Rising Rates: Wait to Buy, Invest Now, or Start Selling?

Interest ratesRising mortgage rates should you wait or invest Now that’s the question we’re tackling today. Our panel of seasoned investors is already feeling the impact on buyer demand financing strategies and overall returns. And if you’re wondering how these higher rates could affect your next deal, you won’t want to miss what they all have to say. Hey everyone, it’s Dave. Welcome to On the Market. I’m here with Kathy Fettke, Henry Washington and James Dainard to break down this all important question about affordability, mortgage rates, and what we’re all doing in the face of rates that don’t seem to be going anywhere. Kathy, thanks for joining us. Good to see you.Good to see you. And I am just going to say, Dave, you’re a genius. You’re a genius because when we talked about this last year, I was like, oh no, rates are going to come down. They’re going to be as low as 6%, maybe less, and you were not so fast.I wish I was wrong. I am I guess a little bit happy to be right and mostly sad to be right about that.Yeah, we just thought you were like David Downer.James, good to see you. How you been?I’mGood. It’sBeen busy start of the year.Well, we’re going to dig into that. I want to hear what you’re busy about. Henry, good to see you.Hey, good to be here. Thank you.Are you thrilled that we’re three years into the show basically still talking about mortgage rates?Yeah, they are not fun right now for me, but it’s part of the game.Alright, well I’m sorry to hear that. We’ll get into that, but honestly, I guess we’re coming up sort of close to our three-year anniversary, which is awesome and we should celebrate in a little bit, but I guess I would say that I would’ve thought by now we’d just be talking about how crazy it used to be and we would be reminiscing about those wild times to back in 2022, but we’re still here three years into it and we’re still in this very, very strange market. But that’s what we’re here for. We’re here to tell you all and help you all make sense of what’s going on and today we’re just going to talk about what we’re each doing in our investing and any advice that we have for the general audience. So I’ll just give a brief overview as if people don’t already know. Clearly mortgage rates have stayed high.
They dipped down a little bit last year, but as of today, the average rate on a 30 year fixed rate mortgage is about 7.1%. This is sort of where it’s been over the last couple of months. It’s actually come down a little bit from where it was around the beginning of the year, but this time last year we did a show just like this and rates were higher then they were in the mid sevens that a lot of people were expecting things to start coming down. It came down to about 6% in I think it was August, like September right before the first rate cuts. Then they just shot back up. We’ve talked a lot about why those things are, but my estimation, and correct me if you guys think it’s wrong, but it’s a lot to do with fears of inflation and less fear of recession since the Trump election and that’s in my mind going to continue. So first and foremost, let’s just start with what you all are doing and have you just given up on expecting anything to change, Henry, are you waiting for things to change or have you just sort of accepted that this is where we’re at right now?No, I’m not waiting for things to change. I mean every market, every cycle is going to give you an opportunity to make money. It’s our job as investors to figure out where those opportunities are and to take advantage of them if they fit our strategy. And so we’re absolutely not waiting, but it is impacting us. Previously when rates were lower, it was a whole lot easier to get cashflow and with rates being higher and insurance being higher and taxes being higher, the cash flow is harder to find, but the market is still allowing us to sell properties at a pretty decent premium, right? Values have not come down a ton, if any at all in a lot of places. They’re still going up steadily and so the opportunity for us has been as we buy, we’re having to be a whole lot more strategic on what we keep. Meaning I’m really only keeping things that are in the best parts of town.
