SFH LANDLORDS! THREE ‘I’ WORDS
Interest, 2) Inflation, 3) Inventory
It’s hard to describe the above four attributes to SFH investing as a “perfect storm” … unless you view the configuration of all four as a once-in-decades windfall for savvy single-family landlords … and those considering a “toe-in-the-water” initiation to the world of rental real estate investing.
So, this month I’ll extend and reinforce the major premise of our January article … now is a good time to save money and build equity! Reasons, illustrations and a special modeling tool for you is your reward for reading on.
Today, interest rates are at an all-time low. Thirty-year fixed rate mortgage rates hover in the 2% range. And that appears to remain so for the foreseeable future.
Federal Reserve Chair Jerome Powell underscored the Fed’s intention to keep longer-term (read residential mortgage rates) interest rates low. As evidence, he emphasized that the central bank is not currently considering any reductions to the size of its $120 billion in monthly bond purchases. It’s logical to anticipate no significant increase in longer-term interest rates is on the horizon.
Expectations for inflation are increasing. Covid-19 vaccines are hopefully bringing daily life closer to normal. This turnoff events coupled with as much as an additional $2 trillion of Congressional infused stimulus … many observers are preparing for price increases across the economy.
A driver of that point of view is the difference in yields between regular Treasury notes and those that adjust payouts in lock-step with changes in the Consumer Price Index … Inflation-Protected Securities. The yield spread recently approached its highest level in over six years.
Source: Federal Reserve
Added Leverage for SFH Investors: With interest rates are at an all-time low, let’s take a look at the added leverage these historically low rates deliver when inflation is factored in.
- Borrowing at interest rates less than inflation = leverage
- Borrower’s interest rate minus the rate of inflation = real interest rate
- Asset value of the property will increase generally in synch with inflation
- Landlords enjoy inflation-stimulated rental spread increases while loan servicing remains level.
So, since inflation reduces the true cost of borrowing, the “real” interest rate is the nominal rate charged by the lender minus the inflation rate. For example, a loan with a 5 percent nominal rate when offset by an inflation rate of 3 percent means the borrower’s out-of-pocket interest cost is 2 percent.
These numbers dramatically illustrate the incredible opportunity that exists today to refinance or make your first purchase of a rental property … particularly single-family homes. Will this “perfect storm” of ground-floor interest rates positively influenced by inflation repeat itself? Never has, so why hesitate to be a winner.
OK … let’s tie the net results together with following Wealth Calculator example.
These graphs illustrate shrinking inventory for single family home purchases.
Yes, I agree that bargains on single family home purchases are few, far-between and in some areas non-existent. That said, in light of the forgoing regarding the synergy of super-low interest and the likelihood of inflation, it doesn’t have to be a perfect world to make attractive long-term, profitable investments.
Of course, in order of priority it would be ideal to have:
- Ideal: Low Interest Rates coupled with Low Purchase Prices
- Second Best: Low Interest Rates and Stable Purchase Prices
- Third in Line: High Interest Rates and Low Purchase Prices
- Worst: High Interest Rates and High Purchase Prices
Today, “Ideal” is not an option. However, I believe significant opportunities present themselves in this economic environment of:
Second Best: Low Interest Rates and Stable Purchase Prices
With that profile in mind, this is an excellent time to refinance existing holdings and/or borrow for an addition to your portfolio.
So, as KRS Holdings seeks to expand its portfolios for our clients and our company, our guiding principles are based on confidence that when it comes to acquiring rental properties today …
With interest rates at record lows, inflation on the horizon …and SFH prices stable
now is a good time to save money and build equity!
The key to success as a SFH landlord is to remain alert and diligent in serving your tenants and protecting your investment. In this economic climate, don’t miss this, perhaps once-in-a-lifetime, opportunity to buy or refi rental properties … whether an initial purchase or to expand your portfolio.
Note: Whether becoming a landlord was a choice or a result of circumstance, it doesn’t change the fact that managing any property comes with its challenges… and we want to help. At KRS Holdings, we stand by our core principles to always be straightforward and honest
Give us a call or drop an email. We’ll respond promptly to relieve
your stress and help you evaluate your property management options
plus maximize your rental property return on investment.
Be sure to see next month’s newsletter and get your FREE Wealth Creation Calculator