Flipping America 560, The Impact of Rising Interest RatesFlipping America

Opening:

Rising interest rates has people worried. Last week the national average for a mortgage topped 6.7% for the first time in many years. What does this mean for real estate investors and what does it mean for YOU? Find out today on Flipping America.

Rates are expected to inch further up over the next few months as the Feds seem to be the only parties in Washington genuinely interested in countering inflation. In case you hadn’t noticed, the so-called “Inflation Reduction Act” does absolutely nothing to even address inflation, much less reduce it.

So, interest rates. How does raising them slow down inflation? Of course like most answers involving monetary policy, the answer is a bit complicated. But I, your humble host, excel at making the complicated understandable, so bear with me and in a few moments I shall explain.

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News and Resources:

A good article explaining the basics of monetary policy. Note this was written in 2008. https://seekingalpha.com/article/85805-inflation-vs-interest-rates?gclid=Cj0KCQjwkOqZBhDNARIsAACsbfJEiABPyPLYxA5rRveLeyWOJftFjTdhIkfUu-m2rFCD_p0GrLt2xdUaAg3BEALw_wcB&internal_promotion=true&utm_campaign=18367158427&utm_medium=cpc&utm_source=google&utm_term=141065818523%5Edsa-1485125202378%5E%5E622615738721%5E%5E%5Eg

Questions:

Topic:

What do you do when you hear interest rates are going up? If you were going to finance something, say a home or new car, you’d go get it NOW before they go up.

So when interest rate increase is announced, activity ticks up briefly, then slows down. As the market slows down prices begin to moderate. It’s basic supply and demand.

From a blogger called “Stockerati” from 2008

Consumer Price Index or CPI: CPI is a measure of the price of a set of goods and services. This “bundle” contains items such as food, clothing, gasoline, and even computers. The amount of inflation is measured by the change in the cost of the bundle. For example, a 5% increase in the purchase price of the bundle y-o-y implies a 5% annual rate of inflation over that period based on the CPI.

The “Core Rate” or the “Core CPI” eliminates certain items in the bundle which are extremely volatile, such as gas. As it removes items which are volatile and impact the cost of the bundle (in either direction) on a month-to-month basis, the Core rate is assumed to be a better indicator of inflation.

Consumer demand and consumer confidence are both driven by the emotions in the mass of humanity, often without any factual or logical basis.

The cost of goods, however, is measurable both in the raw or crude state, intermediate state, and finished products. The cost to manufacture will always play a part and is intertwined with interest rates as well. But profit margins decrease as prices fall and consumer demand dwindles.

What does this mean to YOU?

So you can get more house or car for the money. But the money is going to cost you more. If you’re a cash buyer, you would optimally wait until the rates have peaked, the economy has slowed, and prices are beginning to fall.

So what do increasing interest rates mean to the investor? A slow economy with flat or depressed housing costs make the ideal environment for a cash buyer. We have enjoyed several years of historically low interest rates. This was the time to be leveraging everything in long-term fixed interest loans. Now is the time to put together as much cash as you can and hang on for 3-6 months. Discounted real estate is going to become a thing once again.

Quote of the Day

In previous years I’ve used a series of quotes from Mr. Rogers and Dr. Seuss. Today we begin a series of quotes from Michael Scott of The Office, played by Steve Carrell.

“I’m not superstitious. But I am a little stitious.” Michael Scott

Expected Air Date: Friday 10/7/2022

Guest: Mark Dolfini

Transcript

[0:00] Last week the national average for mortgages top six. Seven% for the first time in many years.

[0:14] Music.

[0:29] Show that teaches you how to make money in real estate wherever you are whatever your situation there is an opportunity for you and now here’s that flipping America guy Roger Blankenship,

Thank you Kathy Curtis. Hello, America.

[0:45] Interest rates are expected to inch further up over the next few months as the feds seemed to be the only parties in washington genuinely interested in countering inflation in case you hadn’t noticed the so called inflation reduction act,

Does absolutely nothing to even address inflation,

Much less reduce it. So, interest rates, how does raising them slow down inflation?

Of course

Your humble host excel at making the complicated understandable so bear with me and in a few moments I shall over simplify and explain it to you alright how to reach us here

At Flipping America, first of all, questions at Flipping America. Net. If you have questions about real estate or real estate investing, send them to questions at Flipping America. Net

The inboxes down to oh today I’ve got some questions built up we’re gonna get to in a future show but we will answer your question whether we use it on the show or not.

