Higher interest rates mean higher expenses! (does Airbnb still make sense?) | Tim Hubbard

I know it may seem like the sky is falling and loans are so expensive now that we maybe missed our window to buy good investment properties. It is true interest rates are higher than they were just recently, but are they actually more expensive? I want to break down why that might not necessarily be the case. Stick with me as we jump into loans and a couple alternative financing options this week on the Short Term Rental Riches podcast. Welcome to Short Term Rental Riches. We'll discuss investing in real estate, but with a specific focus on short term rentals. Quick actionable items to acquire, manage and scale your portfolio. I'm your host, Tim Hubbard.

Welcome back to the Short Term Rental Riches podcast. I just closed on a refinance for 7.5%. For some of you that have been in the real estate game for a long time, that might not seem bad at all. I've been in real estate for about 12 years. This is the most expensive loan that I've ever taken out, but it's not necessarily expensive. So I want to break that down. But first of all, I want to just talk about what happens when we raise interest rates. When interest rates go up in an economy. This is an effort to lower inflation, right? We're at very, very high INFL rates right now, 8, 9% based on the government's terms. And a lot of us know that it's very realistically much higher than that because the types of things that they use to come up with that 8 or 9% are not necessarily accurate. Housing costs, for example, is something that they create on their own, but let's just say it's 8 or 9%. What happens to the real estate world when interest rates go up? Less people can buy properties if they're using financing. That is, that is just the honest truth. Less people can buy properties because money is more expensive. It costs more. If someone was going to buy a million dollar property and their loan was going to be $5,000 a month, but interest rates have gone up and now that monthly payments $10,000 a month, well, it's going to be much harder to afford that property. And if that property was rental investment, then the cash flow or the numbers on that are going to be way more difficult to make sense. So that is just the honest truth. As interest rates go up, less people can afford to buy properties. Now what happens to rents? That is flipped rents are not related to interest rates. In fact, rents are very likely going to continue going up if interest rates go up. Because if you. It forces more people to become renters. Those same people that Wanted to buy a property, maybe can't afford it now. And so there's more demand on the rental pool. Of course, this really depends on which market you are in. But in general, if interest rates go up, that means more people are going to be renting and that means more pressure pushing rents up. So couple sort of macroeconomic things there on interest rates, as they go up, money's more expensive, less people buy properties and the cost of properties can go down, right? I say can because again, this depends on every market. So now let's get to these rates that seem so high, but are they really high? Let's say inflation is 9%. Hopefully you can stick with me on this one. But let's say inflation right now is 9%. I just closed on a loan for 7.5%. That's a 30 year fixed loan. That means that I borrowed that money for less than the cost of inflation. So the real interest rate I paid was negative 1.5%. That essentially means the bank paid me to pull out that money. Not a bad deal, right? Of course inflation can go down and if I'm locked into a 30 year loan, which I can refinance, but if I'm locked into it for a few years and interest rates drop, then maybe I'm overpaying on the cost of that mortgage. But for right now, I'm technically getting that money for free. At least that's the way I look at it. Now if we compare this to a year ago or two years ago when let's just say inflation rate was 2% and I took out a loan for 4.5%, that sounds awesome, right? That's really low. But if we look at the real interest rate, which is the difference between the interest rate inflation, that means I was paying positive 2.5% for that money. That means the money I borrowed back then was more expensive than the money that I just borrowed. I hope you're able to just follow me on that one and get the gist that interest rates are really not unreasonable right now. And the great thing is, you know, if we're locking these interest rates, and of course we don't want to to pull a mortgage out on a property that doesn't make sense, we don't ever want to do that. But if we pull a loan out for a property that makes sense today, with a 7.5% interest rate and interest rates go down in the future, which hopefully they do, we can refinance that property and then we're going to be cash flowing even more with that property. So there are deals out there. Still. Keep in mind that this money is not actually as expensive as it seems. Before we get into a couple options that don't even use a bank, that might be really good options for some of you out there, I just want to reiterate how important it is to talk to lots of different lenders. They all have different terms, they all have different requirements. When I was first getting started investing, specifically in short term rentals, I was buying apartment building out of state, out of this state that I was a resident in at that time. And I had flown out there, I'd done inspections, I had the whole game plan together, I was ready to sign. And about a week or so before, I mean, we were right down to the wire there. It was basically a done deal. And I was excited and I had spent a fair amount of money on it already. Appraisal, inspections and all that, plus travel costs, my lender calls and says, sorry, Tim, we cannot do this deal. They just didn't want to do it. They didn't feel comfortable doing it. It was the first time I'd ever worked with them. And so I'm like, totally bummed out, right? And I call a friend of mine, a friend that actually had a property on the same street and was operating those properties