Knowledge Is Very Powerful, Don’t You Agree? We Can Prepare You To Profit In The High Interest Rate Market To Come.
by Gary MountainI really enjoy history, and when the topic of conversation is history coupled with real estate, then I am in heaven.
You may have read my article entitled “Loans Are A Tool,” which can be found on our website. In that article I discussed several issues to consider about shopping for a loan and the differences between the fixed rate loan and the lowest cost of home ownership which is our “Solid Gold Equity BuilderSM Loan.”
Loans are really just a form of creating capital. The true definition of capital is “land”!
Loans are what create liquidity from the land we own and the capacity to create wealth in order to acquire more land. Hence, I want to attack this topic with history. To illustrate my point, refer to the chart below of the history of interest rates charged for 30 year term fixed rate loans. These annual averages were computed using weekly national rates. For 33 years, from 1972 to 2004, the average interest rate is 9.50%. If you add the total interest rates listed below they will total 313.74 and when divided by 33 years it totals 9.50%.
Now do you feel spoiled? You most likely have refinanced your home in recent years and have a lower rate. If you are our client you have averaged just 6.27% since 1986 with our Solid Gold Equity BuilderSM Loan, currently offered at 1.5% start rate. Our clients have averaged a savings of 3.23% below the market during the same timeframe. California Star Properties has always been a leader in this field. Here is the data chart to examine.
| Thirty-Year Mortgage Rates | |
Year |
30-Year Rate |
1972 |
7.38 |
1973 |
8.09 |
1974 |
9.19 |
1975 |
9.04 |
1976 |
8.86 |
1977 |
8.84 |
1978 |
9.63 |
1979 |
11.19 |
1980 |
13.77 |
1981 |
16.63 |
1982 |
16.08 |
1983 |
13.23 |
1984 |
13.87 |
1985 |
12.42 |
1986 |
10.18 |
1987 |
10.20 |
1988 |
10.34 |
1989 |
10.32 |
1990 |
10.13 |
1991 |
9.23 |
1992 |
8.40 |
1993 |
7.33 |
1994 |
8.36 |
1995 |
7.96 |
1996 |
7.81 |
1997 |
7.60 |
1998 |
6.94 |
1999 |
7.43 |
2000 |
8.06 |
2001 |
6.97 |
2002 |
6.54 |
2003 |
5.82 |
2004 |
5.90 |
So why am I telling you about the past cost of money? History repeats itself! Rising interest rates result in the market contracting. For each 1% interest rate increase, about 10% of the buyers go “out of market” because they no longer qualify to buy the size and lifestyle of the home they want.
As more buyers leave the market, more homes come on the market and as inventory increases the prices will decrease. Higher interest rates result in a change in the buyer’s personality. You will see the “bottom feeders” get very excited and create a feeding frenzy, much like when sharks see and smell blood in the water. It brings them in for the kill. You can be prey or you can be the hunter!
Sellers and buyers can benefit if they are aware of the trends and prepared to make tough decisions. Being well positioned is important. The use of our Real Estate Financial Planning Workbook™ helps you with that positioning in your planning stages. Our consultants are well trained to guide you through this process.
Here is how this information can be used by you to propel you into future profitability. Let us say that today your home has a value of $600,000 and you have a loan balance of 350,000. This means that you have about $ 250,000 of equity in the property. The cost of you allowing the equity to sit in your home is the same cost as if you borrowed it. Hence, if the loans are costing you 7%... then by not borrowing it and leaving it as unused equity you are actually loosing 7% and in this example on $ 250,000 that is $ 17,500 per year! You loose $ 17,500 of real dollars each year the equity is not being used to create more capital. If coupled with inflation you may be losing about 10% a year of your net worth. If you repeat this process and rates go up you loose more money, quicker!
The Government is spending about a ½ trillion dollars a year to pay for the war effort at a pace that it can not continue to support. This is very similar to the spending that went on during 1981-1983. Consider what interest rates did during that time. The only way for our Government to attract more money to fund the spending for the war effort will be to raise the interest rates so that they can attract the foreign investor to buy United States Treasury Bills. If you understand the trickle down theory then you know that supply and demand will take over. Our interest rates will raise and the cost to borrow will increase. If we get a Democratic Congress and Senate then we will see 1981 -1983 all over again. We do not really learn from our mistakes and history just repeats itself.
Clients like you can really benefit right now. You borrow the money at today’s interest rates and you get as liquid as possible. Then, as the market contracts, you are already in a position to make investments and buy at the future reduced prices.
Let's role play and say that you will already be in that “Bubble Bursting Market” that the conventional media says is coming… what will you most likely experience? If you have already refinanced your home and you are liquid then you will have cash to make great buys with. If you’re currently living in a home and it was worth $ 600,000 and it is now worth $ 540,000. No worries -- you are not selling and you got your equity out back when the home was worth $600,000. You will experience a “no loss” position. Then the upside will be the home that you want to buy that was being sold for a $ 1,000,000 will now be selling for $ 850,000 or maybe less as our experience says that the higher priced properties will have a greater percentage of price drop. In either case you will be able to make a better buy and yes for a short time have a higher rate of interest on a loan. You will make money in a down market if you have the right real estate team who knows how to prepare you so that you are liquid and can make investments. Remember that loans are just tools to buy what you want to own.
I do not see any evidence that the “Bubble Will Burst” in the nine bay area counties properties. I believe we are so stable that we will not be affected. However, I do feel that the signs are here… that we are about to be able to capture huge profits in other areas and we are investing where we feel that we will long term receive the greatest profits.
I went through the growth of Santa Clara County in the 1950’s to 1970’s and experienced first hand the whopping profits in the 60’s. Let me tell you that these opportunities are available and that the profits can be real huge in a down market.
I’m going to make a lot of money -- want to travel with me? I have been very rich and very broke and found that rich is so much more fun! In order to travel you need a plan: The Personal Real Estate Financial Planning Workbook. Jon, Vivian, Walt and Gary are all here to assist you.
I am just practicing what I have been doing for 40 years! I am buying properties, then selling them to my investors, developing them out and creating more than was there before me.
We are building homes and condos and providing new homes to meet new market demands.
No, we at California Star Properties don’t really build anything. We just buy the property, create investment opportunity for our clients to own an interest in the investment and then we hire the development team to build it out.
Upon completion we either sell the property or choose to rent the units out for cash on cash returns. Hence, some of our investments are 18-24 months in term and some are five years in term.
We have no loans on our investments we only use real cash so we avoid any interest rate risk. While we do not enjoy the use of leverage we also experience no stress as a result of our choices of investments. We only buy cash flow investments that we can develop and build out for a sale “long term gain.” Alternately, we build for holding a rental investment for a long period of time for cash on cash returns that exceed 10% a year.
As you consider borrowing to make the use of your equity... understand that it is not the cost of the loan that makes the investment a good deal. It is what you can earn from the investment that matters.