Tell us where you’re from, tell us how you listen to the show, and if you don’t have access,

Email or if you’re driving right now, you can call 877 55 Roger. That’s (877) 557-6437.

Press extension one you can leave your messenger question we promise we will get an answer to you we have.

[2:12] Every question that’s ever come into the show and this is show number 560 so we’ve been at this for a while we’ve been answering your questions for a while and we will answer yours now I got another number for you get ready to send a text message pull out your

Your phone and get ready to send a text and I want you to text the word wit.

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3547. I’m gonna say it one more time.

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Flip.

[3:11] Big shout out to our sponsor today flipping America funding get the money you need for your business for your training for infrastructure for your projects flipping America funding is your one stop shop for all of your business funding needs find it at flipping America funding

Dot com.

I’m gonna be doing a book signing of my book Flipping Houses in 10 days. It’s available on Amazon. It’s been certified as an international number one best seller and I’ll be doing a sighting at the public draft house at PDH.

PDH public draft house in Midtown Atlanta,

30 on Wednesday evening

The 12th,

We we go with my wife and I go there for lunch.

[4:14] Once or twice a week and we enjoy the people there and both the managers have already bought a copy of the book and so we’re gonna do the signing there. Cool, right?

And the other announcement is just a quick alert that coming soon I’ll be saying more about this when it’s done all of our previous shows and show notes are going to be linked

On the flipping America website. That’s pretty cool. Alright, so what do you do when you hear interest rates are going up?

If you were going to finance something say at home or a new car you go get it now before they go up right that’s why when interest rate increases are announced activity ticks up briefly but then it slows down because as we hit

Those interest rates and were there and people have less buying power they tend to slow down some of these purchases and when they slow down prices begin to moderate there’s a basic law of supply and demand kind of thing there.

[5:07] I have some notes in today’s show notes which are available on the website and through the free app

It’s an article that actually pulled up from seeking alpha and a blogger named Stockarati from 2008 talking about the consumer price index in the core right now learned a lot

When I first read this

Article

The monetary policy affects inflation. It’s more complete complicated than i wanna get into right here but here’s something I want you to take away.

[5:48] Consumer demand and consumer confidence

Are both driven by emotions in the mass of humanity. Often without any factual or logical basis. But much of what goes on with our economy is driven by consumer,

So there is an emotional component to this and you can’t really separate that and that makes it a little bit less predictable

However, the cost of goods is measurable both in the in the raw or crude state, the intermediate state, and in the finished products as well. The cost to manufacture is always going to play a part and it’s

And it’s intertwined with interest rates as well.

Boy am I over simplifying but that that’s all connected in there when the profit margins begin to decrease as prices fall.

[6:39] Consumer demand and and consumer demand dwindles then you will see,

The inflationary pressures begin to stop at the so that’s how increased interest rates will ultimately begin to drive down

Inflation

50 basis. 75 basis. 75 bases points you know that’s what’s happened this year and

It’s 75 basis points. It’s three quarters of one.

When you raise the interest rates that much are a little bit like that.

There’s a lot of guesswork involved in this. So, what does this mean to you?

When we are not in high inflation time when when prices start to cool off,

Because interest rates are gonna be higher. The money is gonna cost you more. If you’re a cash buyer, you would optimally wait until the rates have peak,

The economy has slowed and the prices are beginning to fall if you are a borrower then the best time for you to buy that thing you’re gonna borrow money for was probably 6 months ago.

[8:07] The next best time could be right now because interest rates are up and they’re really not gonna come back down anytime soon. I have talked to people who predict the interest rates we’re gonna be above 10%.

I’ve talked to a few who believe the interest rates will get above 15% for a mortgage. It has been that way in 40 years. Personally, I don’t think it’s gonna go that high.

[8:29] But I don’t think anyone really knows for sure. So, what do increasing interest rates mean to the investor?

[8:37] A slow economy with flat or depressed housing costs make the ideal environment for a cash buyer,

We’ve enjoyed several years of historically low interest rates. This was the time to be leveraging everything you could into long term fixed interest loans. It’s been a time of high demand and high increases in prices in homes in spin a very tough time,

To be a real estate investor because deals have just been hard to find.

But now my friends now is the time to put together as much cash as you can and hang on for the 3 to 6 months

I don’t think we’re even gonna be see a huge slowdown because there are other market fundamentals that are pushing us too much however it is going to cool off and i believe that once again

Beginning in 3 to 6 months. Now, just so you know when we’re talking about here, this is October of 2022.

