Author Topic: Invest in rental while rates are low, or continue to pay down debt  (Read 3299 times)

icebox92

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My husband and I have been honing in on our FIRE plan, and we have decided that a large part of it will be rental properties.  We are currently paying off credit card debt ($14K @ 9.33%) and will be CC debt free by October 2015 (WOOHOOO!).  Our plan is to then buy our second rental property and continue acquiring properties until we have met our goal (approx 15 units). 

My question is this...  Should we push off paying our credit card debt by a few months in order to capture the low rates on mortgages now?  They will begin rising, and I really want to get in while they are still low.  In the long run will it pay off to carry the interest on the cards for a few extra months (2-3) but secure the lower interest rate?

Mentally I want that damn CC debt gone, and I know this is always the first thing to do one the way towards FI, but considering the inevitable increase in mortgage rates, would this warrant a second look at not paying down our CC debt?

Mirwen

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Re: Invest in rental while rates are low, or continue to pay down debt
« Reply #1 on: July 30, 2015, 09:57:49 AM »
Why can you not wait one month?  Did you mean 2016?

I don't think anyone is expecting a meteoric rise in interest rates.  A 0.25% interest rate hike shouldn't kill your plans to invest in real estate.  If it does, then you were cutting it too fine anyway.  Get yourself in a good financial position before buying.  Pay off high interest debts, save for down payment and a decent emergency/repair fund.  Most people rush into buying their first house before they are ready financially.  I know I did.

icebox92

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Re: Invest in rental while rates are low, or continue to pay down debt
« Reply #2 on: July 30, 2015, 10:51:54 AM »
Why can you not wait one month?  Did you mean 2016?

I don't think anyone is expecting a meteoric rise in interest rates.  A 0.25% interest rate hike shouldn't kill your plans to invest in real estate.  If it does, then you were cutting it too fine anyway.  Get yourself in a good financial position before buying.  Pay off high interest debts, save for down payment and a decent emergency/repair fund.  Most people rush into buying their first house before they are ready financially.  I know I did.

Well it would be more than a month...  we would pay off the debt in October, and then start saving for the down payment / closing costs in November.  We would be ready to close on a house by Jan / Feb of 2016.  If we start saving now and hold off on paying off the debt, we would be ready to close by October / November 2015.

You're correct, a slight increase in mortgage rates won't kill us, I still want the best possible rate.  That is whats driving my desire to buy now.  We own two homes now, one is a rental and one is our primary home.  We financed these at sub 3%.  It gives me heart burn to finance higher than 4% (even though I do recognize this is still an incredibly low rate). 

iamlindoro

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Re: Invest in rental while rates are low, or continue to pay down debt
« Reply #3 on: July 30, 2015, 11:12:01 AM »
We own two homes now, one is a rental and one is our primary home.  We financed these at sub 3%.  It gives me heart burn to finance higher than 4% (even though I do recognize this is still an incredibly low rate).

Note that for an investor loan, you are already going to pay over 4%.  I'm not sure how you got the rental financed at sub-3, unless it was financed as owner-occupied.  With great credit, the best I've seen this year for investor loans is about 4.5%.

tvan

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Re: Invest in rental while rates are low, or continue to pay down debt
« Reply #4 on: July 30, 2015, 11:19:48 AM »
Do you finance homes with less than 20% down? 

iamlindoro

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Re: Invest in rental while rates are low, or continue to pay down debt
« Reply #5 on: July 30, 2015, 12:08:17 PM »
Do you finance homes with less than 20% down?

If you're asking me, no.  25% on multifamily, 20% on SFH are the minimums for Fannie Mae-backed investor loans.

icebox92

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Re: Invest in rental while rates are low, or continue to pay down debt
« Reply #6 on: July 30, 2015, 12:53:46 PM »
We own two homes now, one is a rental and one is our primary home.  We financed these at sub 3%.  It gives me heart burn to finance higher than 4% (even though I do recognize this is still an incredibly low rate).

Note that for an investor loan, you are already going to pay over 4%.  I'm not sure how you got the rental financed at sub-3, unless it was financed as owner-occupied.  With great credit, the best I've seen this year for investor loans is about 4.5%.

Understood.... And I have heartburn about that, which is driving me to want to get the lowest rate possible.  We have very good credit, so we are expecting this to happen.  And yes the current rental was originally our primary home, thus the rate being sub-3.

Do you finance homes with less than 20% down? 

