Podcast Extra: Interesting Interest Rates
Summary
With the CRAZY interest rates going up seemingly every day, I have been asked for help with a skyrocketing mortgage payment. In this special podcast extra, I review WHY the interest rates are going up, discuss how this will impact you as a landlord (or employee or have a fixed income), and what are your options with these unpredictable rates. On today's special podcast let's talk about interesting interest rates!
Listen to full episode :
Full Episode Transcription
Welcome to My Life as a Landlord, where we untangle all things housing and educate the curious. If
you're looking for some entertainment with some honest, awkward conversations, you've come to the
right show. I'm your host, Dr. Jennifer Salisbury. This is my life as a landlord. Welcome to it.
Hello. Hello, and welcome to my life as a landlord. I'm Dr. Jen, your host, your teacher, your guru. I am super.
Well, I'm excited today that you've joined me. I'm kind of sad that I have to do a podcast extra on
interesting interest rates, especially since I've had so many of you reach out to me asking for help on
some of this stuff, on what is going on with these interest rates keep going up, both on the Canadian side
and the US. Side. They're just going up because of inflation, and we'll talk about all of that. So I've
thrown this podcast extra in. It is not in my normal queue. Normally my podcasts come out every
Saturday, but when something comes up, I just throw it in as a podcast extra and it gets aired right away.
So I'm just trying to provide some value instead of making you wait five or six weeks. Here we go. So
let's talk about the interesting interest rates, and here's what we're going to talk about today on this
podcast extra. Why are the rates still going up? Let's talk about why this is happening, how this is going
to impact you. And this is especially true if you are a landlord or you have fixed income or are. 1s You're
working with no wage increase, which is probably the vast majority of all of us, and then what are your
options? What are your options with these interest rates? Especially if you do not have a fixed rate
mortgage locked in at a low rate, you know your payments are going to jump. What do you do? So let's
jump into this. So the rates are going up. They're trying to stop or at least slow down inflation. And they
being the US Federal Reserve, the bank of Canada, trying to stop inflation, meaning they're trying to stop
the rising costs of goods and just everything being way higher price tag in general, including groceries,
including vehicles, gas, basically everything living is getting a higher price. Hence the name inflation.
Now why did this happen? If you are into 1s looking at any of the YouTube videos, there's several
YouTube videos out there that will talk to you about how money works and the actual why this is
happening. But part of this was because of COVID Part of this is because we're living on a fiat currency,
which we'll talk about. Part of this is because we have a huge exit of our labor force in the form of the
baby boomers. Let's talk about this. So the US dollar. Now I understand I've got a lot of Canadian
listeners out there and Canadian listeners. I know the Canadian dollar often follows the US dollar pretty
closely. Valuable? Not right now. It's at about 1.3 Canadian for every US dollar. So when you're in the
States spending money, it's a lot more expensive because you're spending US dollars instead of Canadian
dollars. But for the sake of this, just know that the US dollar is basically it's the base of global trade.
When you go anywhere in the world, I can't say anywhere, a lot of places you will see property listed in
US dollars. And so it has become the global standard of trade, including, like I said, property, gold, oil,
all of those usually get converted to US dollars first, whatever currency they're in. And so they're traded
on the world market in US dollars. And so it's become the US dollar trade. But the US dollar in 1971
came off of the gold standard. And if you don't know what that means, when the US dollar was started, it
was started of if you have. A dollar of currency, then it is worth a dollar of gold, whatever that was
worth at the time. And so there was actually a trade value of something asset based. It was actually
something you could go and you could turn it in and get a dollar for your dollar, dollar of gold for your
dollar note. But in 1971, we came off the gold standard. And when that happened, the dollar was based
on nothing. It was based on confidence, really is what it's based on now. And that's called a fiat currency,
F-I-A-T currency. If you are interested at all in understanding what that is, I encourage you to Google
that term fiat currency. And what ends up happening is you end up printing more money. You end up
printing more money. When you need more money, you just print more money. But as a result, the value
of that currency, in this case the US. Dollar, goes down. But remember, it is the global base of trade, is
the US. Dollar. And so the world doesn't want it to go down, but you just keep printing. And so you get
this inflation. In fact, there's a term called hyperinflation where everything just keeps going up and up
and up because you just keep printing more and more money. And then you add in there the free money
that was given away during COVID The governments were trying to stimulate economies. They were
trying to keep people safe without losing their homes, losing their businesses. They weren't always
successful in that. But there was a lot of government money that was given away. Again, this was like
printing money and handing it out. And as a result, you've got a lot of people that are paying extra money
now for these groceries and these properties. Plus you've got the exit of the boomers. The baby boomers
are exiting the workforce. They're going into retirement. We've got this incredible bank of skilled labor,