We’re going to be able to find discounted real estate and the properties that are put out there for sale are not gonna be snapped up on the same day.

[9:48] Alright.

You heard it here there’s your opportunity the the thing about interest rates is it sounds like bad news for the economy but actually rising interest rates are not necessarily bad news to real estate investors and

Although we don’t sit around rooting for the economy to implode.

[10:13] So, we’re also not going to lament it and we’re not going. It just is what it is. We really can’t do anything to change it or even significantly influence it. So, we accept that’s the way it’s going to be.

Plan prepared deal with it and if you want to stay ahead of the curve all you have to do I mean you can read all the financial news letters and everything that I do or you could just listen to the flipping America show,

And I’ll tell you what’s really going on and you’ll know how to prepare yourself

Alright Mike very good friend Mark Dolphini is one of one of my best friends and really a fantastic,

And small multifamily rental investor buy and hold investor in Indiana and i’ve asked him to join us for a few minutes today to talk addiction his thoughts about the impact of interest rates plus we talked about a couple of other things.

Here he is now.

It is so good to see you man. Yeah. Thank you for taking time. I know that your time is limited and and so we’ve gotta get right to the point. Okay, there’s some.

[11:24] I’ve been wanting to talk to you about this for a while but interest rates keep going up and up in the mortgage rates going up and up,

And i need an expert in the industry who is also an analytical brain to weigh in on this what first of all what impact if any is it having on your business right now.

[11:43] Well first,

Well, honestly, it’s it’s having a really good effect in the fact that it’s taking buyers,

Purchase properties and it’s making the rental.

So or so I look like a genius at the time you know when I’m when I’m I’ve I’ve never hardly ever sell anything.

And and I’ve been holding properties now for 20 plus years and of course the longer I hold on the more more of a genius that I look like but I promise that is not the case but it’s just one of the things that’s always been part of my strategy to buy and hold. I’m not looking to turn stuff over.

And what I’m doing is I’m allowing that compounding of my of my rental properties to just.

Build more and more wealth and the cash flow on those properties is gonna start are to catch up because the,

The the renter pool is gonna get larger because or having trouble buying,

No you you probably don’t know this cuz I I guess maybe you don’t listen to every show that we do but we just a couple weeks ago did a show,

Rent or own and i talked about how the gap between.

Rinse and mortgages is closing and for a lot of people it makes more sense to rent. Right. And I don’t know if you know this mark but the flipping American guy himself rents.

I don’t own my home.

[13:10] I do too. I actually rent too.

Right now I’m currently renting. Yeah, we both own a lot of real estate but we don’t we don’t own the real estate we live in. Right. And that’s an important thing I think that people should take away.

[13:29] There’s there’s a sort of a calculus to all of this and I gave you a lot of credit for,

Now feel better about my own decision,

What do you think about interest rates as a whole affecting first of all the economies secondly the real estate housing market and thirdly what real estate investors should do okay let’s first of all talk about the economy interest rates in the economy ready go.

Oh I think it it has to go up I mean the fair has held him down for a long period of time and I’m not certainly a trying to be an economist here but they’ve been held down artificially for way too long it it has to come back up.

There’s too much money in the economy.

And this is gonna be and I you know I hate to make predictions but,

I just knew it over the next couple of election cycles that was going to be the conversation and it’s probably gonna cost this president his his his his presidency for sure because it’s just it is.

Too much of a problem for for individuals especially for small business individuals.

[14:50] Yeah that won’t be the only thing and I don’t get into political statements here much but yeah it cost this president his job I don’t think,

I don’t think America’s gonna be hurt by that. Yeah, I know. Again, I’m not trying to, I’m not trying to make a political either. I just think it’s it’s going to be the thing,

That’s gonna define the presidency no matter who and the thing is.

It’s been the last four or five presidents have who have contributed to this problem so not blaming this particular guy,

Spending a lot of irrational spending that’s been going on you know from from especially from congress yeah we’re both in agreement that,

Interest rates were held too low artificially for far too long and way too long.

Ryan it was just a question of when I was going to happen.

No question. Alright. So, how high do you think interest rates are going to go?

Yeah. Yeah. I know. I think that that’s gonna be a thing.

You know that is that is definitely going to be a thing in terms of hitting double digit mortgage rates. Gotta keep in mind, you know, back in the early 80s,

They did her double digits in fact that they were double digits that started with a two.