Our first two homes were purchased with less than 20% down, with our future rental only properties we are anticipating 20% down. 
« Last Edit: July 30, 2015, 12:58:12 PM by icebox92 »

CashFlowDiaries

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Re: Invest in rental while rates are low, or continue to pay down debt
« Reply #7 on: July 31, 2015, 09:57:22 AM »
read this article about why you should not rush to get a mortgage right now based on the speculation that they will rise in the future:

http://www.financialsamurai.com/should-i-buy-a-home-in-a-rising-interest-rate-environment/

After reading that, you should be leaning more toward getting rid of that credit card debt once and for all. 

K-ice

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Re: Invest in rental while rates are low, or continue to pay down debt
« Reply #8 on: August 01, 2015, 11:09:43 AM »
I would want to clear the cc debt first. If not with "hair on fire" cash then maybe a LOC at a better rate.

If you want a low mtg rate, at most banks (in Canada) you can get pre approved and have that rate held for the next 3 months.

Pre-approval is a bit harder on rental properties but not impossible. (Very hard on 4+ multi-plexes)

I would just keep churning that every 2-3 months at different banks. (Too often hurts your credit)

Also finding the right property could easily take 6 months. So I would start looking and make your offer subject to financing. You may need to walk away if your finances are not ready yet.

For the down payment, do you have any HELOC room on your primary residence? That could be used on short notice if you don't have 20% down on the new rental.

Talk to the bank and tell them your goals. Your plans may be hard to understand for the novice mtg advisor but  you should be able to find someone who understands rental properties and leveraging.

clarkfan1979

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Re: Invest in rental while rates are low, or continue to pay down debt
« Reply #9 on: August 01, 2015, 07:16:52 PM »
Pay off the credit cards first. I am thinking that once rates go up by 1%, some sellers will go into panic mode and try to unload before rates go higher. Low rates have created more qualified buyers and higher prices.

Sarnia Saver

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Re: Invest in rental while rates are low, or continue to pay down debt
« Reply #10 on: August 02, 2015, 06:15:19 PM »
In an extremely low interest rate environment, likely the lowest in history, now is the time to tackle all those debts with more of your payments going towards principal then ever.  It surprises me to read the headlines about ballooning consumer debt, people empowered to gorge on more and more debt, right up to the max of their capabilities to repay.  Seemingly expecting that the party will never end.

As you described your situation, it seems as though you run the risk of buying something that you might not otherwise, in order to capitalize on the current low rates.

Obviously, pay the 9.33% first.  That's a guaranteed 9.33% ROI, no tenants, no asbestos, no mold, no surprises.  That is quite an exciting and ambitious goal to have 15 units, I wish you best of luck!!!  Your hands are going to be full.

There is a lot of anecdotal evidence corresponding falling interest rates with swelling real estate prices.  It stands to reason that as the rates start to creep up, people will be heading for the exits and the demand for these places will be lower, giving you more chances to look for deals.

Keep in mind that it is highly unlikely that rates are going to skyrocket as that will send shock waves through the entire economic system.  Instead, expect slow, gradual, methodical increases over the next few years, (most of what I have read is stating 0.25% increases per quarter) lots of time to ensure the right opportunity is there.

icebox92

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Re: Invest in rental while rates are low, or continue to pay down debt
« Reply #11 on: August 03, 2015, 12:48:01 PM »
Thank you for the input guys!  We've decided to hold tight and pay off our debt emergency before getting into our next rental.
 
read this article about why you should not rush to get a mortgage right now based on the speculation that they will rise in the future:

http://www.financialsamurai.com/should-i-buy-a-home-in-a-rising-interest-rate-environment/

After reading that, you should be leaning more toward getting rid of that credit card debt once and for all. 

Thanks for the article CashFlow!

zephyr911

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Re: Invest in rental while rates are low, or continue to pay down debt
« Reply #12 on: August 03, 2015, 01:19:22 PM »
Thank you for the input guys!  We've decided to hold tight and pay off our debt emergency before getting into our next rental.
I know you already made the call, but I second the advice. I regularly rack and stack all my debt and investments to make sure I'm not paying more on any debt than I'm earning on any investment. 9.33% is a "OMFG PAY OFF NOW" situation - you can occasionally beat it, and most rentals *should* beat it, but you can't beat it with a risk-free, zero-maintenance, guaranteed return.
The more you strengthen your financials now, the easier it will be to finance rentals and feed a fast-growing portfolio. Don't panic over rates... they'll do what they do, and properly vetted investments will still return far higher rates.