Flip and Danny break down four things to check before investing when rates are rising: material costs going up, whether tenants can actually afford rent increases, vendor contract terms, and bridge loan extension options. Interest rate alone won't tell you if a deal works.
Hey, everybody. Flip and Danny here, founders of the Freedom Real Estate Group family of companies. And welcome to another episode of our.
Podcast, which is called Freedom through Passive Income.
That's right. And this episode is entitled what to look for in a Rising Interest Rate Environment. Yes, like right now.
Yes, like right now. So that's why we're talking about this right now. So your actual loan interest rate isn't as big of a factor as you might think. And we're telling you this right now based on the deal that we're buying and the feedback that we were getting from the people that we were talking to. And we're like, well, here's one loan option, here's another loan option. Here's the differences. Here's what this one's going to do. Here's what this one's going to do. All in all, I was going to go for the lower interest rate. When the benefits of the loan packages when compared side by side. The one with a little bit higher interest rate was the better one and wasn't as much of a factor than what was in my head.
Right, right. And so some good signs of a deal when in this environment. Well, for instance, our rent, we keep talking about apartments, is a large gap in the current rent versus market rent. And I mean, this one, not to put out numbers, but it's over $200 difference per unit.
Yes.
And so it's. So that's a good sign no matter what the interest rate is.
Yeah, absolutely. So you, you never, you hear a lot of people right now going, I'm not even looking for deals. People are overpaying all the time. There are still deals to be had. Right. It doesn't matter what market that you're in, up market, down market, there's different real estate strategies, there's different ways to evaluate deals. There's different opportunities to be had. You just have to know what to look for. Which is why we're saying what to look for when you're in a rising rate interest rate environment. Because these are the things that we're looking for right now. Okay, so the things that you're going to look for, we made a quick list. I think there's four things here, four biggies that we did. Number one, cost of materials. There's been, I mean, yeah, we are all talking about the cost of materials right now. So this is going to affect any of your renovations. It's gonna affect your turns, it's gonna affect your repairs and maintenance. So make sure that you're factor that higher cost, the Second thing is tenant affordability. So if you're evaluating a deal and the deal only works because you're dependent upon the interest, sorry, the rents going up 3% every single year, but perhaps the tenants there can't afford that. So if it's a C class, it's much harder in a C class to be able to raise rents consistently. If you're in a B or A, not as much of an issue. That's why a lot of people right now, you're going to hear them saying, I'm looking at A class and I'm looking at B class when the cash flow is in the C class. But they're just doing that because some of their models are depending upon that rent increase. And it's easier to forecast that and more dependable when you're in the B and A class things. And if you don't know what a B class and A class is, we do have an episode where we talk about A B and C class, D class, which we don't invest in. So that's another thing that you want to be thinking about when you're looking at deals. And we always say to stress test those things, which are question marks. The third thing is vendor contracts. So when you're looking at the vendor contracts, it could be for pest control, it could be for, I don't know, lawn, snow. There's all kinds of different things you're going to have a vendor contract for. I think we have like, you know, I don't know, six or seven vendor contracts from the deal that we're buying. When do they expire? Because in a rising interest rate environment, many times the vendor is raising their prices. Well, right, because in the real estate industry, it's not necessarily bad to be dealing with inflation because usually you can raise the rents, you can get more money as things cost more. And so contractors are sometimes the same. Same way. Not always. Some. A lot of our contractors, the labor is still exactly the same. We're worried about the cost of materials, not the cost of labor. But anyways, just take a look at them. If they're expiring soon, know that you might get a higher rate on your renegotiation of that contract. And then the fourth one is short loan products. So bridge loans, for example, can be, you know, a couple years, three years, you can have some extensions to them. Just make sure that you're not getting something so short that you're forced to refinance or sell in a period of uncertainty. So again, perfect example. On the, on the property that we're doing. We actually got into a loan that is short term so that we can refinance out in a few years. But we have a couple extensions that allows us to move past that period of uncertainty. So that's something you want to be looking out for as well.
Right. So beware of what's happening, you know, everywhere, but don't.
And not beware. Be aware.
Yeah.
And I only say that because I talk fast. And the way he just said it, I was like, hey, he just talked fast. So be aware. Not the where.
Yeah, not beware. Be aware. Not be aware, Wolf.
Oh my God.
Anyway, be aware of what's happening, but don't lose sleep over it. You know, one of the things non real estate related, but with this inflation and everything, what some companies are doing is they're keeping the packaging the same and the price is the same. And so you're like, wow, I'm still getting the same amount for the same, you know, whatever. Nothing's changed here. Well, that packaging and the price is the same, but what's inside is less.
So instead of a six ounce package, it's now a four ounce.
It's now a four ounce package.
So they changed one number on the front of their package.
Check your potato chips out there if anyone buys potato chips. Because you're getting less potato chips now. But it's still the same price. But again, don't lose sleep over it. You know, it's. And when we were talking about this right before we started recording, you know, it's better than a couple decades ago.
That's right.
And which it is by leaps and bounds. But guess what? There was real estate investors back then too.
Yes.
And they figured out how to do it. You have to. And I always talk about real estate investing, no matter what you're doing, whether it's commercial, single family, whatever, you need to be a chameleon. You know, when we were in Texas, we were doing one thing. When we moved to Phoenix, we had to do something completely different. Then we moved to Ohio because we're doing something yet again completely different. But it's all real estate investing.
Yes. Love it.
Be a chameleon.
Yes, be a chameleon.
That's right. Well, we hope that you enjoyed this episode. Make sure you're heading down to our website, freedomcapitalinvestments.com and join our investor club. That's right, Buffet. But make sure you join the investor club because we do have information there that is not on the social media accounts. But make sure you're checking out the Facebook group and the LinkedIn group. Make sure you're hanging out with the team, asking them questions, whatever it may be. If you're watching on YouTube, make sure you hit the subscribe button right there. But we hope you're enjoying all of our episodes. Let us know how we're doing if you have any recommendations or whatever. But we always end all of our episodes with Invest Smart, Live Happy.
Bye everybody.
Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, financial or business professional for individualized advice. Opinions and information on this show are not guaranteed or all investment strategies have the potential for profit or loss. Y' all.
Physicians and High Earners — What Real Estate Can and Can't Do for Your Taxes