[16:19] Yeah and and at that point in time in 18 you’re probably getting a bargain compared to what they they peaked out at.

On the other hand that house I was buying was only $35 thousand.

And that’s where the the what’s gonna drive the economy,

Is not so much the money but the availability of credit. And that’s what always has driven the economy. So I think that as you start you’re gonna see the economic contract a bit. I mean we’ve already seen that and obviously in equities and the equity markets.

You know, that that drives a lot of value for people towards, you know, if you’re looking away, you know, if you’re looking at real estate, that makes a lot of sense. If you’re looking at tips,

In a treasury inflation predicted securities that makes a lot of sense for for folks to invest in,

Obviously there’s lots of things that are on sale on in the equity market if that’s something you’re looking for. There’s gonna be you’re gonna see more of that. Also extend another real estate market in my opinion. Okay. So yeah. The question that you know is coming. What should real estate investors be doing right now.

[17:27] Well, first of all, don’t get freaked out, right? If you’re used to five% rates, that means you haven’t been in real estate very long. Okay.

It’s okay. You know, you’re talking to two guys, you probably got 40 plus years of combined real estate experience. What I can say is that,

You know though your numbers if the property cash flows it’s

Fine don’t say oh I’m not gonna buy that property or I’m not gonna take that mortgage because the rates are at eight or nine% or 10% again just keep in mind that when you know your calculations

You know you as long as you’re again your cap rate is above your loan constant.

[18:03] I know two calculations that you can learn to do really easy. I’m not gonna get into that right now. But cap rate everybody knows cap rate.

Long constant is a very very simple calculation as long as your cap rate is above your lung constant you’re gonna be typically you’re probably gonna be fine okay but just keep in mind that this this spine hold investing I’m gonna buy and hold investor that means I don’t sell stuff,

And I’m letting that compounding run.

Yeah hello and here I am showing up late. That’s alright.

But I wanna make this quick point is that I read that Warren Buffett obviously you guys were without maybe no eight or 90 1 billion dollars.

[18:49] At the age of 50 he was actually worth 300 1 million.

So not in a small number but when you compare that to 80 or 90 1 billion.

Inconceivable. Okay, so when he was 50 years old, he was worth 300 1 million then he’s closing in a 90 and he’s worth, you know, I think 80 1 billion.

The reason why is because he did not interrupt the compounding.

That’s why I like holding properties because the properties that I’m holding now that have been increasing,

Now I’m getting the I’m gonna be getting the full benefit over the next 10 to 15 years of the compounding effect of those properties that I bought for 40 or 50 $1000,

You know, 20 years ago.

The bank.

So so don’t interrupt that compounding effect as much as you possibly can get into the buy and hold game and stay there.

Alright.

So, here we go. You’re ready? Yup, I’m ready. Number one.

[20:18] How does the general economy affect your business? You got 1 minute for each one of these. That’s the ground rule. How can the general economy affect your business.

[20:26] How does the general economy affect my business?

From the coaching perspective, it’s a lot of fear and unfortunately,

People don’t know what they don’t know because they’re not taking the time to educate themselves in terms of the the the other side of my business. It’s probably more of the same. They’re not taking the time to educate themselves in terms of what they could purchase.

And get out of the rental game and and I actually be be a homeowner. Okay,

Question two.

Huh? Alright, that’s a quick answer. Yeah. Question three. Oh by the way, do you have a pilot’s license? I do.

Okay. And I flew in the Marine Corps. I was an aviator. I wanna see 130 in in the marine.

No. No. Not in my vision yet. It’s it’s in my vision but not yet.

Oh, man. I’ve often thought of this.

[21:39] Interesting choice and I like it.

It’s everything,

For me it’s creativity of thought creativity of of how to navigate the the chest pieces that I’m that I’ve got on the chessboard creativity is everything for me and and and even as a coach

As I I get lots of of variety of folks that come to me,

Bring the same tools to bear at the same time every single, every single day.

And that takes a creative approach for sure. So, I love it. Creativity for me is, is pretty much everything.

Number five what are the business in economic trends you watch most closely.

[22:27] I definitely watch rental rates and watch mortgage rates I’m I am,

Cautiously up by cautiously distanced from what equity what the equity markets are doing and the bond markets.

[22:45] Number six there’s a lot of talk about pursuing your passion in our circles talk about the impact personal passion has on your life and business.

[22:55] Well, for me, I’m a vision focused coach. So, that is.

