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How Mortgage Rates Impact Real Estate Investing: Expert Advice from Mike Schroeder
Introduction
In this episode of Investing to Win, I had the pleasure of speaking with Mike Schroeder, a seasoned mortgage specialist from Mortgage Architects. Mike has extensive experience in private real estate financing, working with both business owners and first-time home buyers. His insights into mortgage rates, particularly the differences between fixed and variable rate mortgages, were invaluable. We also delved into how the real estate industry adapts to economic changes, making this a must-listen episode for investors and home buyers alike.
Key Insights
1. Fixed vs. Variable Mortgages: What’s the Difference?
One of the standout topics Mike discussed was the difference between fixed and variable rate mortgages. While fixed rates offer stability with a locked-in rate for the duration of the term, variable rates fluctuate based on the Bank of Canada’s prime rate. Mike highlighted a lesser-known third option: adjustable-rate mortgages, where your monthly payment changes as interest rates change. According to Mike, the choice between these options depends on personal risk tolerance and financial goals.
For investors, Mike pointed out that a variable rate mortgage can save you money over the life of the loan, as historical data shows lower interest payments overall. However, he cautioned that you need the financial flexibility to weather periods of high rates. His advice to investors was clear: understand your cash flow needs and determine how much fluctuation you can tolerate.
2. Penalties: The Hidden Cost of Fixed Mortgages
A crucial piece of advice from Mike was about penalties associated with breaking a mortgage. First-time home buyers, especially, may not realize the potential costs involved if they need to break a fixed-rate mortgage early. Mike shared an eye-opening example where a client was penalized up to 6% of their mortgage balance. This can wipe out profits, especially for those involved in short-term real estate deals, like house flipping.
From my own experience in real estate, I can confirm that these penalties can be a significant financial burden. It’s essential to weigh the pros and cons of fixed versus variable rates, especially if you foresee life changes like moving or refinancing.
Financial Considerations
Investing in a secondary suite requires careful financial planning. While there are upfront costs and renovations to consider, the potential for increased income is significant. Merouane advises a realistic approach to budgeting and rent pricing, emphasizing the need for a conservative estimate to ensure the project's economic feasibility. This careful financial strategy is key to the long-term success of a secondary suite investment.
3. The Impact of Current Interest Rate Trends
Mike also provided an overview of the mortgage rate trends over the past few years. Fixed rates have recently dropped, but variable rates remain high due to the Bank of Canada’s efforts to control inflation. While variable rates typically offer lower costs over time, the current economic environment makes fixed rates more attractive for some. Mike stressed the importance of aligning your mortgage strategy with your financial situation—if you can handle the uncertainty, a variable rate could still be a better long-term option.
4. Real Estate: Still a Good Investment?
Despite the recent rise in interest rates, Mike firmly believes that real estate remains a sound investment. Whether you’re buying your first home or building a portfolio of rental properties, the long-term benefits of real estate—like building equity and wealth—outweigh short-term challenges. He recommends that young investors consider starting with multi-family properties, such as duplexes or triplexes, where rental income can help cover mortgage payments. This strategy allows for quicker growth in real estate without needing large down payments.
From my perspective as a property manager, I agree with Mike. I often see investors overly concerned with short-term cash flow, losing sight of the bigger picture. Property appreciation and principal paydown are where the real gains are made in real estate.
Garret’s Perspective
As someone who has been in real estate for over two decades, I found Mike’s insights incredibly valuable. The discussion on mortgage penalties hit close to home. I've seen too many first-time investors make the mistake of locking into a long-term fixed mortgage, only to be hit with massive penalties when they need to sell or refinance. Mike's advice to avoid these penalties by opting for a variable or short-term fixed mortgage is something I highly recommend.
His recommendation for younger investors to start with multi-family homes is also spot-on. I’ve seen countless investors benefit from this strategy, using rental income to offset costs while building equity. If I had to give one piece of advice to any new investor, it would be to follow Mike’s path of investing early and often, using real estate as a vehicle to financial freedom.
Conclusion
Mike Schroeder’s expertise in the mortgage industry provided listeners with a deep dive into the complexities of mortgage rates and investment strategies. Whether you’re deciding between fixed and variable rates or looking to get into real estate investing, this episode has something for everyone. Mike’s practical advice, combined with his deep understanding of market trends, makes this a must-listen for anyone serious about building wealth through real estate.
If you haven’t already, make sure to listen to the full episode and subscribe to Investing to Win to stay up-to-date with the latest strategies in real estate investing. If you found this post helpful, don’t forget to share it with others who might benefit from these insights.