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 40s. In his mid50s, 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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