If it’s in the best parts of town, that means I’m going to get higher rents and that means I’m going to get more appreciation and so I can sustain buying a property maybe that doesn’t cashflow in year one or that breaks even in year one in the best part of town because when I zoom out and look long-term an asset that’s going to do well both now and in the future versus a few years back, we would buy almost anything where the property was going to cashflow in year one and that was going to make sense. Now we can’t do that, so we’re selling a lot of the properties that we were previously holding because if I can only get a hundred to $200 a month cashflow, but I can make 50 to 60 grand selling it, it’s just making more sense to sell them right now. So the pivot has just been that we’re selling more. Where interest rates are hurting me though is on refinances and that’s because a lot of the property that we bought as rental properties back when things were amazing in terms of interest rates, those commercial loans are coming dueAndSo now we’re having to refinance properties that we do want to keep in good areas. Sometimes we’ve got four to 6% interest rates on those and now we’re putting them in six to 8% interest rate mortgages.So are those commercial properties or you just used a commercial loan on residential property?Yeah, commercial loan on a residential property. So they were on a five one arm on the purchase and so now we’re refinancing them into a 30 year fix, but the rates are around that 7% and some change.So you went from a four or 5% to 7%, like what’s that going to do for your cashflow on those properties?We buy at such great discounts that the properties that we really do want to keep will still cashflow not as much, but you also have to consider that the commercial loans were typically amortized over 20 years and the refinance I’m doing at a 7% rate is going to be amortized over 30 years, and so that helps kind of balance some things out 20 years at four to 5% and 30 years at 7% you’re still paying a little higher, but it’s not as dramatic as it probably sounds.Just one question, do you think that if you were not a full-time real estate investor you would hold onto more properties for you it’s a matter of time, you could spend your time and make more money by flipping, but if you were just a person who’s more of a passive side, are the properties that you’re selling problems or are you just seeing better opportunity to optimize your capital allocation?Yeah, no, they’re not problems. The properties that we’re buying and we’re ending up selling it just financially makes more sense to sell. They’re maybe not in the parts of town where I want to keep long-term properties and so the return that I can get on my investment as a flip just far outweighs the return that I’m going to get in the first two to three years as a rental property. We just sell them, accumulate the capital and then can use that capital to buy properties that are better positioned because even though I want to keep a property in a nice part of town, it still doesn’t fix the fact that it may not cashflow in the first year. And so flipping the properties that I don’t want to keep helps me build up the capital I need to buy and hold onto those properties that I do want to keep because I may have to end up subsidizing them in the first couple of years and they may not cashflow, but I know it’s a long game and having a good property in a good part of town is going to get me the appreciation long term.Kathy, switching over to you, just what’s your sentiment right now? How are you feeling about the market these days given the stubbornly high rates?I’m not as concerned about the rates as I am about other rising expenses.
It’s definitely harder to be a builder today. I think I told you on a show prior that somebody wanted to buy a lot from us, but they gave us super steep offer. They wanted a discount because of what the expenses would be. They’re like to make this pencil, we need the lot cheaper. Well, we didn’t agree to that, but it’s harder to build, it’s harder to refi coming from the perspective of, oh, these poor Pacific Palisades people who weren’t adequately insured have to rebuild their homes. It’s going to be so much more expensive. So just overall inflation stinks and we thought we were done with it and here it is between tariffs and just rising costs of insurance. It’s definitely getting harder.
