Buy now before interest rates go up?

Question

I have three properties, one paid in cash and two with mortgages. I still qualify for 2 more conventional mortgages which I am hoping to use before rates go up.

At first I was having trouble finding decent properties with cash flow, but then I decided to focus on Tacoma, WA where one of my rentals is and prices are still low enough to make a profit for the time and risk invested.

One thing that concerns me is that rising interest rates will put a damper on the economy, pulling housing prices back down. This of course would be an advantage to me if I were still paying cash for houses, but I've since discovered the benefits of using leverage, as such, any pull back in prices will hurt my net worth temporarily. I'm more concerned with cash flow, though I buy with an eye to appreciation as well.

I've done well so far, buying over the past five years my rentals are profitable, and have doubled in value. I want to keep doing what's working, but am worried that once rates go up housing prices will come back down. According to an article on Forbes where they looked at historical records, when interest rates rose, housing prices actually went up as well, at least in most cases.

What would you do?

Russell Brazil · Answer

@Jack B. You actually qualify for 8 more Fannie Mae mortgages. They allow up to 10 conventional mortgages. They raised the mortgage limit cap from 4 to 10 a few years back.

Also the correlation between interest rates and housing prices does not follow the pattern you would expect.  Nor do mortgage interest rates necessarily in the short term follow the rate movement of the Fed.  It is completely possible for the Fed to raise rates and for mortgage rates to actually go down in the short term.

When the Fed does ultimately start to raise rates....it will be in very small increments....we may even see the first rate raise as being only an 1/8th of a point.  That being said 5-10 years from now there is a high probability that we will be back to a more normalized interest rate environment and due to that fact I am trying to load up on  much more mortgage debt in the next 6-12 months. I am even partially shifting my investment criteria to allow less cash on cash in order to take on more debt.

Michael Pierri · Answer

Generally speaking from an economic perspective, interest rates increase when inflation increases in an attempt by the central government to control the pace of inflation. Increasing inflation implies housing prices would be going up, not down. Your real estate holding would be worth more in a rising interest rate environment, and in contrast, the rising interest rates will increase your debt service and the price of property being purchased. As Russell mentions above, the interest rates will likely be modest as first, and it could be years before the US returns to a "normal" interest environment. Personally, I would not worry too much about interest rates. They are low, and even if raised, they will still be low in comparison to historic averages.

Jack B. · Answer

@Russell Brazil

Thanks again, that's hugely helpful.

Russell Brazil · Answer

@Jack B. So you said you have 2 conventional loans already. There is a 99% chance those loans are Fannie Mae loans.  If you apply for a mortgage through most banks, there is probably a 99% chance that loan is securitized into a mortgage bond by Fannie Mae.  The loan is serviced by Bank of America, Citibank, PNC and the other thousands of banks, but that is a Fannie Mae conventional loan.  So you are able to hold up to 10 conventional loans through Fannie (6 through Freddie I think?) So just apply for a loan where ever you see the best rates and terms.

Also consider on the two properties you own free and clear doing a cash out refinance.  You do not get the same 80% LTV, but until you hit 4 mortgages you can do a cash out refinance with a Fannie Mae loan.

Below I am posing a link to the Fannie Mae eligibility matrix. That chart shows you how many loans you can have (10), what credit score you need, what reserve requirements you need etc.  It is a very handy little tool. Also an individual bank may have a limit of only servicing 4 loans, but Fannie allows 10...so you can just move onto another bank if you hit their internal threshold.  I use a mortgage broker myself, so they shop around amongst 100s of banks for my loans. I currently have 7 loans...and I think that 6 of them are Fannie loans and 1 is a Freddie loan, but each is serviced by a different bank altogether.

https://www.fanniemae.com/content/eligibility_information/eligibility-matrix.pdf

Jack B. · Answer

Russell, thanks for posting. Can you tell me more on the FM mortgages? Is it as simple as selecting FM as my lender regardless of house or do I have to buy a FM owned property? I suspect they have competitive interest rates compared to the hard money/portfolio lenders?

Agreed on the lack of correlation between interest rates and house prices, but I do suspect rising interest rates will cause the demand curve to shift left, while the supply curve shifts right. This should theoretically lower the market equilibrium or price at which real estate clears the market.

This is unless the economy is roaring when they raise rates, and income constraints for buying are lifted by rising wages. Microeconomics are complex, and it's difficult to ascertain what will happen. I purchase primarily for cash flow, but I try to buy with an eye to appreciation, as I plan to 10-31 exchange my portfolio in roughly 7 years when I retire from my career and relocate to a better rental market (Florida) where I replace my salary managing 10 or more paid off rental properties with the proceeds of these leveraged ones rising in value. The fact that I can keep financing with FM is fantastic. The more leveraged properties I buy at low interest rates the better off my long term plan is, as long as I don't buy at a peak.

Scott Grover · Answer

@Jack B. Congrats on the progress so far.  I think that regardless of what happens with interest rates, you'll have properties that rent for rates that provide good cash flow in a great rental market.  Keep refinancing to purchase the next, and if interest rates rise it will be a small blip in your progress - that's part of investing right?  There's always what-if's, but not letting them slow you down is the key to progress.

I hope to be wondering the same thing a few years from now when I get more rentals.

George Hermann · Answer

In 2008 when there was catastrophic decline in property value all sorts of predictions were made. Since then, billions of dollars have been made in real estate, property value has far surpassed the height of the 2008 market and the rental market has increased substantially.

Don't worry about the Fed raising rates. Plan for it and keep making smart decisions based on the numbers in each deal. You will do very well.

Jack B. · Answer

I guess the other option is to use a portfolio lender to keep buying real estate as prices draw back, if they draw back, as a form of dollar cost averaging.

Trouble is, all the ones I've seen thus far want 12% interest, at least according to a couple of web sites I checked.

5% I could see, but 12%??

Buy now before interest rates go up?

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