Since 2008, the Federal Reserve (Fed) has kept the interest rates at or around 0%.
The Fed has hinted many times over the past few months that they are going to raise the interest rate gradually over the next year.
This was the first time the Fed will raised interest rates in almost ten years. There will be positive and negative effects on us investors and the economy as a whole.
Because you invest in passive income, you need to pay attention to how the Fed handles the interest rate.
The actions of the Fed, with its crazy low interest rate and the printing of money, can be both good and bad depending on how you use credit and money.
If you borrow lots of money on your credit cards to buy liabilities (items that take money out of your pocket) you may have a hard time in the coming future.
As I have taught in my eBook “How to Quit Your Job with Rental Properties” investors buy assets (items that put money in your pocket) with leverage (loans) because they make them money.
If you buy an expensive car that doesn’t make you money, it is a liability. If you buy a rental property that makes money each month, that is an asset.
How the Interest Rates Affect Real Estate Prices
As an investor, you need to understand how interest rates affect prices of properties as well as how much you will have to pay for those properties.
Think about this. If you work a hourly wage job, your wage does not go up and down with interest rates.
If the interest rates go up, your boss will not take money out of your paycheck and if it goes down, he will not pay you any more. Because of this, you need to think about how other home buyers will be affected by a raise in interest rates.
High Interest Rates = Low Real Estate Prices
Low Interest Rates = High Real Estate Prices
A homeowner looking to buy a home to live in will usually take out a mortgage on the property and make monthly payments to the note holder to pay off the principle plus interest.
This homeowner will who receives a paycheck only has so much money each month that he can afford to pay for a mortgage.
Lets say that Bob is someone who is looking for a new home to live in. He makes $3,500 a month and can afford a mortgage of $1350 a month. Bob needs the rest of the money to live off of and pay off his other debts that he has.
That $1350 a month payment must include taxes and insurance and is ALL HE CAN SPEND.
|Bob with Low 3.5% Interest Rate
Purchase Price: $250,000
Down Payment: 3.5%
Terms: 30 year
Monthly Payment: $1,083
Monthly Taxes + Insurance: $300
Total Monthly Payment: $1,383
|Bob with High 8.5% Interest Rate
Purchase Price: $140,000
Down Payment: 3.5%
Terms: 30 year
Monthly Payment: $1,038
Monthly Taxes + Insurance: $300
Total Monthly Payment: $1,338
Interest Rates Go Up, Prices Go Down
As you can see, Bob’s money only goes so far each month. No matter what the interest rate is, Bob can only afford $1300 because his income will only allow that much of a payment for him to live off of.
The real estate prices began to skyrocket in 2005 and finally crashed in 2009. Homes that should be sold for $100,000 were being sold at the height of the market for $250,000.
While there are many factors for this, the ability to borrow money easily and cheaply, home prices became inflated.
More people where able to buy real estate because they were getting loans they could not afford and causing all real estate prices to go up.
Supply and Demand
When there is more demand for something than there is supply, the price of that item goes up. During that time, there were many more buyers than there were homes for sale.
That drove the price of the homes up dramatically.
Now that the Fed will raise interest rates, home buyers will not be able to buy as much of a house as they were able to in the past. What they could once afford would now be out of their price range and there will be more homes for sale than buyers for that property.
This will bring the prices down because there will be more supply than there is demand for the property.
What To Do Now?
Be patient and watch for deals!
There are deals out there but you need to be picky. I waited 6 months to find the property I purchased in Houston.
Be careful and don’t buy for appreciation!
You don’t need to jump be hasty and jump into a property that does not make financial sense and will not make you positive cash flow each month.
Look to the future even more so now than ever!
Recently, I read “The Demographic Cliff” that shows deflation will most likely occur sometime before 2019.
This was a very interesting read and shows how throughout history, inflation and deflation occur with population. Inflation rises when a larger than usual block of younger people enter the workforce, and it wanes when large numbers of older people retire, downsize their homes, and cut their spending. The mass retirement of the Boomers won’t just hold back inflation; it and massive debt deleveraging will actually cause deflation.
Be ready to jump on a property when it comes up!
Real estate prices will decrease and properties will be harder to purchase because of higher interest rates. The diligent investor will watch for deals and be ready to jump on a good deal in an up and down market.
What I am Doing Right Now
Even though I foresee property values decreasing, I purchased a $150,000 rental property in Houston Texas.
The reason why is because it was such a great deal that I could not pass upon it.
The value of the property today is around $220,00 and the property value was $150,000 before the huge run up in value with the real estate boom/bust.
I don’t believe prices will crash much father than where they started. So, whatever the value was before the run-up in prices, values should return to that price if not just a little below.
Also, I will make at least $500 in rent and possibly $1,000 in rent. The reason why the cash flow is so varied is that depending on what the property is rented for the cash flow will be adjusted.
The minimum of $500 profit is in preparation for the coming fall in home prices which would lower rental prices as well. Even though the property values and rents will possibly come down, I am well insulated from it.
Learn how to make money in an up and down market!
Investing in rental properties will make you money in an up and down market. No matter if the supply is high causing prices to go down, or the supply is low causing the prices to go up. If you follow my lead, you will not lose money in real estate rental properties.
You don’t want to lose money and in a down market it is easy to do if you do not know how to protect yourself.
The key is to buy for monthly positive cash flow and passive income. If you buy a property hoping the value will go up, you are not investing.
You are speculating…
The Master Passive Income way is to make cash flow each month that puts money in your pocket without you working at all.
In order to make money in an up or down market, you need to have the rental income be more than all your expenses so you make money each month.
As I have said before, I look to make at least $200 each month per property I buy or I pass on the deal.
Next Steps for You
Sign up for my online course where I show you how to quit your job with passive income in rental properties.
Please let me know what you think about the Federal Reserve rate hike and how else it will affect our passive income.