Interest Rates And The Real Estate Market – Episode 262

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[00:04] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler. Welcome to the Prosperity Podcast. Today we’re talking about interest rates and what’s happening in this crazy real estate market. Kim, are you there with me? I am, Spencer. Hello. Hello. Well, as any of us that has searched on Yahoo or opened up a newspaper, which most of the time we don’t look at newspapers, but if we did, we would see that interest rates are on the rise. And it has everyone saying, oh, what do I do? Should I buy a house? Is it right now? Should I buy? Am I missing out? So we want to ask our favorite prosperity author and ask him, what do we do in

[00:59] this crazy interest rate world? Well, the first thing is to stop reading the news and stop listening to it. That solves all kinds of problems. Okay. But beyond that, and since we do live in a very connected world, and you’re right, we might need to explain what newspapers are, actually. I’m not sure everybody knows those. But yeah, however you pick up information, whether it’s a physical newspaper, not, or a magazine, not, or on the TV, UG, or via some kind of social media platform online, et cetera, et cetera. The authors are the first thing that you want to check out when you get or hear information like that. Because of course, the news media wants you to read their information. And so they’re going to use headlines like, oh my gosh, interest rates are going up.

[01:58] And it’s funny because I’ll have clients occasionally call and ask about that and I’ll say, yeah, they’re going up and they’re going down and they’re going up and they’re going down. And it’s because they do. They make tiny little fractions of movements over time. And yet I also understand that that’s not really the question that you’re asking. The question that you’re asking is, okay, what if there’s some legitimately, even if slow, increase in interest rates, what do we do right now? What action can we take right now? And I’m completely serious about staying off the news because I just don’t feel like there’s a lot of helpful information there. And yet the fact is that we do hear this kind of thing.

[02:42] So let’s say what should you do if you’re going to buy a house? Well, without a doubt, you will want to get an interest rate locked in. I’m a big believer in fixed mortgages and I didn’t always used to be. And I’ll even admit, I have some various types of real estate financing that is variable myself, but as a general rule, if you can lock in a 30 year mortgage at a decent rate and I’m going to define decent as anything below eight percent, which is really going to surprise some people, depending on when you’re listening to this podcast, we have for years used eight percent as our dividing line. In other words, eight and under is a good loan and efficient loan and effective loan. Go ahead and take that loan.

[03:31] And above that, if you can find something better elsewhere, you should. Now, mortgages are sometimes in the four, five, six, seven percent range these days, depending on what type of property you’re looking at, whether it’s an investment property, residential properties at a jumbo loan, not. And of course, we want to provide information that’s valuable regardless of when you’re listening. So that’s my first recommendation is if you’re looking at a home, go ahead and get a 30 year fixed rate mortgage and don’t let the media talk you into scrambling around and hurrying and buying a home just because, oh, my gosh, interest rates are on the rise because the difference between, say, a six percent mortgage and a six and

[04:20] a quarter percent mortgage is nothing. And you do not need to worry about it. You know, I completely agree. Now, for our listeners, I want to give some perspective that may help. When I was 20 right when I turned 22 years old, I got a real estate license and I remember being fresh out of real estate school, excited to be a part of the market. And I remember sitting inside the bullpen of our real estate office and the mortgage broker inside the office came out and he said, I have some amazing news for all of you guys. The interest rates dipped below seven percent. And I remember all of us going, yeah. And we thought how amazing it was. But if you tell someone today, seven percent, they’re going to go, what?

