by | 07, May 2022

Refi With Raising Interest Rates?!

This past week, Dan and Anthony were a bit under the weather. So things might get weird this episode… weird like doing a Refi with Interest Rates on the Rise?

We all know interest rates are rising, not by a whole lot, but still… they’re trending up!

So we’ve gotten some questions… How and Why are you doing a Refi when interest rates are going up? Aren’t refi’s supposed to be done when interest rates are lower?

What’s the difference in Single-Family and Multifamily Refi’s?

We unpack all of this and more on this week’s episode of Multifamily Investing Made Simple, In Under 10 Minutes.

Tweetable Quotes:

From the view of return on equity, if you have all this money sitting in your building and it’s just sitting there dead, like it’s not earning any kind of return, that’s not helping you.” – Anthony Vicino

“But in our space, it’s a little bit different. There’s another big incentive to do a cash-out refinance other than the rates.” – Dan Krueger

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** Transcripts

Refi With Raising Interest Rates?

[00:00:00] Anthony: that’s up, everybody. Welcome to multifamily investing. I tried something new there. I don’t know if it worked, but here we go. Hello, and welcome to multifamily investing made simple the podcast. It’s all about taking the complexity out of real estate investing so that you can take action today. I am your host, Anthony mussino of Invictus capital joined as always by Dan.

I wonder where Reed is going to edit this podcast today.

[00:00:45] Dan: Print given him a lot to work with not

[00:00:47] Anthony: a lot to do, hopefully for you, the D dear listeners, you will not notice any of our shenanigan rebuilt. Sometimes right today, Dan and I are a little bit under the weather. And so we’re flying loosey goosey, which means a [00:01:00] lot of editing for our beloved production engineer read.

So read, we love you. Thank you, Dan. What are we talking about today besides the fact that like, we have a hard time staying on topic?

[00:01:13] Dan: Yeah. I mean, I’m on medicine. This isn’t going to be an organized. Okay, listen, I am on date. I

[00:01:22] Anthony: like that. You said medicine, not drugs, like, cause cause if you said I’m on drugs, like that gives me some clickbait.

I can work with Dan Kruger’s on drugs

[00:01:31] Dan: hashtag druggie. Um, no, I think it should be a good one. I think we’re going to talk about something that I think a lot of people are curious about because we’ve been getting a lot of questions from people about this. Um, this is the first time in a long time we’ve seen.

Interest rates rising. We’ve been in this low interest rate environment for a long time. And a lot of people are asking, Hey, why do you guys want to do cash out? Refinances? Well, interest rates are going up. Isn’t the point of cash out refinance to get better [00:02:00] terms and better interest rates like what’s the deal am I answer is, I don’t know.

That’s how my answer. That’s that’s a weird answer. I’ll be honest with a question. Not a good answer. That’s a good question.

[00:02:13] Anthony: Yeah, it is a, it is a good question. It kind of implies that there are different reasons to do a cashout refinance, right? Like I think a lot of residential owners, when they do a refinance there, they’re trying to lock in lower rates to bring down their, their monthly payment.

So that makes a lot of sense. But when it comes to the cash out refinance, it’s a little bit different.

[00:02:33] Dan: We think that’s kind of the main point is the context that people are coming into this concept with, which is, you know, for most people, their experience with doing a refinance is on their personal residence.

And typically the reason somebody is going to refinance their. Excuse me, the personal residence is because there’s better terms available in the current credit market. So maybe you have a 4% interest rate on your mortgage and rates dropped to 3.5%. A lot of [00:03:00] people will do a refinance under lock that in and reduce their monthly payment.

But in our space, it’s a little bit different. There’s another big incentive to do a cash out refinance other than the rates. Obviously, if we can block better rates in that’s great. But the main points on our side with our model with value, add multifamily investing is to, uh, be able to extract some of the equity that we created through our forced appreciation business model.

And so. The main goal is to extract equity, take that out in a non-taxable event and redeployed it into something else. And if we can get better rates, that’s great. But a lot of the time, if the rates are the same or even marginally worse, it’s still worth it to be able to reallocate that capital. And that’s really kind of the crux of the issue.

I think a lot of people are coming in with the context of a, a consumer who owns a home and. And not an investment context. I think that’s, that’s the big, the big disconnect for a lot of people when they’re trying to figure out why the heck are these guys doing cash out refi as well, rates are getting [00:04:00] higher and higher.

[00:04:02] Anthony: So think about it, like from the view of return on equity, if you have all this money sitting in your building and it’s just sitting there dead, like it’s not earning any kind of return, that’s not helping you. It’s not growing your wealth. But if you were to extract that money, let’s say right now, uh, we have some loans in the low 3%.

Right. And then let’s say in two years we go to do a refinance and then the interest rates are in the five or six. You would look at that and you would maybe say, well, wouldn’t my money be better? Like, instead of taking on more debt at the high rate, just leave my money in the building. But no, if we can take that equity out of the building, even at say a 6% loan interest right now, and we can go out and redeploy it in another investment opportunity.

That’s maybe earning 10 or 15 or 20%. Yeah. Everything above that 6% is pure gravy. Right. And so that’s the highest and best use. Now, if we’re in the high teens interest rate market, like we saw in like the late seventies [00:05:00] and eighties where it’s. Interest rate, it was for going from 3% to an 18% loan. Well, the question I have to ask is can we do better than that 18% and find better yield in our returns and an investment opportunity.

