Don't Wait For Interest Rates | Freedom Vlog | EP. 87

Hey, freedom fans. Aaron Davis, Mark. Mark runs all of our investments, like pretty much spreadsheet jockey manager.

Aaron, our president, CEO.

That's right.

You are listening to and watching vlog number 89.

Wow.

Lots and lots of info.

Yeah, we're 89 deep already goes quick.

Yeah.

We're going to talk today about what I think is probably the biggest risk people are facing when it comes to real estate investing right now.

Right.

And that's waiting, waiting, wait and see what the market does.

Playing the waiting game.

How many people are saying that to you right now?

Lots. Way too many.

It's a big loss opportunity, big missed opportunity. So we're going to talk a little bit about that here in the blog and then more in podcast 73. We'll get into a longer conversation.

Sure.

So yeah, I'm hearing that chatter. It's one of those periods where fear has gripped people.

Sure.

Because interest rates are changing. That's the big variable, interest rates. And then also maybe to a lesser extent to our real estate investors, this talk of like recession coming, what's the impact on owning real estate and so on. Both of those things have people hesitating despite looking right at the data that tells them otherwise.

Right.

And so we wanted to chat a little bit about, about that fear. I think it's meaningful. When my little dude, my five year old wakes up, he's had a bad dream, I don't blow him off and say, get out of here. It's nonsense.

Right.

I say, hey, what were you dreaming about? Why, whatever. Take it seriously and then find a way to make him understand some of those fears are exaggerated.

Yeah.

So that's kind of what I think is important. It's timely for us to talk to our, our audience about really the bigger risk.

Sure.

Being seized by fear, sitting around and.

Waiting when there are ways to move missing opportunities.

Yeah, that's exactly right. I got a long list of things on my mind to talk about.

Yeah, no worries. I'm definitely looking forward to, you know, the longer chatter.

But yeah, because this will probably go be a conversation we keep up for hours after this. Right.

Good.

Because it's.

Yeah, it's real.

It is, it's, it's real time right now. So a couple of things that, you know, the kind of like the foundational principle that I was thinking about that kind of made me realize that we needed to talk about this right now so that, you know, we just had another interest rate hike, mortgage rates have gone up a little bit. And, and the fact that those things impact your cash Flow of a rental property is real. So that, that will happen.

Right, right.

The, but the founding, the kind of foundational concept or whatever is that long term 10 year financial freedom vision and plan that people like put together and that, and they, they execute on day after day, year after year to build that portfolio that wins in financial freedom. It's being threatened right now by this. I want to wait and see.

Right.

And I think the kind of revisiting that concept of having a long term investment strategy where you put a portfolio together and depending on your financial situation, different people can do it at a different pace.

Right? Yep.

Some people can buy a property every couple of years, like scrape together the nickels or whatever and then you're in a different position five years later. And some people have plenty of disposable cash and they're, they're buying a property every quarter.

Right, Right.

Everybody has their own pace. I'm not saying there's only, there's only one way to move. But that long term plan is, is kind of like the foundational principle that I wanted to kind of re. You know, kind of bring people back to.

Sure.

Well. And you know, you don't you compromise that when you say, okay, I'm just going to sit on the sidelines and wait.

Yeah, yeah.

So I used to be a, I was in the stock world, sold mutual funds and stuff and we talked a lot about dollar cost averaging and this idea of like, don't try to time the market when it's up, when it's down, you can't really know.

Right.

You know, like you could buy and the next day it shoots up, the next day it tanks. But dollar cost averaging approach essentially says that if you just make your investment on the 10th of the month every month, over time you're going to win.

Right.

Over time you're just executing without bias about whatever's going on in the world. You're going to get lucky and you're going to get unlucky on timing the ups and downs of the market. But the market moves up.

Right.

In a series of ups and downs. And the same is true for real estate. As you're building your portfolio, it's, it's moving up.

Sure.

So trying to time things is a big risk.

Right.

I'm sure that investment people hate when they see a little dip and everybody's selling off.

Yeah.

I mean, and, but, but the smart investors are buying up.

Yeah.

They're.

Wait, yeah. Coca Cola is on sale. Exactly that company.

Right.

That's the Warren Buffett attitude. Or Whatever.

That's exactly what's he say.

He says when everybody else is afraid, you should be greedy.

Yeah.

When everybody else is being greedy, you should be afraid.

Right.

And you know, I would say in reality what you should do is just execute your long term strategy over time. So that same methodology of buying stocks and maybe on a more frequent interval, just executing that strategy over time, building up that. You do the same thing with real estate.

Right?

So.

Right.

Because if you think about it and like breaking it down to as simple as you can, your strategy was to buy one property a year, two properties a year, the only variable that changed was the interest rate.

Right?

Yeah.

I mean, the plan is still the plan. No, Mark, the sky is falling. Like the only thing that's changed is the cash flow.

Yeah, yeah.

