This is a bonus episode of the Rebel Income podcast. And no, there's been a lot of changes in the mortgage market recently, and a few weeks ago, the Federal Reserve made a surprise half point rate cut, Jayley, can you tell us what this means, give us some background on what this means for the mortgage market.
Absolutely.
So, first of all, let me take a minute and explain to your listeners or dispel maybe some of the myths or misunderstandings that they get when we talk about the Fed Fund rate. So, first of all, everybody, this is the intra daily trading rate between banks. That's what the Fed Fund rate is based off of. Very different to our long term mortgage rates that are bond driven. The Treasury is the one most commonly measured for our
longer term mortgage rates. So just to differentiate those two, and while there is a connection clearly between them, they are very different indices indexes. So you know, I was one of those believers that thought that when the Fed's met on September eighteenth, that we were going to hear them announce a quarter percentage point rate cut, when in fact they came out with the half As you mentioned, Dan I lost lunch based on that I had bet out there and I got to pay for lunch, So I didn't.
Get that one right.
But as a result what we found right afterwards, we did see some improvements to our long term rates, initially probably within the first few days to week right after that announcement, But from then to now, if you've been watching this or even seeing any of the headlines, you know that the reverse has taken place for our long term rates. Interest rates are actually up, and the reason for that is is that the inflationary metric or data that's been posted since the announcement, the economy is.
Still too hot.
So as a result, Wall Street has kind of taken it into their own hands and made the appropriate corrections for mortgage backed securities as it relates to our long term rates.
On today's Bonus episode, chay Ley's going to explain more about what's going on in the mortgage market and what this means for us as rental property investors. We'll take a look at what the mortgage rates are today for a rental property and go over a payment example with today's rates, and we'll see how much your payment could be if rates come down a little bit more. Jay Lee's also going to talk about a creative way to finance your rental properties. Joining us on the show today
is longtime friend of the podcast, chy Ley Ridge. If you've been listening for a while, you know she's been on the show a bunch of times, and she's been sponsoring the show for years. We'll take a really quick break to bank our sponsors today. We'll come right back and we'll talk to Chailey. I want to let you know about a really easy way to track your rental income and expenses. It's an accounting software custom made for rental property investors. It takes just seconds to enter an
expense or to record that you collected rent. It makes tax time really easy to report and give it to your tax person and you are done. They're currently offering a free thirty day trial. There's no credit card required, so if you don't like it, there's nothing to cancel. You can learn more and sign up today at rentaltrial dot com. That's Rental Trial t r I, a l rentaltrial dot com Rental Income podcast. We're recording this on October seventeenth, twenty twenty four, so this is real time
information for anyone listening. But I think if you're listening in the future, you'll still get something out of this. But Chayley, when the FED cuts the short term rates, can you explain how that impacts mortgage rates, because it's not it's not like a one for one example, but the rates kind of trend down as the FED cuts rates where they should trend down, right.
They should in theory.
But let me just start by answering that that there's so many different variables, almost unlimited amounts of variables that will play a role in determining with what the FED has done and what actually happens with that long term interest rate that could completely turn it on its backside. So let's just use the most recent example. The FED reduce the Fed Fund rate that in daily trading rate
between banks by a half a point. So there is no metric that I can give that we would say, Okay, if the FED reduces by a quarter or a half or whatever the number it is, it's going to yield an eighth or a full percentage point or whatever the one to one would be. It doesn't work that way. There's too many other components at play, and those are going to be the things like the Jobs report, or the PCE, which is an inflationary metric that stands for
personal consumption expenditures. That's the one that the Feds most closely watch. That's their favored inflationary metric CPI consumer Price Index, foreign affairs, all kinds of things are going to help shape and dictate how the comments. And sometimes they don't even have to reduce the Fed fund rate. They just speak in a certain language, and we'll see some volatility to our long term rates. So you've got to really understand that it's not going to be just one thing
or two things. If I had to give somebody one way in which they could potentially try to forecast where interest rates we're going to go, that might be the most reliable, and certainly not full proof. It would be the treasury. The ten year Treasury bond is the one that if you're tracking that and you're watching the ticker tape throughout the day or weeks, that one tends to measure or be in line with how you're going to watch the long term interest rates move up and down.
Okay, so the Fed is going to meet two more times this year. They have a meeting November six, and then another one December eighteenth, And what's the thinking right now? What's the kind of the word on the street on what they're going to do with those meetings.