That has a lot to do with the and being vision focus means that I’m gonna I wanna know specifically what it is that you want not that you want 100 rental properties but what specifically do you want Roger from your life

And part of that has to be something that you’re passionate about. So, what the more clear that you can get on your personal vision? It allows for more passionate,

More passionate things in your life, right? So, whatever that is, passion is a big deal. People are often surprised to hear that I am not passionate about real estate.

Yeah I’m passionate about freedom I’m passionate about my wife,

Yes. Enjoying it and being passionate about our two different things. Alright. Number seven, in your personal goal setting and planning, how far ahead do you typically look?

[23:47] And I never look more than 36 months so in my I have a 36 month vision

Then I backed that up to a 1 year vision and then I will break those so out into 90 day projects so so I’ve got vision

Project’s goals and I always do it that way. The reason why is because if it’s beyond 36 months, it’s too easy to hide inside inactivity,

So, you can just kinda say, well, you know what? I want those six pack abs. Put all but I’ll, you know, I’m gonna have a bag of potato chips first.

[24:16] Hey, man. I got a six pack right now. I just covered by a keg.

[24:21] You know what? It takes a lot, you know what? I I appreciate your your your your endurance for that. Yeah, just sticking with that.

Alright what’s the next number? Number.

[24:35] If someone walked into your life right now and said i wanna get started doing what you do.

[24:46] You’ve gotta take the time to

I’ve a lot of people who attend courses or classes that I teach,

You’re just there to like audit the class. Okay, well, what are you actually what action are you gonna take from the education that you that you are bringing in to your life,

So those are those are two critical things as education and action. Okay.

Number nine understanding it is impossible to accommodate every person’s lifestyle and spending habits with this answer what would you say is the minimum amount of money a person needs in order to retire.

[25:29] Oh, man.

Man, I want a great, what a great question. Minimum amount,

Just to be safe okay.

That’s a that’s probably live frugally I think. Yeah, you’d have to, I mean, it would be it’s a lean answer. And you’re thinking of some more to buy a,

You know, 750 1000 took it into and purchase a fixed index annuity. Something like that. I mean, it would generate, you know, depending on your age and so forth but that would generate some money. But it it you’re living lean. I’m telling you that. Okay.

Number 10 if you were picking someone who is alive today to model your business after who would you choose?

[26:27] Man, it’s a really good question. Holy crap. You’ve already, I think you’ve already eluded to it.

[26:34] Well it was like by Warren Buffett.

I like what he’s about.

I like who I really like is Tony Robbins. I like what he’s about. I like that he’s he’s not just about the,

You know his his,

Okay. No. Alright. Number 11, how do you start each day versus how do you wish you started each day.

[27:21] Which I’m not really fond of. I, but I need the rest. So, I have to listen to my body.

So I’ve been getting up around 6:30: and I usually like getting up around 5:30: but it’s because I’ve been reading a lot I’m reading about 100 pages a day right now,

So, as a result, it’s the, yeah, I can’t, I, I gotta, I can’t burn the candle up both ends. If I, I think I would love to get up a little bit earlier than a post to waking up at 630.

Alright number 12.

Is where you actually have the cash flow to do whatever it is that you want in terms of having control over your calendar. That’s that’s having cash flow but not just the cash flow.

Is I know but I’m not jumping ahead to another another,

Our church truly wealthy it’s also being that free.

That for me is being truly wealthy where I don’t have to be be beholden anybody I’ve got control of my calendar and I’m I’m and I’m free from worrying about other people think of me.

[28:40] Alright.

You have completed the random the round table of random questions here flipping America marked Alphini everybody can reach mark at landlord coach. Com if you want to,

Find one of the premier guys when it comes to real estate investing and buy and hold rentals mark as your guy,

Mark@landlordcoach. Com mark thanks for joining us today thanks so much Roger good to see you,

In previous years I’ve used a series of quotes from Luminary such as Mister Rogers and Doctor Seuss today we begin a series of quotes from the inimitable Michael Scott of the office played by Steve Carol

Here’s your first one.

[29:24] Alright, everybody. Have a little fun out there. Stay safe and remember what I always say here in Blipping America.

[29:34] You’ve been listening to flipping America real estate investing for everyone. Listen three times a week on stations across the country or on the flipping America app free in the app store,

Be sure to like us on Facebook find and follow us on Twitter and Instagram and keep your eyes open – opportunities are everywhere.

[29:50] Music.

Flipping America

Flipping America 560, The Impact of Rising Interest Rates