as short term rentals. She was like, old school. I mean, she was doing this before Airbnb, and she gave me her lender and she knew what I was doing. I was buying that property for short term rentals. We actually became really good friends. But she gave me her lender and said, why don't you try calling Heath and see what he says? So I called up Heath and he says, sure, Tim, we can fund that deal. And, oh, by the way, do you want some money for the renovation? And I was like, yeah. Oh, my gosh, I couldn't believe it. You know, when I called him, I was a little nervous. I was definitely nervous because I thought this was a done deal. So just make sure that you're shopping around and you're talking to multiple lenders, because they are all different. Okay, a couple real quick options that you might want to consider without a bank. And the biggest one here is owner financing. And what is owner financing? That's essentially buying a property that you don't use a commercial bank for. You're not taking out a bank loan. The owner, the existing owner of the property, is going to sell you the property, lend back to you the balance of the property. So to make it simple, let's say the property is $100,000. I know those don't really exist anymore, but let's just say the property was $100,000. The owner wanted a 20% down payment, so you gave him 20,000. But you still owe $80,000 on the property. Right. Normally you would go to a bank and say, hey Mr. Bank, can you give me a loan for $80,000 so that I can buy this property? Well, if we're not using the bank in this example, the owner owns the property outright, so he doesn't have any debt on the property. He can offer to finance the balance for you. So let's just say that $80,000 that you still owe, the owner says, yep, I want to sell this property. I know that interest rates are higher for you right now and making it more difficult to qualify for this property potentially. So why don't I loan you the balance over a 10 year period for 6%. Now this can be a really good deal for both you right on the owner's side. Let's say the owner really wanted the cash, the down payment, but also wanted a monthly income stream. Well, this can be a good solution for that. At the same time, it allows you to buy the property. Now that loan's not going to go on your credit report either, which is also kind of a nice thing. Of course we want to make sure that we do this professionally. We want to make sure we have a lawyer draw up all the docs and everything is squeaky clean and just as it should be. But it can be a win win for you and the owner. If we think about it, a lot of people don't have loans on their properties in the US Actually one of the recent stats I heard is that like around 50% of the homes in the US are owned outright. That means any one of those people that owns one of those homes and doesn't have debt on it, they could potentially sell their property and offer you owner financing. So there are a lot out there, not necessarily as easy to find. Sometimes people advertise it straight out that they're open to lending. You might see what they call a FSBO for sale by owner. And a lot of times those owners don't have loans on the property. So take a look at that and if you see a property you do like ask, ask if that is a potential. That's the only way we're going to find out, right, is whether we ask or it's advertised that way. So we have a lot of people that own homes in the US and don't have debt on them. We have an aging demographic in the US all the baby boomers have reached retirement ages and they're living on fixed incomes. But they also have a lot of equity in their properties. So this could be a really good solution for them to sell their property. Maybe they want to downsize and they want that 20% down payment or 10% or whatever you work out with the owner. That's the beauty of owner financing as well. It's super flexible. It's whatever terms you guys agree on. So maybe that owner wants that initial chunk of money, but they have a fixed income, which is being sort of disintegrated by inflation, unfortunately, and they want a little extra spending money. Well, receiving that monthly payment from you for 10, 20, 30, 40 years, whatever you work out with them can be a really good option for them. So consider owner financing. If you haven't already, it is a good option, and you can always refinance out of that in the future, too. Of course, that has to be in your terms. But let's say interest rates do go back down in a couple years, you pull out another loan from a bank and you pay off the balance that you owe from that owner. So very, very flexible can be a really good option. One last alternative financing option I want to leave you with. Not necessarily a financing option like with a bank or with an owner, but that's just partnering. If properties are out of reach for us, maybe we don't have the down payment or we don't have the background or the skills. Partnering is one of those beautiful things that real estate allows us to do. We don't partner when we buy stocks, right? We don't partner when we buy precious metals or some of these alternative investment options. But with real estate, that is an option we have, and it's a really good one. I've done it myself, so maybe a topic we can explore more in the future. But consider those options. And just a recap, interest rates may seem high right now, but if we look at the rate of inflation, it's actually still cheap money. Doesn't mean you can't refinance in the future. If you pull out a loan today, just make sure your loan terms allow for that. Make sure you talk to all the lenders you possibly can to get a good idea and explore your best options. And if you don't find any options with them, consider owner financing if you can find a property or an owner that's willing to do that. And lastly, consider partnering can be an excellent option for us as real estate investors. I hope that gave you some good insight into loans. And. And I hope you're sticking with it and still looking for deals. And until next time, I hope you have a wonderful, wonderful day.

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