404: Financial Independence Day
Your Financial Independence Day happens when your residual income stream amount exceeds your basic monthly expenses. Rental demand is high for three big reasons: rates are rising, stringent mortgage qualification standards, housing undersupply. I answer three listener questions: Should I make a big down payment? Is borrowing at lower than inflation profitable? What about prepayment penalties? Ridge Lending Group President Caeli Ridge joins us to discuss today’s mortgage lending landscape. Today, are ARMs beginning to make more sense than fixed-rate mortgages? We explore. Learn about the cash-out refinance climate. Second mortgages on income properties are still limited. Does it ever make sense to refinance to a higher mortgage interest rate? We discuss. Caeli Ridge thinks mortgage rates will keep rising. Resources mentioned: Show Notes: www.GetRichEducation.com/404 Get mortgage loans for investment property: RidgeLendingGroup.com or call 855-74-RIDGE or e-mail: info@RidgeLendingGroup.com Freddie Mac Includes On-Time Rent Payments Into Underwriting: https://www.housingwire.com/articles/freddie-mac-to-include-on-time-rent-payments-into-underwriting/ Airbnb Enacts Permanent Party Bans: https://www.cnbc.com/2022/06/28/airbnb-makes-its-party-ban-permanent.html JWB’s available Florida income property: www.jwbrealestate.com/gre To learn more about eQRPs: text “GRE” to 307-213-3475 or: eQRP.co By texting “GRE” to 307-213-3475 and opting in, you will receive periodic marketing messages from eQRP Co. Message & data rates may apply. Reply “STOP” to cancel. Make passive income with apartment and other syndications: www.imaccredited.com Best Financial Education: GetRichEducation.com Get our free, wealth-building “Don’t Quit Your Daydream Letter”: www.GetRichEducation.com/Letter Our YouTube Channel: www.youtube.com/c/GetRichEducation Top Properties & Providers: GREmarketplace.com Follow us on Instagram: @getricheducation Keith’s personal Instagram: @keithweinhold Partial transcript: Welcome to GRE! I’m your host, Keith Weinhold. Happy Financial Independence Day on American Independence Day. I answer some of your most burning listener questions today. Shifts in the mortgage market could now change your strategy. Does a cashout refinance to a higher mortgage rate make sense or not? Is an adjustable rate mortgage actually feasible for you now and lots more… on Get Rich Education. _____________________ Hey, welcome in to GRE. From San Luis Obispo, CA to Saint Louis, Missouri and across 188 nations worldwide, you’re back in that abundant place. And you’ve got to lead with an abundance mentality around here. How many places can you do that when the scarcity mentality is abundant and the abundance mentality is scarce. I’m Keith Weinhold. This is Get Rich Education. Though it’s American Independence Day… is it your financial independence day. Are you drawing closer to that day… as you add income streams in your life. With 8.6% government-admitted inflation and stagnant wages and a higher cost of living… has there EVER been a more important time in your entire life to add an income stream through real estate? You can make the case that this is the most important time for you to do that. I am about to answer your listener questions here on July 4th. It’s also Episode 404. There’s no chance that this becomes an error 404. Some dorky humor there. First… Freddie Mac is going to include on-time rent payments into underwriting. Yes! This starts next week. This is a good thing for you. This incentivizes renters to make on-time payments to you if they ever want to become homeowners. …and… Airbnb enacts a permanent ban on parties. They & VRBO have long struggled with what to do about parties. I just shared those stories with you in Friday’s newsletter. If you didn’t see them, they’re in the Show Notes of today’s episode. Be sure to get our free “Don’t Quit Your Daydream” newsletter. We’ve been really informing you about so much in the real estate world there. We’ve also been telling you about our webinars. I know that some of you enjoyed last week’s Texas properties webinar. Stay up-to-date with our newsletter at: GetRichEducation.com/Letter Now, let me tell you. Back in the year 2004, eighteen years ago. Yes, I was an active REI then. My tenants were increasingly leaving. They were vacating my property and I had to find a new renter. This was increasingly happening for a few reasons: #1 is that mortgage rates were falling then. But secondly, and really the big reason is that anyone could qualify for a loan. Mortgage underwriting standards were so lax that nearly any human could get a loan, even if they had zero income. So… loans were too easy to get. Then the third reason that my tenants seemed to be vacating is that there was ample supply - and an oversupply of properties - first-time homes - for them to move into. Well, today, all THREE of those