So I'm going to answer that directly, and then I'm going to give some context. You know, I think that they'll probably reduce another quarter point in November. It'll be announced on you. Like you said, they meet on the sixth and seventh. On the seventh is when we will hear mister Powell state whether or not we're going to see another rate cut at that meeting. But the things that we want to be looking for for where I may or may not be changing that statement are going
to be. On the thirty first of October, we're going to get that PCE that I just mentioned, so they're going to be waiting on that.
So depending on what that reading says.
And then on the first of November or the first Friday of every month is when we get our jobs report. Both of those two pieces of information are going to shape what really happens when Jerome Powell makes that announcement on the seventh.
The rates have dropped quite a bit from where they were at the peak. Do you remember where what the rates were at the peak.
Sure, I would say, just make sure that it's it's prefaced by saying that it's very specific to the characteristics of the transaction that you're quoting. Okay, the difference in interest rate that someone might say at the peak for an owner occupied versus what we're talking about most of the time between us is the non owner occupied side.
All of those variables count. But I would say the highest that I probably sought over the last couple of years was in the high sevens, maybe in the low eights, credit score loan to value, loan size driven, but I'd put it in that range, high sevens, low low eights.
Okay, So in the rates have dropped quite a bit from that, and we'll get into where the rates are here in a few minutes. But the rates went up pretty quickly. Do you see them coming down pretty quickly too.
Unless something devastating happens within the economy. No, And I would quickly just mention that, you know, a lot of times we want it both ways. We want the economy to be doing great and we want interest rates to be low. And I think a lot of people just miss the detail that that they're not mutually exclusive it's really.
One of the other.
The the economy is doing, the lower the interest rates are going to be, and vice versa. That said, I would also say that historically speaking, that interest rates do go up much faster than they end up coming down, so I would expect a slower burn on the way down. I do think that we are headed in that direction.
I think trajectory is south for interest rates, but I think it's going to be or take a lot more time for them to level out to maybe the baseline that we hope back down in the fives ish right for our non honor occupiedes. If I'm going to guess, and I think that we're probably a good year year and a half in timeline from now to then, so.
Real estate moves and cycles, and if you were to take a one thousand foot view of the market, would you say that we're at the beginning of a cycle where the rates are going to be trending down and that may translate to prices going up as the rates come down.
You know, I am of the opinion that a we are at the precipice of a new cycle. I think it's actually already begun. I'd say in the last couple of months, but right there, kind of at the beginning. And I think that both rates and and I'm not going to blanket statement this for the entire nation. Okay, there's pockets, there's markets, and it's always going to be very specific to the market. But I do think that
a buyer's market is on the horizon. I think that home values are going to start coming down in certain markets. The appreciation rate in some places have been has been completely out of control, very unsustainable. So even though many would assume that as interest rates come down, then they think that the home values are going to go back up,
I'm not sure I agree with that. In a lot of markets, I think that we're going to see buyers having more opportunity to negotiate, whether it be price point and or seller concessions, closing costs, along with some reduction and.
Interest rate well, I mean that could be really good for investors. I mean, if the rates are coming down and if prices do come down a bit, that could be really good for us.
I agree.
Yeah.
Now, obviously the pushback there is people are going to say, well, what about you know, lack of inventory, et cetera. But remember it's market specific but in some of those markets, do you guys know which ones they are? The appreciation values are just they cannot continue in the same theme that we've been seeing. It's just not possible. They will start coming back down.
Well, let's talk about rates today. So what can you give us an example of what an interest rate is right now?
Sure?
And I think a lot of people will be pleasantly surprised by this news. So let's just set the stage. We'll talk about a purchase of an investment property. We're going to call it a single family residence, will put twenty five percent down. Let's say that the loan amounts about one hundred thousand dollars, good credit, et cetera. You're probably looking at about six point six two five is an interest rate, and you're probably looking at about two points for that interest rate today.
Okay, well that's pretty good. That's really good. Now, what if rates were to drop, say a half point, like, is that going to make How much of a difference in the payment does that make?