However, in personal portfolio and even at real wealth, we don’t hear very many people complaining. So I don’t know. We haven’t seen our insurance rates in Florida really go up that much. Some of the homes are older, some are newer and we’re not feeling it. One was even in St. Petersburg and the only thing that happened was a fence blew down, not a big deal to rebuild. So I’m not personally feeling anything, just kind of more concerned about others because again, like I entered when I entered real estate, love me still, but in the end of the nineties, so 97, 1 of the things my dad said is you’ve got to buy a property now because rates are under 8% and he had been in the double digit. So 7% was like, oh my gosh, jump on it. So the rate I don’t worry about, it’s just all the expenses together that is making it more challenging for buy and hold, but I am a buy and hold investor for the longterm. I am looking at retiring, not now in the future. So yeah, my strategy really hasn’t changed. In fact, if anything, we’re having more opportunity because builders are stressed out because they’re having a hard time building, they need to get rid of inventory. We’re negotiating those rates down to still four or 5%,So you’re able to buy down rates, but that’s your new construction, right?That’s new construction. But if you have a distressed homeowner, they might be willing to do that too. And the closing costs, maybe you pay a little bit more for the property and the seller just pays that money to get your rate down to make the numbers work or however you can do it. You kind of need a distressed seller and they’d be willing to pay that. We have a bank we work with, it’s called a builder forward loan, and they’re happy to provide that four, 5% in some cases we got it under 4%.Are they permanent buy downs or a couple years?It’s just a 10 year note, it’s 10 year and then it converts to adjustable.Wow, that’s good. 10 year buy down.Yeah,That’s great. Wow. Okay. Because a lot of what I hear at least on existing home sales, I don’t know Henry or James if you do this at all, but I hear like two one buy downs or even 3, 2, 1 buy downs, which is that you get a steep discount in the first year, a little bit of less of a discount in the second year, maybe one for a third year and then it’s gone. Then it floats back to the normal rate. But I haven’t heard of a 10 year note at a discounted rate. Have either of you?I have not, no. So what bank is that?Yeah, give me that.CMGI think.Do you know what the monetary value is? What do you pay to get your rate down for 10 years?I think the seller’s paying six, seven points, something like that. It’s not cheap.Yeah, it’s expensive,But if you are selling a three or $400,000 property, let’s say it’s a duplex or a fourplex and you would have to discount it by that amount, you would rather not discount it. You’d rather find a way to keep the value high so you have good comps. So they would normally in the past just reduce price. They don’t want to do that,Especially for builders who are building more in the area.It’s not a difficult negotiation,Huh. Okay. Well that’s great. That’s good to know. We’ve just scratched the surface on how higher rates might reshape your investing strategy, but stick with us after the break. We’ll have more great advice after a word from our sponsors. Welcome back to On the market. We’re here with our panel breaking down how interest rates are reshaping all of our respective strategies. James, what are you up to? Given rates, you do a lot of stuff, but just in your capacity as a flipper here, are rates impacting you at all?Yeah, I mean rates always impact you no matter what. On the flipping side, I would say that they had a lot less impact the last 18 months. We’re still moving through inventory, man. I will tell you the last two weeks have been nuts. The amount of multiple offers we’re dealing with right now,Dude, it’s the opposite here, really so slow.There’s waves and sweet spots, right? Right now we just listed a house in Ballard, Washington. We underwrote the deal very conservatively. It was during the dead time and it backed up to a busy road. So we only caught the house at like 1 5, 1 2 max. We got a little bump listed at 1, 2, 9, 5 or our client did. It’s getting bid up to one four.It’s unbelievable.It’s like this sweet spot. I’m a huge believer right now you have to play in the absorption rates. Wherever things are moving work those absorption rates backwards on the dispo and play in those areas because there’s sweet spots in every market, whether it’s 200 to two 50 or it’s 1 million to one four. There is a sweet spotSay that and not business bro speak.So basically where there’s the least amount of inventory and the most amount of pendings in a price point, that’s where we want to be because that’s the most buyer demand. And so right now in Seattle, I don’t like the one seven to 2 million range because there’s way more actives than there are pendings. But if you look at one two to one four, there’s like two actives to 10 pendings. Oh,Okay, that’s a good way to look at it.And each city’s different so you got to move it around. That has been working well, but with the interest rates, we just have to adjust on the flip side, but the benefit of being flippers and value