The Low Interest Myth

Wednesday, October 14th, 2009 | Uncategorized

Hi everyone,

Hope that you’re getting out there and opening cases and making smart buys. There’s so much going on in real estate investing, that I feel like I’m being pulled in a million different directions.  Right now, short sales are on fire, REOs are heating up, and we’re even getting back into wholesaling. If you haven’t been doing this for a while, then my advice is to take it slow and steady, and focus on one area at a time. Your business will never move as fast as you want it to when you first begin, but don’t worry, you’ll one day get to the point where you have trouble keeping up!

So a few days ago I offered a challenge asking readers to give me their thoughts on why buying property for the long term with low interest rates was a bad deal.

Remember, much of what we do as investors is counter intuitive, and this is no different.

The comments were mostly dead-on.  So I’ll round them out with my list of reasons.

First, prices rise as interest rates fall because a fixed monthly payment covers a smaller mortgage at a higher interest rate. Right now interest rates have only one direction that they can go –– up. What will happen to prices?  They’ll fall.  This is what the Fed hopes to prevent by artificially keeping interest rates low . . . hoping that they can buy some time until the market and economy recovers.

If you want to buy for the long term, and buy smart, keep some cash on hand for when rates go up forcing potential buyers out of the game because they can’t afford the costs.

What are the benefits of a low price with a high interest rate? First, property taxes are lower (on the coasts, this is huge). Second, a low price gives the buyer the chance to pay off the debt, instead of being tied to the bank forever (think “trapped in a prison of debt”).  Remember, when you rent you are borrowing someone’s house, but when you buy, you are borrowing someone else’s money –– which gets expensive (more on this in future posts). And finally, the third point is that in many markets property values are still dropping.  Recently, this past May a report by Fitch Ratings was issued that predicted housing values in California would drop and additional 36 percent!  For all those buying in California, chances are good that they will end up with a mortgage greater than the value of the house.  This mean no ability to refinance, and the strong possibility at selling for a loss. And California is not alone, plenty of other markets will find themselves in the same position.

So as investors, we can act like real estate agents, and attempt to get people in houses for the most amount of money, or we can sell them a great deal, that also affords them some protection from an uncertain future. When you sell for a low price, assuming you’ve done the work needed to create a spread (if a short sale), you’re minimizing the risk that the end buyer will face –– especially if they are buying for the long term.

Hey, for more info and to get involved in a fantastic community of investors collaborating on how to get smarter with real estate investing, click the box up to the right, and join Silver.  It’s free and you get a ton of free resources!    ~ josh

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2 Comments to The Low Interest Myth

Melvin Campbell

Good post, Josh. Another great thing about buying for the long-term at a…low price – high interest rate…is you’ll always have the option to refinance to a lower rate, but you’ll never have the option to reduce your principle.

Polycarp

While everyone agrees that the interest rates have to go up from where they are today, I am not sure that prices will come down…
This is because I believe that we have a good amount of inflation in the near future, and it will most probably keep the prices of housing atleast at the same levels if not higher.

Does anyone else agree/disagree with me?

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