Yeah? I'm glad you asked that question, because I feel like this is the piece that I'm I'm constantly trying to put out there for investors. So that they're doing that math because without actually doing the math, there's a psychology about the rate itself, and people I think, play themselves out of very substantial investments just because they hear a number. So to put it into perspective, let's just
keep using our example. At about one hundred thousand dollars, the principal and interest payment at six point six two five is four hundred no excuse me, six hundred and forty eight dollars a month for each eighth of a percentage point below that, Let's go to six and a half percent. The six hundred and forty eight goes to six hundred and thirty nine. So what is that That's going to be about a nine dollars a month difference,
right for eighth of a percentage point. So if we take it down half a point in payment at six point one two five, So again six point six two five down to six point one two five is a half a point reduction in rate. The payment is six hundred and fifteen dollars. So you know, the mental math there is what thirty three bucks?
Did I get that? Right? Yeah?
It's it's not as substantial as a lot of people mentally expect the number to be, especially on the smaller loan sizes.
Okay, so there's not a big incentive I guess to wait for rates to come down, and it's not like that's not going to have a significant impact on your cash flow. I guess just getting a better deal would really be the driver. If you can buy a property, get negotiate a little harder and get a better deal, that's going to benefit you more.
Sure, Sure, and especially if you can get the seller to contribute towards the closing costs, right, a few percentage points, and maybe you can use those to get that rate down if that were the case. But you know, I've got I've got countermeasures to every one of those discussions, because I'm talking about rates all day long. It's it's the buzzword, right, everybody wants to know about interest rates. And what would I would say about that is a
few things. One, if you're holding out for the lower interest rate, and in our case, we're talking about thirty bucks a month or whatever we said it was, the first thing I would say is that if the deal is a make or breakover thirty bucks, there's something wrong with the deal. And I would continue to research and look for potentially another investment. The other thing is is that if you're waiting, you may play yourself out of
the deal altogether. And then remember when we talk about layering in the advantage of tax the tax benefit, And while this is secondary, I fully recognize, be sure to know that you're going to be less in the deduction of interest on the lower interest rate too, So there is checks and balances at work here, and for thirty bucks, I don't know that in my mind the float of the interest rate or the holdout for getting into real estate too, to look at it as an investment justifies
the potential reward.
Does that make sense? Maybe it's saying that another way.
If you know it's the difference between half a point and thirty bucks on whether or not I'm going to make a decision to invest in this particular property in this particular market, I would argue that there's something else there that needs to be considered that the investor isn't seeing.
Yeah, I mean, you shouldn't walk away from a deal over thirty bucks, And that's really kind of short sighted. I think that you're going to get a thirty dollars rent increase at some point and that deal is going to be right there, So I think you're a spot
on with that. Well, one thing that I really like about having you on the show and sponsoring the podcast for so long is that you've got lots of creative strategies and you're not just a lender that's just processing applications, like you really help people kind of get a plan together and help them invest and help them build a portfolio.
And I wanted to see if you could give us, like maybe one of the creative strategies that you've used recently with one of your clients, just to maybe give us an idea of some things that we can do differently.
Well, first of all, thank you, Dan, thank you for saying that. I really appreciate it. We work very hard to be as holistic a lender relationship as we can, so that means a lot coming from you. Yeah, I've got something that I think would be noteworthy. We have a loan product, and I think we've talked about it before. It's a first lean helock and check this out.
This is my.
Absolute favorite loan product, especially for real estate investors where and it's going to take a minute for some people to wrap their heads around Okay, it's a first lean helock.
Like I said, it's called the all in one. And if you've ever heard of the term velocity banking or infinity banking, that might resonate and connect a few dots here, but it is a way that you can utilize an open ended, revolving line of credit at your discretion so that you've become your own bank theoretically, whereby I have clients that have let's say, access to large sums of depository dollars and cents every month before it has to
go back out the door. Okay, I'll give you an example so I can try and paint a picture here. Let's say that you have one hundred thousand dollars in cash that sits idle for or you can allow it to sit idle in an account for the majority of a thirty day billing cycle let's call it twenty nine days. And let's say that you have an outstanding balance on
this heelock of one hundred thousand dollars. Just to keep the mouth simple, if you were to take your one hundred thousand in cash that's sitting idle, deposit it into this all in one loan vessel, it's going to drive that one hundred thousand dollars balance down dollar for dollar. So for twenty nine days of that thirty day billing cycle, you're going to pay zero in interest. No interest will crew because on any open ended revolving account this is
think about a credit card. Okay, same principle here, you will only pay interest when there is a balance. So if you're an individual that has access to good depository income and then maybe residual income left over at the end of the month, the all in one product can greatly and I mean by hundreds of thousands, greatly diminish the amount of interest that you would pay in comparison
to say a traditional three year fixed mortgage. It's it's quite a tool that most investors, I believe should have in their tool belt.