add is we can still make money in this market with these rates and it’s just a different game and it’s been the year and now I think it’s going to be like this for the next one to two years is you have to invent your return and you have to invent the strategy to create the cashflow. This year I want to buy at minimum five bur style properties and keep ’em for a yearFor rentals.For rentals.Why?It’s about banking that equity so then I can 10 31 exchange it and create the cashflow. So how we make money in this market right now is you can still buy deep and create equity. You can create a 20% equity position. So if I’m buying a house that’s worth 200 grand and I can create a 20% equity on that, that means I’m going to make $40,000 in equity on that house. I might make no money on my cashflow, but I created that 20%. If I can do that five times over, you’ve doubled your money. But then I can also then sell, once I sell that property, we got 40 grand in equity times five houses is 200,000. Once I sell that year in a day, I can take that 200,000 and stick it against a multifamily property and that you do create cashflow at that point because if I buy a multifamily property that is 800 grand in Seattle, I’m going to be able to create a 10% cash on cash return that way.But are you going to renovate it again? So you’re going to 10 31 into a multifamily that you’re going to value add another time?Yes. We’re always going to keep value adding. And so the benefit to that is too, then we’re going to create another 20% equity spread. So we’re going to double up the equity again, but that’s how we actually create the cash flow. It’s like domino game
For investors. We use cash to create cashflow. If I’m going to put 20% down, I want to make this 6% return or 8% return, whatever it is that you want, but we run out of cash, that’s the problem. And then we don’t want to run out of cash buying properties, making a lower return that won’t get us to financial freedom. So what we have to create that as inventory. And so I don’t care about multifamily, I don’t care about big deals. I want burr houses because burr houses are easily sellable in a year or two. They’re tradable. People need single family. I know I can buy that, clean that up, create that equity break even and then every one of these I will be selling and rolling them into a bigger building and I can at least double my money when I do that. And so it’s all about banking equity because I’m giving, I don’t think rates are going to go down. I was wrong last year. I thought they’re going to go down, Dave, you’re right. And so now I have to create that plan of, okay, if I don’t think rates are going to go down, I still have to create cashflow. That is what I’m doing this year. I’m going to buy five to 10 burrs, bank ’em and sell ’em.So why will you do the 10 31 strategy instead of just burying a couple properties that you can’t get the cashflow unless you put more equity into the deals.It’s a matter of what you can get on a return basis right now, if I can go buy a 6% return right now and I’m putting 20% down or even a 5%, people aren’t excited about that because it’s only 5% and with inflation and cost of money, it doesn’t really clear anything for you. So how do I create more equity when I do the 10 31 exchange? I don’t have to pay tax on that so I can roll the tax-free money into that new property and by putting more money down that puts me on a lower basis and creates more cashflow, I take on less debt.Awesome. Yeah, I mean it’s a very compelling but active strategy, you’re doing four or five deals, but it makes a lot of sense if people are able to do that to try and do that continuous value add, use the 10 31 and then roll that into some cashflow. Ideally things will get a little bit better by the time that you do that 10 31 as well.That’s the kicker. If it does get better, rates do go down, then it explodes and you do really well. But yes, it’s a very active strategy.That’s kind of the way I’ve just been thinking about it, right, is if you can find a deal that’s solid right now and then there’s just this cherry on top that might come around that is good enough for me. And I know that’s not the most exciting, but what else are you going to do with your money? I can never have this conversation with you guys because you guys don’t invest in anything else. But when I think about where else I’m going to put my money, I just don’t think the stock market’s going to do that. Well, I don’t know, maybe I’m just skeptical, but it’s already so expensive. The stock market, it’s hard to imagine that it’s going to outperform even an average run of the mill rental property deal. For me, if I can find a deal that cash flows three or 4% or even two or 3%, that’s still better than anything else that I’m going to be doing with my money right now. And then if rates did go down, it would take it from what seems like a very prudent and still profitable way to make money in 2025 into something that could be a great option for 26, 27 and sometimes further out. So I don’t know. That seems Kathy, sort of like what you’re trying to do and just bank on these things for the long run. I don’t know. It’s probably still the cheapest you’re going to be able to buy these houses for a long time or ever.