And if the answer is no, then the answer is like, don’t do that refinance. Don’t take on that higher debt. But if the answer is, yes, we have better opportunities we could put into, then that’s the highest and best use of the capital. So it’s like a different way of looking at the opportunity cost of your.

[00:05:28] Dan: Yeah. Yeah. I think that that concept is not intuitive for people. And so it helps I think, to hear the logic behind that, uh, multiple times, because it, it’s not intuitive for people who have grown up listening to the traditional kind of financial rhetoric that you hear, which is generally kind of that debt is not about.

However, if you’re able to borrow money at three, four or 5%, and the value of the dollar is dropping at 7, 8, 9, 10%. It almost always [00:06:00] makes sense to borrow money up to a certain point to invest into something that’s going to generate a yield above inflation. Um, And so it’s counterintuitive for a lot of people because we spoke the other night at an event.

And I had somebody come up to me that was chatting about what we’re doing. And he was very interested and he was 19 years old and he was just getting into this, which I’m super excited about because I wish I was looking at, uh, actively investing when I was 19. I was. Drinking, but I was 19. I wasn’t doing anything productive, but this guy was way ahead of the curve.

And he’s kind of thinking like, oh, well, so what do you guys just buy your properties and all cash? I’m like, no, no, no. It makes like, obviously, like that’s half the, that’s the majority of the points. Be honest because we’re able to borrow money today and pay it back at 93 cents on the dollar every year.

You know, into infinity. I don’t know how long inflation is going to stay elevated, but currently I borrow a dollar today. When I pay that dollar back next [00:07:00] year, I’m only giving them 70 93 cents. Uh, because right now inflation is around about seven to 10%. So every dollar I borrow, I only get 97 or 93 cents package once they had numbers, but you’re, you’re paying back pennies on the dollar, but yeah.

Uh, in this current environment, this could, flip-flop entirely like Andy mentioned. We could be in the eighties and breakthrough in the teens and this logic makes no sense whatsoever, but where we’re at right now with inflation outpacing interest rates, yes. A certain amount of debt makes sense. In my opinion, up to about 75%,

[00:07:30] Anthony: you can think about that as well.

From the equity perspective and say for every dollar of equity that you just have sitting tied up in a bill. That’s also losing value. So the next year that $1 is going to be worth 93 cents. Right? And so the more we can get those dollars working and even in asset a and then refinance pull out some of that capital, put that into asset B, do the same thing, rinse and repeat and keep stacking assets.

The better chance that we have of outpacing inflation. And these are, these are tricky concepts to. [00:08:00] It’s a really understand it like a deep, intuitive level. Um, and you have to be careful of course, because there comes a point where, you know, debt is a two-sided, um, blade and it can cut you just as easily as it can, um, serve as a tool to cut down a tree and create a shelter out of, I don’t know that metaphor is gone, but you gotta be careful

[00:08:19] Dan: as are most good things.

I mean, most everything. That’s amazing. Is, uh, only amazing up to a certain point. Access almost always ruins everything. I think. Well, there’s a,

[00:08:30] Anthony: there’s a, there’s a good argument. You made that everything is deadly in excess up to a certain like oxygen is deadly in excess water. All the things that we find necessary to life are deadly in excess

[00:08:44] Dan: a hundred percent.

Yeah. So really it’s. At the end of the day, it’s really a question of opportunity costs. Um, you might be earning 10, 15% where your money is currently at, but are you missing out on 20, 30% [00:09:00] over here? That’s really it that’s. I think the crux of the issue, you want to make sure that your, your capital is being used in the most effective way.

And do it a cash out refinance to reallocate that capital to its highest and best use is really what that’s all about. Yeah. Rates might go up a little bit in that transaction. Uh, there might be a cost to that capital a little bit, but ideally you’re going to be offsetting it and saying, okay. Yes, my money’s currently making 10% in this property, but if I extract some of that money, Pay three, four or 5% interest.

I could actually earn 20, 25% over here. That’s that’s where that makes a heck of a lot of sense, regardless of that, the reason.

[00:09:38] Anthony: So all that’s to say is that the cash out refinance is not currently dead. There, there could be a world that again, like if interest rates go to the moon and there might be a world where that doesn’t make sense, but at the moment it does make sense.

And for the foreseeable future,

[00:09:52] Dan: we saw this after a late, at some point there’s just no capital to go up and nobody wants to, nobody wants to land. Yeah. We’re not there. We’re far from it. I [00:10:00] think

[00:10:01] Anthony: hopefully, hopefully this guy is a guys and gals gave you some value, got some interesting nuggets of wisdom or insights.

Um, If he did then maybe go leave a review. I don’t know. Does that too much? Apparently, because you’re still sitting here listening to this, not leaving a reviews. So I don’t know what it’s going to take to get you to take. Sorry, I got . I’m sorry. I’m sorry. I’m sorry. I still love you guys already. Don’t go and leave a review.

That’s totally cool with us. We appreciate you taking some time to join us and we’ll see you in the next

[00:10:26] Dan: episode.

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