as much as I can from one of my properties and 'lose' the cash flow I have from it (lose is not the right term here, more like re-invest). Will that be something I can use to negotiate with the lenders? What is their motivation? I got several offers they were all pretty similar, would someone actually do a 2% discount to make this deal happen?

Henry Clark · Answer

@Tom Stern.  If you’re renting, your best financial move is to live in one of the units.

Also, Check with your tax accountant on the degree to which you can do the 1 out of 5 year tax free sale.

Henry Clark · Answer

@Tom Stern. Another avenue to check.  Use one of your existing properties to both leverage No downpayment and ask for a 2% reduction in the interest rate.  As long as you don’t plan on selling the old propertY you leverage then you’re fine.  Pick the smallest unit you have that will achieve the leverage.   Don’t tie up a $200,000 asset in a $50,000 downpayment and rate reduction move.

Dave Foster · Answer

@Tom Stern and @Tom Stern (how'd you manage that :). As soon as you said it was a strategic direction you wanted to make.  and that you had the ability to do it in this lending environment with margin You should have hit "go".  Any uncertainty you're sensing from the market is about current things not fundamentals right?  MF properties will not become white elephants will they?  Could prices go down - sure but over time they don't.  As long as you have margin and don't have to sell their value shouldn't matter very much.  It just looks good on paper. And you've got the bonus of having a proforma that works in the current lending environment.  So a drop in interest rates quickly becomes more cash flow to you.

Uncertainties in a market are transient.  Fundamentals are centuries old.  If you're healthy in the transient conditions of today.  You'll be very well off when the fundamentals readjust in the next market.