And so it just still seems worth it to me.Let’s just say that you did make an extra payment per year through the cashflow. You can have those properties paid off in 12 to 15 years. It’s amazing how much you can accelerate the payoff by just making one extra payment and that doesn’t have to come out of pocket. You pay from the cashflow. So once you have properties paid off, I don’t recommend it when you’re building, but when you’re in cashflow mode, you don’t care about interest rates, it doesn’t matter. So that’s kind of the goal to get a 15 to 20 year plan. I’m going to be real old then, but not that old because I’m going to have to take good care of myself and I’ll still enjoy it. I’ll still be surfing and skiing and have paid off houses and I just think that’s a great plan for the future.I’ve talked to two different investors just in the last two days who have done essentially that people who have portfolios that are like 12, 15, 18 properties and they’ve just reinvested a lot of cashflow back into that and this guy I was talking to yesterday, he used to be in law enforcement and by doing that over 12 years, he has now eight properties, 18 units and has increased his income by eight x. He’s eight Xed his income just with that amount of units by just being diligent about it.
And I know it’s not as sexy as it used to be, but that is still possible. You can absolutely still do that today and start that today and even with higher interest rates and make that work over 10 to 12 years. And he said something really good, he was like, real estate is actually a get rich quick. You just have to realize that 10 years is quick, which is a really good way. I think it’s a really good way of putting it right. How else are you going to get rich in 10 years and don’t tell me crypto maybe, but it’s a big gamble. We’re ing for another quick break, but when we return, our panel is going to talk more about advice that they would give other investors on how to navigate the high interest rate times that we’re in right now. Welcome back to On the Market. We are back talking about how to navigate higher interest rates. Let’s jump back in. I’m curious if you have any advice about creative ways to invest right now to look for financing, things that you should be thinking about or doing with your money in this higher interest rate environment. I’ll just open up to any of you. Do any of you have any thoughts?I think switch the product you’re looking at if you want to. Cheaper rate too, like Kathy said, new construction, you can buy down that rate commercial financing’s cheaper than residential financing.Yes,And if you want that lower rate, I was talking to commercial brokers last couple of weeks like, hey, I’m looking for multifamily. That’s five to 10 units, this smaller beat up stuff because the rates are better in there and I can get a much lower rate than I can a two to four on that product. And so target the stuff that comes with cheaper money and then also zoomable loans. There’s a deal I’m looking at right now where I can assume the loan with the bankCommercial.Commercial, yeah, it’s nine town style units that all have garages. You can condo ’em off if you want, but the rate is 3.35 for the next three years. What? It’s locked in with a commercial rate. And so that’s why I’m looking at thatDeal. Were they on a seven year arm or something and they have three years left?Yes. I think I don’t have the full loan terms or sending over to me and it doesn’t make sense because the amount of cash I have to put down, but then I’m in a condo and sell off one of the units which will backfill in the down to where I can get my cash down and then still get that low rate.Yeah, I mean when you have the flexibility that you have James, it makes that makes so much sense to be able to just kind of go where it’s going to be easy, not easy, but what the market’s given you. The market’s telling you go buy this unit, you can get a 3% mortgage rate. Or Kathy, it’s telling Kathy to go buy new construction because you can get a four or 5% interest rate. I think that makes a lot of sense. And have people just sort of expand your search criteria a little bit because I admit five years ago I would never have considered new construction. Now it’s pretty compelling. The median home price on a new build right now is less than an existing home. There is a lot of interesting things going on. You just have to sort of look a little bit deeper than what your old buy box might’ve been. Henry or Kathy. Any other advice on financing? I’m curious, maybe I’ll ask you this a couple of years ago it’s still popular, but creative finance seller financing, those types of things, are you guys doing any of that or hearing people doing it anymore?I’m hearing people do it. I haven’t done it yet but would like to, but I am just traditional. But I like what James said, we’re really looking at the smaller multis because I was really shocked that the commercial rates are not that bad.I’m trying to do a creative finance deal right now. It’s about figuring out the math equation for the cash in though and how do you balance that out? Because there’s a property where someone will sell it to us for around 575, it’s worth seven 50. It will not cash flow if we buy it for 5 75, renovate it, but the owner owes 400 on it. And so we’re looking at trying to creatively take a subject to, we’re having our attorneys look at it, making sure we can go through all the right motions and then I still don’t like the cash down. And so then I’m looking at a private investor that’ll put down a second at 8% and he’ll do that for a two year period and by taking the lower rate and the blend of the private investor, it actually does cashflow three to 400 bucks a month. Whereas if I do it with conventional financing, I’m going to be breaking even at best case. And that was just simply asking the seller a question. I like this property, I think it’s cool, but I can’t pay you what you can and this is why I cannot, I have to pay for this property every month. If you’re willing to look at doing this, then we can keep talking. And price was the big deal to ’em.