criteria are flip-flopped. First, mortgage rates are rising. Second, mortgage qualification standards are tough. Tougher than Kevlar. And thirdly, there’s an undersupply of homes, especially these entry-level homes that make the best FTHB places. That’s precisely why rental demand is sky high today, tenants are not fleeing to become homeowners, rental occupancy is close to 100% in many markets, and rents are rising multiples faster than historic norms. These phenomena can move you closer to you financial independence day. I had a group of financing-themed listener questions come in recently, so I want to get to three of those before we talk more about today’s lending landscape later. ________________ The first question comes from Dave in Bellingham, Washington. “Keith, I thought it was good to make a big down payment on a property. That way, I’d have not only less debt, but I’d have the benefit of having a smaller mortgage payment over time. This means I’d pay less interest over the life of the loan too. Can you tell me more about how FF beats DF?” That’s from Dave. Good question, Dave. Common question. In fact, there was a time in my life, before I ever owned any real estate where that same line of thinking made complete sense to me. I even thought, “If I could be mortgage-free and own a property, I’d have it made.” Dave, let me answer this in a somewhat different way than I’ve answered it before for other listeners’ benefit. If you can borrow at a 6 or 7% mortgage interest rate, which, after tax deductions might be an effective 5% interest rate, many think that they can beat that in the market over time. One probably can. The riskiest thing that a lot of people do by making a big down payment is now they don’t have much liquidity. If the cash is already in the home, then that borrower might worry about not having much cash for other disruptions or expenses that come up in life. The worst one could be, “What if you lose your job and your job was, say, 70 to 100% of your income?” Now that cash is trapped in the home as equity… and you can better believe that today, banks aren’t going to let you access your equity if you don’t have a job. The best way to keep equity separated from your home is to make sure it never goes in there. The other reality too, is that the more than you borrow, the more you make use of OPM. So the great question to ask yourself, Dave, is “How big of a real estate portfolio could I ever build if I limit myself to only using my own money… and NOT other people’s money?” We’re going to discuss this more later in the show today… but that should provide some sufficient context and food for thought to your question, Dave. Thanks for writing in. You, the listener, can always contact us with any questions at GetRichEducation.com/Contact ________________ Andrew from New York state had a question through our Contact Page. Andrew’s been an avid listener for quite a while. I remember your name, Andrew. You’re a veterinarian from New York state. I hope that we can meet sometime in the future. Andrew asks: “Is it a true statement to think that even in today's High "er" interest rate environment any mortgage rate under the rate of inflation roughly 8% is a bargain?? Today ..I am not getting great cash flow...$100/month or break even..on new builds...but still see the upside in RE investing due to its inflationary hedge.” Alright, thanks for that Andrew. With the first question, is any mortgage rate under the 8% inflation rate a bargain. Well, it could be. Many think that the real rate of inflation - the true diminished PP of the dollar is 15%. But let’s just stick with 8%. Yes, if you get a mortgage at 6 or 7% today, you are effectively being paid to borrow. That is because with the money that you’ve borrowed from the bank, over time, you get to repay the bank with dollars that debase on the bank faster than THEIR interest can accrue on you. That’s how it can stealthily build wealth. The risk associated with that is - besides being most attentive to your personal cash flows, Andrew - is that at some point over your loan term, there’s a good chance that inflation will duck back below mortgage interest rates. We’re in this inversion now where the opposite is true. So, enjoy it while it lasts. I’d think of your interest rate being lower than inflation as a short-to-medium term tailwind. Your second question was about how today, you’re not getting great cash flow when you buy a new-build rental property. It might be positive $100 or just a break even. But you still like investing in RE for the inflation hedge. First, I think of RE as more of an inflation-profiting center than a mere inflation-hedging vehicle. I take you point though… and then… Yeah, a lower $100 positive cash flow or less on new-builds is lower than what we’ve all been used to in recent years. There’s a chance that this will widen - certainly no guarantee. It like how I described a