Investors turn to me regularly to express their confusion as to how to choose the right market to invest in . They are exposed to several markets and have a hard time deciding . In some cases , this can lead to “ freezing ” and not ever pulling the trigger , as I have seen many times in our history of rental-home investing .
In order to address this question and other questions about timing , property locations and types , etc ., I have to cover one of the fundamental elements present in rental home investing in the United States . Its importance is so high , it puts these questions into a unique perspective .
I always share my wonder at the phenomenon of the 30year FIXED rate mortgage . The U . S . may be the only country in the world where a loan like this exists . The 30year fixedrate loan is a bonanza ! It ’ s magic . It ’ s incredible .
I was born outside the U . S ., so I speak from experience when I say that if you come from another country and see what ’ s available here , certain things stand out . A 30year fixedrate mortgage is one of them . Americans may take it for granted , but foreigners certainly don ’ t .
When I speak in Europe , my audience invariably stops me when I tell them about fixedrate loans in the U . S . They think I don ’ t have my facts straight . They think it ’ s not possible . Or they think I ’ m just plain crazy . They can ’ t comprehend how , in a country where the costofliving keeps rising , banks will lend money for 30 years where the monthly payment and the balance of the loan never change — except to go down . For anyone from outside the U . S ., this is truly an unbelievable thing . In other countries , loans are indexed to inflation .
To live in a country like the U . S ., where inflation exists all the time , and yet be able to get a loan where neither the monthly payment nor the loan balance ever keep up with inflation ( while everything else in the U . S . economy does ), means inflation constantly erodes the true value of your debt .
I have seen thousands of investors retire powerfully , and they didn ’ t have to wait for 30 years to do it . A typical example is the Silicon Valley engineer who called to tell me that he had bought 11 homes in a couple of our markets when he was in his 40 ’ s . In his mid50 ’ s , all his loans still had
17 years left to go . However , he noticed that the balance of his mortgages was under 30 % of the value of the homes . He sold three homes , paid capital gains tax , and used the proceeds to pay off the other remaining eight small loans . With eight free-and-clear homes , he could retire in his mid50s .
These days we have a very interesting and advantageous window : the interest rates are some of the lowest rates ever . However , inflation is already starting to gain steam . Getting a 30year FIXED rate loan at one of the lowest rates in history , heading into higher inflation , is sweet music to the ears of the savvy investor . Inflation will erode the loan constantly , and the super low rate will cause even the principal payments to start to matter sooner .
I usually say that merely buying good rental homes with 30year fixed loans , and holding them , will change your financial future dramatically within 13 , 14 , 15 or 16 years . It ’ s a longterm investment , but then the life change is very dramatic . With today ’ s interest rates and higher inflation , it ’ s not unthinkable to assume the change may happen in 10 or 11 years .
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