Wait for high interest rates to buy if you have private equity?

Question

Howdy all,

With interest rates so low and housing prices currently high for many reasons, i am considering on waiting for the interest rates to come up to about 5% to 8% to buy a home. I would do this because i have a connection to some private equity that would loan me at 2%. The thought would be that if everyone else going through a bank has to pay 5% and i have access to 2%:

1: i would have better margins than others with my rental properties and could in turn be more competative

2: the housing prices would come down because of higher interest rates, no?

OR should i just buy now at low interest rates through the bank and high housing prices?

Mason Hickman · Answer

@Caleb Haynes

I think there are a lot of variables in that plan that will need to align, and it may take many years or never happen. Why not find a good deal and still use your 2% debt?

Mike Dymski · Answer

Source opportunities and make offers.  You're focusing on stuff that you can't control, may never happen, or may go away.

Frank Jiang · Answer

I don't mean to say this to be mean, but your question shows a fundamental lack of understanding of how interest rates work.  If rates go up, the 30 year note doesn't just stay at 2%, these things move in accordance with each other.

When rates goes up to 5%, this means that anyone can get 5% return on their money basically risk free (by buying treasure bonds). Your private funding source would have to be pretty dumb to lend you money at 2% in a risky venture like real estate when they can get 5% risk free.

You can currently borrow money at ~3% interest from an institutional lender, which is a smoking deal.  Why would you wait for money to be more expensive to buy?

Michael C Williams · Answer

https://www.ft.com/content/3d7...

All communication from the Fed points to rate stagnation through at least 2023. Hot markets will likely appreciate another 10% min over the next two years if inventory doesn't increase so you can draw out your financial assumptions and calculate best, worst and likely case scenario's. A good think to keep in mind is that for every 1% rate increase purchase power decreases 10-11% so buyers will be squeezed when that happens.

Michael C Williams · Answer

Account Closed. That is certainly an opinion circulating at the moment. The Fed Gov Chris Waller addressed those charges a few days ago and (not surprisingly) citing the Feds complete autonomy as still intact and free from political influence. But words are words and short of incriminating emails/phone calls, we'll never truly know. See his comments below...

https://www.cnbc.com/2021/03/2...

Caleb Haynes · Answer

Account Closed are you implying that rates will stay low for these next few years as housing prices continue to rise? Therefore just buy now?

Caleb Haynes · Answer

@Ricco Ardemagni thats exactly what i'm trying to do. Buy and hold

@Frank Jiang thanks for explaining, i dont really know how bonds work.

Ricco Ardemagni · Answer

Caleb - Like a few others have implied, I would not count on that private equity being available at 2% if overall interest rates rise. I too have access to a margin account that currently offers a very low rate, but that same line of credit 3 years ago was a full 4-5% points higher. Additionally, your private equity is probably on a variable rate? So if you borrow $100k at 2% right now, if interest rates do spike 4-5% in 3 years, then you're going to be paying more interest on your loan balance, which will negatively affect your cash flow.

My personal advise under current conditions would be to lock into a fixed low rate for as long as possible. Use your private equity source to secure deals rapidly, then convert as much of that deal to long term fixed debt as possible, even if that debt is 1-2% higher than your current floating private equity rate.

This is all assuming a buy / hold strategy. If you don't intend to hold onto the property long term, then other options might be better.

Caleb Haynes · Answer

@Matthew Wilson they would give me 2% because that is what the current 30 year note is and that beats inflation or is about what inflation is.

Also:

1. they would have better access to liquidation

2. diversification (they already have money in bonds

if you were the lender, what are the downsides of investing your money as a loan for an investment property? (not challenging honestly looking for downside)

Mason Hickman · Answer

@Caleb Haynes

Without knowing about your source of funding, it’s tough to give a specific answer. But personally, you never know when your 2% debt might disappear or things may change: use it while it’s available. Someday in the future may never come....

Wait for high interest rates to buy if you have private equity?

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