I mean, like you buy that thing, and we were talking about this a little earlier, is that you buy that property with the hopes that it will go up in time. You know, real estate is going to go up. You know what I mean? It might have slowed down, it might not be going, you know, I mean, some of these investment markets where at one point it was going up like 8% a year, 10% a year. Yeah, it might have slowed down, but like over time it's going up. So that variable hasn't changed.

I think there are a lot of people who, let's say they started their investment journey eight years ago, right. And so they've been in a bull market the entire, their entire time. And so things change, get shaken up a little bit and they're like, right, so if you started in, let's say 2012, 2014 or whatever, you know, we had recovered from the, you know, the Great Recession or whatever, and prices have steadily climbed and then we enjoyed this 5ish year period of just crazy, right. Gains. And, and so everybody thinks like, oh yeah, that's how it's supposed to be. That's how it should be.

Right.

But no, man, you're on a rocket ship, right? And that's how it will be sometimes. And that's cool, right. We should all be there. What happens, right.

Hopes for that soon, right?

It could happen, right. Like any given year, you don't know when it's going to happen, Right. Is it going to happen in 2024? Is it going to happen in 2028? You don't know when those crazy runs are going to happen years in advance, Right. But you build your portfolio so you're holding when it does, right? You're not going to do that if you're Sitting on the sideline, waiting. Right, right.

Because think about it, right. Let's just say I'm sitting, I'm waiting and I wait till interest rates come back down and I buy my first property. But that's years from now.

Yeah.

Versus right now. Let's say I'm buying a couple properties.

Yeah.

I mean, maybe three properties. Let's just say it hits that rocket ship again that you're talking about. My three properties are on that rocket ship versus the one that I'm buying during that flight.

Right.

That one's going to be the ones.

Going to be the one that I.

That's the most expensive.

I'm paying the most for it.

Yeah.

Like so. Versus like the ones that I bought now.

So there is a dollar cost averaging methodology to building your real estate portfolio.

Sure.

Where, you know, you since 2012. About 2012. Ish, depending on what marketers you look at. You know, kind of the Great Recession, real estate took a dive for a while or whatever and all values were kind of back a few years later. Right. Since that period, there has been a reason, like every year, maybe year or two, every 18 months or so, there has been a reason why I want to wait and see what this correction does.

Right.

There have been people who have sat and waited since that period for the last 10 years, for the last decade. People have been at some period or another. It's, you know, I want to wait and see what happens with the election. I want to wait and see what happens. All these, you know, various things. And generally speaking when you do that, you're, you're going to lose if you make a habit out of trying to wait on waiting and seeing what happens next. So you could do the same thing. Now I wanna wait until interest rates go back down. Well, how far? How long?

Well, think of it like this, I'm sure. So as a realtor, you know what I mean? Like when I'm out working with clients on a, like their primary residence, you know, I have heard from a lot of them that they're gonna wait until this hot market ends because they don't wanna overpay.

Okay.

You know what I mean? So it's kind of like the opposite of what we're talking about with turnkeys is that, yeah, I mean like, oh, I don't want to buy now.

So.

So their primary residents are like, well, you know, they see that, that, that growth every year. I mean, like people, we just got out of a place where it was like multiple offers, waive your inspections, like just anything you can to win the deal.

Yeah.

And they, some people were like, just so turned off by that. They're like, I don't even want to shop for a house because I don't, I don't want to overpay 20, 30 grand on a house just because it's, it's a hot market. And so. But they've been waiting for years, you know what's crazy, for that to happen. And the home values are still the same, you know what I mean? Or accelerated from three years ago. So I bought my house.

I bought a nice house in Springboro. And I was, I have thought even until recently, I read a report that made me think otherwise. But I bought right at the peak. Oh, I overpaid.

Right?

No, like five years from now, it's going to be worth a lot more than it is now.

Right.

I didn't overpay at all.

Exactly. You paid what that time was calling for. Like, that's it.

I just, I just didn't grab the discount I could have gotten if I had gone earlier. So I think I've overpaid. But, you know, home values don't bounce around like that. It's rare when they dip. So that's a whole nother. That's a whole nother thing. I mean, in fact, I was just looking at doing some comps on my own home or whatever, and I've actually gained equity in that home just in the months that I've lived there.

Right.

Even during these months. I. I was reading some data recently that, that, you know, the prices are. Home values are still worth more today than they were year over year 12 months ago.

Right.

So this idea that, you know, just because things have slowed a little bit.

Right.

That the bottom is. The bottom hasn't fallen out. I don't see any reason why it should. It could. I mean, we could see print prices, diplomatic, but year over year, we haven't seen that yet.

Yeah.

I mean, again, I'm not a mortgage expert, but you would think that, like, when they made the correction, you know, with the housing collapse, you know, 2005, 2008, like in that. That they were just obviously writing loans to anybody that would sign one.

Right.

You know, I mean, so I think they caught on to the game.

Regulation addressed that and a lot of those things, big holes in the debt.