And so now we’re going through that motion to where the seller’s getting the highest price and we’re creating the best cash flow scenario.Interesting. I bought a property for cash last year and I was considering seeing if I could sell or finance it to someone and I just don’t get it from a seller’s perspective why they would do it. Why is this guy willing to do that, James? Just because no one else would buy it just to move the inventory?Yeah. Well he has a property that he wants to buy and move into.Okay,This guy actually lives in one of the units right now. It’s a triplex. And so for him, he’s actually looking at buying a manufactured home about an hour and a half down the road. He can pay cash with the delta of the loan. And so he’s really looking at that dollar amount in and so it makes sense for him because it achieves his objectives and then it makes credits for us. We can pay him more. Other than that, I told him I need to be at like 5 25 so I can pay him 50 grand more for that property if he allows me to do the financing that way.But he doesn’t get that 50 grand right away or you’re saying on the down payment you pay him moreThe down payment.Okay, so he does walk with that.Yeah, I’m paying the delta between the closing cost, his cash in the broker that brought me the deal and then I’m assuming his loan, it’s like around 400, 5,000 or something like that.Got it. Okay, cool. Alright, well any last words of advice here?There’s also something, and forgive me, I can’t explain this super eloquently, but some banks do offer debt swap loans. Have you guys heard of these?No. It sounds scary.So essentially the bank can give you a loan at the same rate that banks trade rates at. And so you can essentially get a lower interest rate loan, sometimes a couple of points lower than what the market rate is, but you’re locked in for a fixed period of time and typically these are going to be higher amounts, so you need to have half a million to 2 million that you’re looking to get locked in at a certain rate. You could potentially lock in your rate fixed for the next three or five years at, let’s call it 5%. The banks make money on the fees for this. And essentially it’s almost like a gamble for the bank because if interest rates drop in that timeframe to 4%, then they still have to honor your rate at where it is for that five-year period. But if interest rates rise to like 8%, then you win because you get to stay in that lower interest rate. And soInteresting.There are two banks I’ve spoken to here locally about potentially doing a debt swap. So meaning I’m looking at could I consolidate multiple of my properties that are at a higher rate since now I’m going to have to do these refinances. So can I take all of these properties that I would have to refinance, put them on one loan at a lower rate, locked in for the next five years. And then it’s a gamble on my part because if rates come down then I can’t refinance that until that period is up. And if rates go up, then that helps me because then I’m still locked in at that rate. So debt swap consolidation loans, I believe are what they’re called. And you can ask your local community banks if they do something like that. If you’re in a position where you have higher loan amounts or several properties, you’re looking at refinancing that are going to be at higherRates. Interesting. All right. I don’t know anything about that. It just reminds me of credit default swaps, which is why I said it was scary, but clearly it’s probably more interesting than that. Alright, well thank you guys. I appreciate this. This has been a lot of fun talking to you guys and just catching up. I think as we’ve been saying for years, there’s still deals to do. It’ll still be done. It is a little, I mean I’ll admit it, it’s discouraging that rates have stayed higher, but there’s still things to be doing and I still think it’s the best possible way to use your resources and use your time as real estate investing. And so at least I’m still doing it. Sounds like all of you are doing the exact same thing. Let us know first of all what we should do for a three-year party. That’s the most importantThing.Also, let us know what you all are doing or if you have any additional advice that we should be considering or sharing about how to navigate these difficult higher interest rate periods that we are in right now. James, Henry, Kathy, thanks for being here and thanks so much for listening. We’ll see you soon for another episode of On The Market.