It’s almost impossible to go through a financial crisis and NOT hear some wealthy investor on CNN talking about how it was the best time of his or her investing life. It’s always the same story. “I saw opportunity when everyone else saw horror.” I’ve heard this many times over my life, but for the first time, I can see a similar path forward that is easily understandable and accessible to the average person.
Interest rates were around 3% just months ago, and the market priced properties accordingly. When you are buying an investment, the largest expense is usually the interest on the mortgage, so the lower the interest rate, the lower your payment, meaning higher cash flow, and ultimately higher prices because people can afford to borrow more for the same home. As interest rates have risen, the interest payments have gone up roughly 30-40%, and unfortunately the prices have had to adjust to accommodate that increase in cost. Everyone knows this, but what people are failing to recognize is that we are on the cusp of a great boom.
The rapid increase in interest rates has adjusted prices downwards, but it has also positioned those who buy now to be hugely rewarded. If you can buy a property at 7% interest and have it make sense, what will happen when the interest rates adjust back to 5% or even 4%? If your property made sense at 7%, it’s going to be a gold mine at 4%. You, as the property owner, don’t even have to do anything other than refinance and you have an instant increase in your cash flow. What about your equity? Well again, when interest rates drop, the value of property generally increases, so you’ll have a huge bump in equity instantly. No fixing things up. No replacing windows. Interest rate drops alone can skyrocket your equity. This is in sharp contrast to the world we have been living in since 2008.
When interest rates started dropping from 6% to 5%, then 4%, then 3%, and then somewhere in the mid 2%, it became almost impossible to take advantage of interest rate cash flow and equity bumps. If you bought an investment at 3% interest rate on your mortgage, there was no way interest rates were going to drop to 1% and give you a huge bump in value and cash, but now with high interest rates that everyone knows won’t last forever, people can position themselves to gain big time when rates drop back down.
It’s unlikely that you or I will ever end up on CNN talking about how we made it big, but we certainly can make money if we choose to do so. Most people are still worried about prices falling further and further, but for those who have the horsepower to buy now, I think there will be a great pot of gold at the end of this rainbow.
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