So, so the fact that people are, you know, have purchased homes that were more expensive, but there was the lower mortgage and interest rates, and so they're still, you can still pay them. It's not like when you Bought a home back in 2008 and did stated income with zero down. I mean, you got no skin in the game, so I mean, of course you couldn't afford that. And so that's, you know, all the foreclosures and collapsing and stuff. So again, I don't know where that's.

Going, but we've had at least one good cycle of tightening that happened since that period too. Really? Two cycles like 2012, 2018 ish, or whatever, where standards for getting a loan have been, have constricted a little bit.

Right.

And that's healthy.

Right.

Like, okay, let's make sure that the money we're loaning can actually be paid and whatever that. So those cycles are good, those are healthy. And that's back in that big collapse or whatever we had. No, just whatever anybody wants.

Yeah.

You seen the movie the Big Short?

Yeah, I was part of that, I think. I think in an earlier vlog I referenced that. I did that in California. Yeah, Home prices were going up like 15%, you know what I mean? And my realtor, because I wasn't a realtor at that time, was like, oh yeah, just buy a house, you know, on interest only. Just hold the house for three years and then like the house will have gone up so much that the, then you, when you refi. Then you just take it out and do like a 30 year fixed.

Yeah.

Problem is I bought it and couldn't make it three years because the housing market collapsed literally like the year I bought it. Yeah.

Well, we gotta keep this short because we're gonna have a longer conversation on it in the podcast.

Sure.

I think the big, the big things that are, it's really those, it's the recession factors that has everybody scared a little bit and it's the higher interest rate fact factors. You did a good analysis on this decision making about interest rates now versus what they, you know, some fictitious. And you know, when running that analysis, you came to that same conclusion I did, which is, you know, let's say a property that's cash flow, let's say you just make 200 bucks, you pay your maintenance, you do all your stuff or whatever you. Cash flow, 200 bucks a month between now and a year from now.

Right.

Well, you've just produced enough cash to pay for a refinance. Let's say, let's say interest rates are way lower a year. You don't know that, but let's just say they're way lower a year from now. You've cash flowed enough to pay for your refinance you've also gained equity by having somebody else pay for your mortgage.

Yep.

The capital has appreciated on the property, so it's actually worth more now. Yep. And you bought the price, the property at today's price instead of tomorrow's price.

Correct. Right.

So like what do you gain by waiting? By waiting you get a better cash flowing. Property, let's say that fictitious future, whatever that is, that's a year from now or whatever. But you're going to pay tomorrow's price, which is higher and so many other things, other quantitative tightening factors that could impact your ability to get financing and everything else.

Right.

But what do you gain by wait? You gain nothing. You actually lose capital appreciation. You actually lose equity that's being paid, know, paid down on the principal that's being paid for.

Yep.

On the loan. So it's a. This is the moment where fear is make. Is going to cause people to miss out.

Sure.

While everybody else is scooping up and building their portfolio, people who are afraid or seized by it are looking at the wrong. Instead of looking at the cash flow and saying does that, does that pay for my mortgage, build me equity over time or does it not?

Sure.

Instead they're asking what can I do to time the market? That's the wrong question.

Right. Yeah.

And then, you know, the recession factors. Is everybody going to lose their job and stop paying. Well, rents don't go down. Not in BNC class properties.

Right, Right.

Rents go down and you know, your luxury condo or whatever, your, your executive home or whatever. Rents will go down in a recession. But generally speaking, recessions have very little impact on the, on the, the B and C class properties that you're building your portfolio with. So that's a. There are better ways to mitigate that risk.

Sure. Right.

You know, buying in different economic hubs, you know, buying next to a. We have an Air Force base here in Dayton. We have a big airport, kind of like distribution, whatever hub in Cincinnati. You know, we have different economic pockets or whatever that impact.

Sure.

Employed in wages and all that kind of stuff. But that diversifying is smarter than. I'm gonna, I'm gonna wait, make sure.

Right.

The economy's healthy and all that fun stuff.

So there are lots that can go into that. I mean, even if you just look at your buying power three years from now, if you have multiple properties that are performing, you're now not a rookie. Banks may look at you a little different. There's so many different things and variables that you don't even, maybe even take into consideration. Is that, you know, imagine having three or four properties. There's tons of equity in it. You can pull that out, do blanket loans, buying power goes up again. You know what I mean?

So not if you were sitting, waiting.

Not if you're sitting, waiting. If you're waiting for your first one, you've got no buying power three years in the future, but the rates are better, Right?

Right. I'm thinking about that guy who. I look at you and I see this college athlete, right? So I'm thinking about that guy who didn't make, you know, didn't make the team or whatever, but he wants to come back and. And try again next year. You just gonna sit and wait or are you gonna hit the gym?

You know what I mean?

Like, you have to be doing something, right? So anyway, maybe that's not a great analogy.

Well, yeah, right. Red shirt it for a year, but don't work out.

Just red shirt.

Right.

All right, well, let's call it a wrap on the vlog. We'll come back and talk in the podcast.

Sure.

Thanks for listening. Freedom fans.

Invest smart.

Live happy.

Cool.

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