I had a conversation last week with an investor who's been sitting on the sidelines since October. He's got the down payment. He's got the deal lined up, a solid duplex in a B-class neighborhood that has cash flow at current market rates. But he's waiting. Waiting for rates to come back down to 6.5%, maybe 6.25%. He's convinced that extra half-point is the difference between a good deal and a great one.
Here's what I told him: the math doesn't support that strategy. Not even close.
Let's say you're looking at a $300,000 property with 25% down. At a 7.125% rate (7.35% APR) on a conventional 30-year, your principal and interest payment is about $1,516. If rates drop to 6.5%, that same payment becomes $1,422. The difference? $94 a month.
Now, $94 isn't nothing. But let's put it in context. If you wait six months for that rate drop and property values appreciate even 3% in that time, you're now buying a $309,000 property instead of a $300,000 property. Your down payment just went up $2,250. Your loan amount went up $6,750. And even at that lower rate, your payment is now $1,465. You saved $51 a month compared to buying today, but you're out an extra $2,250 in cash and you've lost six months of rent, which on a duplex might be $2,400 or more.
You didn't win. You lost.
And that's assuming rates actually drop. What if they don't? What if we're still at 7% in six months and the property is now $315,000? *If the property is even still available then. Now you're paying more per month AND you put more cash in AND you lost the rent. The opportunity cost compounds fast.
Here's the Part of Rate Anxiety That Drives Me Crazy
We're so focused on the rate itself that we forget to do the actual math on what waiting costs us. I get it. 7% feels high compared to where we were. But gang, anyone that’s waiting for pandemic rates to make a comeback, you're dreaming. Further, do yourselves a favor and go back and check historical average rates. I’ll do the leg work for you; dating back to 1971 the average 30 yr fixed mortgage is 7.69%-and that is for primary residence!!So it’s not the rate. The harsh truth is, it’s you. You have been sold a bill of goods that has you believing your real estate investment is tied exclusively to a single number…. The rate. Not true. Rate is probably 4th or 5th on the list of my objectives when considering a rental for purchase or property for refinance. So the question isn't whether 7% feels good. The question is whether the deal works at 7%. If it does, buy it. If it doesn't, pass and find a better deal. But don't pass on a deal that works today because you're hoping for a rate that might never come.
Here's the other thing nobody's talking about: rates are already starting to move. We saw the 10-year Treasury tick up this week after a brief dip in late March. The Fed's still holding the line, and inflation data keeps coming in stickier than anyone wants to admit. The idea that we're headed back to 5% or even 6% anytime soon? That's not what the bond market is pricing in. We might see 6.75% by summer if things break right. We might see 7.5% if they don't.
Either way, the window for "waiting for lower rates" is closing, if it was ever really open to begin with.
And even if rates do drop, you can refinance*. That's the part people forget. If you buy today at 7.125% and rates hit 6.25% next year, you can look into refinancing. And if you push back here is ‘but the closing costs of a refi’, ok fair, but the majority of those costs are tax deductible so be sure to include that in the analysis.
Bottom line, the math will not lie.
(*Refinancing is not guaranteed and is subject to credit approval. It may result in a higher total cost over the life of the loan, depending on the terms of the new loan.)
Where We Are Right Now on Rates
Conventional 30-year fixed for investment properties is sitting around 6.75 to 7.25% depending on credit and loan amount. DSCR loans are running about 7.25% to 7.5%. Bridge loans for fix-and-flip are in the 9.5% to 10.5% range, which is higher than we'd like but still workable if you're moving fast and the ARV supports it.
But here's what I want you to focus on: your qualifications. Because while you can't control interest rates, you absolutely can control how you show up on paper. And right now, with rates where they are, the difference between a 7.125% approval and a 7.625% approval might come down to whether you optimized your debt-to-income ratio before you applied.
The Part Most People Don't Think About
I had another call this week with an investor who's got four properties already. Good portfolio, strong cash flow. But he's got $1,200 a month in car payments and another $800 in credit card minimums. His DTI is sitting at 48%, which puts him right on the edge of what Fannie Mae will approve. He wants to buy property number five, but the numbers are tight.
Here’s what we did. We looked at strategically restructuring his debt by paying off those credit cards, which he was able to do without touching his reserves. In this example, that brought his DTI down to 44%. Now instead of being borderline, he was able to qualify with more flexibility. And because his DTI was improved, it may have opened up additional financing options. The estimated difference in payment on a $350,000 loan? About $75 a month. Over 30 years, that could be roughly $27,000, depending on the loan terms and how long the loan is kept. All because we spent time reviewing his qualifications before submitting the application.
Example for illustrative purposes only. Results will vary. Approval, loan options, interest rates, and payments depend on borrower qualifications, loan program, and underwriting approval.
Ridge Lending Group is not licensed to provide debt consolidation advice. Please reach out to a licensed professional.
This is what I mean when I say qualifications are fluid. You're not stuck with whatever your DTI happens to be today. You can move things around. Pay down debt strategically. Restructure how properties are titled. Restructure your current portfolio to improve terms of harvest equity either or which could be responsible for improving your overall qualifications. Use a DSCR loan for one property to free up your conventional capacity for another. But you have to know what levers to pull, and you have to pull them in the right order.
And this is where most of us get stuck. We don't know what's happening in the black box of underwriting. We submit an application and hope for the best. Or worse, we get a pre-approval from a lender who doesn't understand investment property guidelines, and then we're shocked when the deal falls apart at closing because the lender suddenly realizes they can't count the rental income the way they thought they could.
I see this all the time. An investor gets pre-approved for $400,000, finds a property, goes under contract, and then two weeks before closing the lender says, "Oh, actually, we can't use that rental income because you don't have a two-year history as a landlord." Now the investor qualifies for $280,000 instead of $400,000, and the deal dies. *BTW that is called an ‘overlay’ in ‘mortgage speak’- Ridge Lending Group does not impose overlays for investor type loans.
That doesn't happen if you're working with someone who knows the guidelines and walks you through them on the front end. It doesn't happen if you understand that Fannie Mae has specific rules about when rental income counts and when it doesn't. It doesn't happen if you know that even with a signed lease in hand, underwriters are still going to hit you with a 25% vacancy factor and only count up to 75% of that rent toward your qualifying income.
These details matter. They're the difference between closing and not closing. And they're definitely the difference between building a real long-term financing strategy and just stumbling through transaction by transaction hoping it works out.
( Ridge Lending Group is not licensed to provide debt consolidation advice. Please reach out to a licensed professional.)
Do Your Homework Before You Apply
If you're thinking about buying in the next 90 days, pull your credit report. Look at your DTI. If you've got credit card balances or car loans weighing you down, run the numbers on paying them off. Or call us and we’ll work through it with you and help you strategize. If you're married and you're both on all the properties, run the numbers on separating your qualifications. If you've got six or seven properties already and you're running out of conventional capacity, let's talk about DSCR loans and how they may fit into your strategy.
Rates are what they are. You can't control them. But you can control how you qualify. You can control whether you're using the right loan product for the right scenario. You can control whether you're setting yourself up for property number 10 while you're buying property number three.
That's the difference between investors who scale and investors who plateau.
The market's not going to wait for you to feel good about rates. Deals are moving. Inventory is still tight in most markets, and the investors who are buying right now understand that a good deal at 7% beats no deal at 6.5%.
So stop waiting. Do the math. Optimize your qualifications. And if the deal works, buy it.
Happy investing, Caeli