[05:03] Are you serious? Exactly what you just mentioned. So the two rules that I share with everyone and hopefully we can create some principles off of these two rules is that when you’re buying a house, you’re one having to decide if you’re buying a house for an investment or if it’s just your home, because if it’s your home, it’s not an investment. It’s not an asset. At least that’s how I look at it. You’re just it’s your home. It’s where you sleep. It’s where you live. It’s where you keep your kids. It’s where you form your memories. So it doesn’t matter what the price of the house is. You’re going to lock in a good interest rate. So you shouldn’t feel the urgency to just go and buy. Now, if you’re not going to be in the home for a long period of time,

[05:48] well, you have to factor in that if you’re going to sell it in five years, you have to pay additional closing costs and realtor fees. So the investment’s not as sexy as it would look. So you’ve mentioned that we look at it and we say, OK, anything below eight percent, we’re good. And we’re going to lock in 30 year mortgage. And in other episodes, we’ve talked about a 15 versus a 30 year mortgage. What other things should we be focusing on? Well, I think the other question that always comes up is around car financing. That seems to be the most common other thing, in addition to the mortgages that are related to interest rates. And this could also be true of like air conditioners. Somebody called the other day.

[06:31] They had a new air conditioner they had to buy. And I’m sure there’s other things out there where zero percent loan is put forth as an option. And so I want to make it very, very clear for everybody that 99 percent of the time, if you’re being quoted as zero percent loan, it is not a zero percent loan. What it is, is the interest at whatever rate has been added to the principle. I’ll give an example here in a minute. And then they’re just dividing out those payments by the length of the time of the loan and telling you that it’s zero percent. So as an example, maybe it’s a thirty thousand dollar car and there’s about four thousand dollars of total interest at prevailing market rates. So just the normal car loan rate that you would get out on the street.

[07:26] And so they are then telling you that that is a did I say four thousand in interest? OK, they are telling you that it’s a thirty four thousand dollar car at zero percent interest. But what it really is, is a thirty thousand dollar car with four thousand of interest added on at, say, five, six, seven percent, whatever the math ends up being. Same with the air conditioner. You know, somebody called in, they had a thirty thousand dollar air conditioning unit they were going to buy. They were being told it was a zero percent. Well, in actuality, that’s probably a, I don’t know, twenty eight thousand dollar air conditioner or even twenty five thousand dollar air conditioner. And they’re just adding the interest on.

[08:08] Now, there have been a few exceptions. That’s why I said 99 percent of the time. I remember in 2008, nine, when our economy was cratering and everybody was scared to death, me included. The interest rate then truly was zero. Like there were car companies that just wanted to get the cars off the lots. And so they were truly offering zero percent interest rate. But in most cases, you can figure out this difference if you will just ask the price of whatever it is that you’re talking about for cash. So say to them, if I had cash, how much would you charge me for this vehicle, this air conditioner, et cetera? And then you’ll get the bottom line number and then you can use a financial calculator to figure out really what the interest rate is.

[08:57] And then that will enable you to go to your own bank or your own credit union and ask for financing for that particular car slash air conditioner, et cetera. You can also, of course, look at your life insurance loans and see if those are better interest rates for financing. And I do want to talk about that a little bit more, but let me just pause and see if all that makes sense so far. That does. That makes a lot of sense. And I think specifically for our listeners to say, just to be armed with that knowledge of saying, hey, what’s the price, the cash price, just so you can get very clear on what’s built in. Absolutely. There’s a great blog post on the Truth Concepts software page. So for our listeners that don’t know, my husband’s name is Todd Langford.

[09:43] He has calculators and software that he puts out for financial advisors. And you can go to truth concepts dot com and look at some of the blog posts on this zero percent interest rate. I’m sure we’ve got some on Partners for Prosperity, too. The additional thing that’s helpful on the Truth Concepts site back to our real estate discussion is there’s an actual real estate calculator that you could use to figure out the rate of return that you’re earning on a particular real estate deal. This would be more for an investment deal. And then that will help you decide, well, is it worth getting a loan at six, seven, eight percent, you know, whatever the numbers are, when I can earn only four percent on this real estate deal?