So just to walk through an example on that, like saying someone has twenty thirty forty thousand dollars a month coming in in rents every month and your mortgage payment ded They say the rents come in on the first. You've got forty thousand dollars coming in on the first, and you're going to pay your mortgage on the fifteenth. You could save money by having that money deposited to your all in one account and then paying the mortgage out of that account.
One hundred percent. And the nice thing, the reason it's called all in one is because it doubles as both this line of credit this he law comaqu a line of credit and checking in savings. So let's say you
bank with BABA. Okay, you're going to replace your BABA checking in savings with this new checking in savings, which it's an FDIC insured account, So exactly the same automation, exactly the same technology here that you would have over there, and you're just going to nothing changes, nothing changes about your spending habits or the moneys you've got coming in
are going out. But you're going to utilize this these deposits in such a meaningful way and letting them sit and ride so that the interest accrule is is so greatly diminished on a day to day basis that when you look at the math, the interest can a crew. Because let me give you an example. Let's take because a lot of times I feel like dan people, this is this concept is very new to most of.
The people in this country.
Okay, it's actually pretty it's pretty popular and widely used out there and the rest of the planet.
In the US, it's not so much.
It's not as mainstream obviously, So we are kind of preconditioned to understand that amortized mortgage. Our thirty year fixed are a fifteen year fixed. So I'm going to give you an example between a thirty year and a fifteen year. So let's say that both of these loans start at four hundred thousand dollars is the balance, and the thirty year fixed mortgage let's say locked at four percent interest rate,
the fifteen year locked at seven percent. People that don't understand amortization, and they use that psychology about interest rate, they're automatically, without exception, they're going to run to that four percent thirty or fixed. They're not even going to
think about it. I want a four percent rate. Well, when in fact, because of speed and that velocity of money, if you were to run the amortization, you will pay forty thousand dollars more in interest using my example on a four percent thirty year than a seven percent fifteen year. So and the reason for that is speed. Now I
know I'm not exactly comparing apples to apples. We're talking about two closed ended amortized mortgages versus what I'm describing, or what we're talking about here as an open end revolving helock. Totally different animals. But my point is speed. We've got three hundred and sixty months on a thirty year fixed versus one hundred and eighty months on a fifteen year fix.
You can see that the.
Time in which you are paying interest is what's at play here. So now come in, knock on the door the all in one. The amount of time in which that interest is going to be allowed to accrue is the point that I'm trying to make. So because you can utilize this and become your own bank, as I've said, driving those principal balances down and really reducing the amount
of interest that you're going to pay. The other thing I would say about this, guys, is that think about the first ten years of any thirty year fixed mortgage. How much of your principal and interest payment is going to principle? The very, yeah, very very small amount that was rhetorical. People know that the first ten years, just a fraction of a percent is going to the principle. And why is that, Well, it's because you know the
GSS government sponsored enterprises, the Fannies and Freddy's. They want their interest right. They're going to make their interest and they know that historically speaking, you will be refinancing that mortgage typically on an investment property five years, seven years on a primary residence. So they're obviously they're keeping our
payment low with the amortization. That's wonderful that we have access to that, but we're going to front load the interest so that they make sure that they get as much of it as they can before you go and either sell the property or refinance it for whatever reason, cash out, REFI, reduction in rates, et cetera.
It's a very interesting strategy, and I'm sure someone hearing this for the first time has questions or maybe wants to walk through a real life example for them. What would be the next step If someone is interested in learning more about the all in.
One, well, certainly get in touch with us. And there's this really really cool tool that I do a lot throughout the day.
One on one.
We share screen on a zoom call or a team's call. There's an online interactive simulator. And the really thing is the mouth will not lie. If you're a good candidate, for this loan. It'll be very clear at the end comparing what you have now or what you might be getting in a thirty year fix whichever to the.
All in one.
It'll be extremely obvious what your interest savings is going to be, whether or not this is the right move for you on a purchase transaction or refinanced transaction. The simulator is pretty slick.
If you want to talk more with jay Lee to see if the all in one makes sense for you, you can get in touch with her at eight five five seventy four Ridge, or just go to ridgelendinggroup dot com. Jay Lee, thank you so much for coming on the podcast. I'll be back with a new episode on Tuesday. My name is Dan Lane and this has been a bonus episode of the Rental Income podcast.