Is it me, or are mortgage rates crazy for investment properties??

Question

Just want to get some others opinions on conventional lending rates for long term hold. I am good for ~5.5 with a conventional lender which I think is pretty high. That’s considering 20-25% down and all the jumps and hoops from the bank.

Private money I qualify for ~5.9 and 20% downs. Strictly asset based and no hoops or personal info provided.

To me - the headache I save and pay a few extra basis points for quick close with private money almost makes sense???

Thoughts?

Chris Mason · Answer

Until it actually closes and you have keys in-hand, you don't know that you qualify for anything -- true of FNMA money, and true of "private" money with advertised rates that are typically "too good to be true."

But, in any case, 5.5% and 5.9% are both historically LOWER than a typical vanilla owner occupant interest rate. We've nothing to complain about except what spoiled brats we are since we're so young that we don't remember the old days.

1972: 7.38% w/ 0.9 points in fees.

1981: 16.63% w/ 2.1 points in fees.

1990: 10.13% w/ 2.1 points in fees.

2000: 8.05% w/ 1.0 points in fees.

That's with 20% down for an owner occupant on a single family home!

Source.

The ONLY way rates get as low as they are right now is with massive intervention by the Federal Reserve, following the Great Recession. In the future, historians will look at the period of time we are in now the way we look at the late 30s during FDR's "New Deal" when artists were getting paid by the federal gov't for doing busy work... homebuyers are currently being similarly subsidized, and the fact that landlords can get on board with up to TEN (!!!) rental properties w/ gov't-subsidized interest rates is historically unheard of and unprecedented (unless you look back at Feudal Europe and you are of noble blood and trying to build a castle and you helped the King win his last war against France or whatever). Almost all economists agree that this needs to stop and rates need to go up to something closer to their "natural" levels. If you are concerned about rates, the thing to do right now is lock up as much debt as possible at a sub-6% rate, because that will not last forever, certainly NOT for investment properties.

Cassi Justiz · Answer

That's great for private money. A lot of the private money lenders in my area of are at least 3-4% higher than the bank (with several in the 10-12% range) with at least 1-2 points up front. If you have that kind of a deal, then I would totally take advantage of it.

It's usually easier to refi than it is to qualify for an initial bank loan. So I would probably do the private money to purchase and then plan to refi whenever it makes sense for you.

Anthony Salamone · Answer

@Scott P.

Funny how that’s works. I guess being mid 30’s and only old enough to remember even lower rates than we currently have is humbling. I bought my first house when I was 25 less than 4%. Bought my second home 5 years later at 3.8%. So I guess 5.5 seems very high for a spoiled guy who hasn’t seen anything else.

Peter Tverdov · Answer

My personal play is making an extra mortgage payment per year and after 7 years rolling it into a 20 year amortization. With some ARMs if the spread is wide enough I pay extra principal each month like it's a 30 year mortgage rate. You have to keep in mind once you start straying from conventional loans, the 30 year fixed rate evaporates. I also started doing ARMs recently, not when rates were 100 bps lower.

Chris Mason · Answer

$935 in 2003 dollars is $1295 in 2019 dollars. $1295 is less than $1043. Rate would have to be 6.733% for the payment to be $1295. The payment is still less per month, inflation adjusted. Unless of course you haven't gotten a pay raise since 2003 and are investing in a market where rents haven't gone up since 2003, in which case I would suggest re-evaluating both your career and the market you are investing in. :)

Source: https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=935&...

Anthony Salamone · Answer

@Peter T.

Peter,

What advantage do you see using an ARM?

Are you concerned what rates will be at in the next 5 to 7 years? If we do go into a state where we see unprecedented inflation what is the exit strategy there? I’m asking because the rates are more appealing, but for a long term hold (which I am most interested in) how does it play out in the future?

Peter Tverdov · Answer

I am getting a 7/30 ARM at 5.375% for a property I have in an LLC that is not a commercial loan. I thought that was pretty good compared to the 5/25 ARM at 6% garbage for commercial I've gotten quoted on. Rates are still historically very low.

Bryan Vincent · Answer

@Chris Mason I think you also have to Consider that prices were also a lot cheaper which offset the monthly payment. I was just looking at a house that is currently 200k.

With interest rates at 4.75% , the mortgage payment by itself is about (not including taxes/insurance)

200k@4.75% 1043$

The house was last sold for 156k in 2003

Interest rates at the time we're about 6%

Mortgage alone (not counting taxes and insurance which I'm sure was also lower)

156k@6% 935$

So even though the interest rates are historically really low, I think the high home prices makes it more expensive

Even if you went up to 7%, the payments are still cheaper at

156k@7% 1037$

Figures are from whatsmypayment.com

Scott P. · Answer

Echoing @Chris Mason, it's been over 10 or 15 years since I've borrowed to buy a rental and NONE of my loans were ever less than 6%.  (15 year terms, usually fixed, and always awesome credit with 15%-30% down).  Rates remain historically low for my lifetime.

Anthony Salamone · Answer

@Michael Ablan

Thanks for everyone’s input! Appreciate the help and guidance.

Is it me, or are mortgage rates crazy for investment properties??

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