[10:28] Well, obviously not. But if you’re earning, say, 12 or 13 percent on a real estate deal, then yes, it’s worth getting a loan at six, seven or eight percent, as long as it’s less than your actual return that you’re getting on that particular property. So people might be interested in checking that out. But I want to go back to the idea of barring against the life insurance cash value, because that is something that people forget that they have available to them, not only at the insurance company. So you can go to your insurance company that has the cash value and borrow against the cash value at the insurance company. Or you can use outside sources. And we have a variety of relationships with banks that work nationwide and private companies

[11:16] that know how to do cash value loans. And so there’s a particular link on the Partners for Prosperity site that I’ll give you. And then Spencer, maybe you can put it into show notes for us. And it’s partners number four prosperity dot com slash collateral. And Collaterals with an A.L. And it gives you our absolute defined people, phone numbers, companies, the whole bit. Everything’s there. Not only the contact information, but also some thinking around this, because you can often borrow against cash value at a lower interest rate from an outside company than at the insurance company. Not always. It depends on the marketplace. But that is your source for how to do that. I just did a loan with one of the private companies on there myself

[12:05] because they are offering a lower loan rate than the insurance company is offering at this time. Well, that’s fantastic. And so I think for our listeners, if if you’re looking at your finances and you’re saying, OK, well, my house is in order. I’ve got some savings. And you’re trying to decide about making an investment with a rental property. If you see what today’s rates are and you think that’s pretty good, I don’t know where they’re going to be in five or 10 years. Now you have another option of borrowing against your cash, the cash value of your life insurance. But you also can look at it and using the truth concepts calculator, which I’ve gone through. It’s amazing. You can actually see what’s going to happen

[12:43] as far as your real return on investment. Now, we don’t know what’s going to happen in five years. The interest rates, hopefully they don’t go back to what was it? Jimmy Carter days of 17, 18 percent. Let’s hope it doesn’t do that. But one thing is certain is locking in those rates for the long term. That’s a smart thing to do. Another smart thing that we didn’t cover and sure, we’ll get to another episode is to follow Robert Kiyosaki’s rules. OPM using other people’s money as much as possible. So putting as little down as possible. Would you agree, Kim? Absolutely. And whether it’s the insurance company’s money or a private company’s money or the bank’s money or what have you, always pay attention to the cost of that money

[13:27] and using other people’s money when you can and paying a cost for it. You know, there’s value in paying interest to use somebody else’s money in order to get into a deal that you couldn’t have done on your own. Now, was we wrap up here? I’m going to ask one final question is, do you have any past loans or things where you wish you would have taken advantage of a lower interest rate and you just didn’t? That’s an interesting question. Nothing comes to mind. I really don’t think so. We’ve always been careful adding liabilities when we could instantly create cash flow from them. And so there are definitely times when I’ve been offered, oh, a hundred thousand dollar line of credit for my business.

[14:19] And that will be at three percent for, you know, the first nine months or something like that. And I’ve not ever taken advantage of anything like that because there’s not a clear correlation there. And I will admit, I tend to be focused on the bigger picture and not pushing the envelope so much on getting into real estate deals. Whereas if I were, then maybe I would have taken that kind of opportunity because those deals can create immediate cash flow. Because I always if I’m going to borrow against something to invest, I want cash flow from that investment so that I can make those loan payments. I agree. You know, as I asked that question, it had me thinking as well. And I asked it on the fly.

[14:58] But I thought, you know, there’s really no loans that I regret not taking because I’ve tried to be very conservative with it. And I’m happy with the ones that I’ve done. And sure, I could look back and think, oh, hey, I could have gotten picked up some more properties here, could have done this. But truly, I think it’s the ones and we saw this in 2008 when the people that were overextended, not focusing on cash flow. It really came back to haunt them. So even with low interest rates, don’t be persuaded by those numbers. Be conservative, save first, and that will help you truly get to prosperity. I do agree. Yes, I think that it’s tempting. And for somebody that’s really pushing the envelope, then that’s fine.

[15:39] But they need to understand that that’s what they’re doing. And that’s up to each individual person to be OK with or not. So for listeners, if you do have a cash value life insurance, make sure to go to partnersforprosperity.com forward slash collateral. And you can get a list of all the resources there. If you’re wondering how to set up cash value life insurance or if you have questions, well, Kim is the person to ask. And I do that at hello at partnersforprosperity.com. Thanks again for being with us today on another episode. Thank you for listening to the Prosperity podcast. To take control of your money and have it work for you. Visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.