these incredibly experienced folks who are now departing the workforce. And millennials are not
entering those same jobs. At the same rate. It's just not happening. And so now what you've got is
you've got this vacuum of these boomers departing. You've got not anywhere near the millennials
entering, and so you've got this labor crunch, which all of us are seeing. All of this is resulting in
inflation. And one of the only ways that the Fed and the bank of Canada, the US. Fed, can try to curb the
inflation is to raise interest rates. And so what they're doing is they're raising the cost of money so that it's
more expensive to borrow money. So they're trying to tighten the money so that the costs will go back
down. How successful are they? I don't know. Even a week ago, the US federal Reserve had raised
interest rates 25 basis points, or that's one quarter of a percent. Basis points is if you're saying 25 basis
points, that's 25 parts of 1% or a quarter of a percent. So if you're saying five basis points, that would be
0.5 of a percent. Hopefully I'm making sense on that. But regardless, the rates keep going up. Everyone's
alarmed, they're going up, and they're going up quickly, which depending on what kind of notes you have
on your properties, this can be alarming, especially if you've got a pending renewal or an upcoming
renewal. So that's why the rates are still going up. But let's talk very. In depth, as in depth as we can
possibly do. This is how this is going to impact you. If you've got a limited amount of revenue coming in,
meaning money you're taking in, whether that's a wage, Social Security, investments, landlording. Let's
say your rents are let's say you have all fixed leases, fixed term leases, and you can't raise the rents. But
let's talk more about this. If your mortgage rates are going up with short terms, this is probably going to
concern you. So here's what this looks like. Usually when someone buys a property, it's a 25. Or if you
bought it a while ago, it might even be a 30 year amortization. Amortization means you've got that length
of time to pay off that note and for that they charge you some interest, they charge you a monthly
payment and whatever are the mortgage terms, when they registered the mortgage, when you bought the
property. But there is also a way that you can have that 25 or 30 year amortization, but you also have a
term period. Let's just call it a term period. It's usually one to five years where you can change the rate
temporarily, if that makes sense, you can change it. So it's usually one to five years and you can
renegotiate the actual balance of the mortgage. This can be a little bit scary, right? Especially if you've
locked in a 25 year or a 30 year loan at 2%. Let's say it was five years ago and it was 2%, but you were
on a five year term and it's coming up to renew and the rates are now at 7%. That's reality. That is
exactly what's coming up. So that means that you've got to renew at a higher rate. That rate, as we can
see, is likely much higher than before, which means the payments are much higher than before. And if
your revenue is set, like your rents are set, your wages set, your investment is set, your pension is set,
whatever it is that is set, you don't have any way to make more money coming in unless you go get a job.
Then how are you going to do this? Further, as a landlord, if your rents are set? You're also battling
this other issue with inflation that no one's talking about. The property values are going up and you're
probably seeing properties around you sell for way more than you bought yours, which is kind of exciting
until you get your insurance bill or your property tax bill. So what happens is your property taxes are
then based on the market value of what the state or province or territory thinks your property is worth.
Well, guess what? If they're selling if the properties around you are selling at a much higher rate or much
higher price than when you bought your assessed value, which is the value that the tax folks will make
you pay taxes on that value, that assessed value is going to be higher, which means you guessed it. Your
property taxes will be higher, even if the rate is not changed, even if your local government doesn't make
any changes at all to the property tax itself, because they can also change the rate of what they charge.
You, but just the value of your home going up or your rental going up, and then the resulting property tax
payment is going to go up. At the same time insurance is going up with different losses and different loss
calculations. Now they're looking at what replacement costs. 1s Replacement cost is what the insurance
company looks like saying if you have a total loss on one of your rentals and you have to rebuild it at
market rate. Market rate for what? You have to go out and find a contractor and rebuild the whole thing.
Replace it as is. Again, at market rate. So market rate of materials, market rate of labor, market rate of
timing, waiting for this contractor to be able to get permits and then build that is what the insurance
companies base their premiums off of is replacement costs. So your replacement costs have gone way up
as well. Isn't that a little crazy twist there? So your replacement costs have gone up. You can probably
guess that your premium calculations will go up as well. So it's sort of a double zinger on your
insurances. So it's not just your interest rate on your mortgage that is going up in this inflation, there are
other factors that are going up as well, including property taxes and insurance. So let's talk about this. If
you're a landlord and you've got rentals and you're in a fixed term lease for your rentals, you potentially
can't cover all of those increased expenses now, right? You might be in a potentially cash flow negative,
meaning the mortgage, the insurance and the property taxes are now higher than the rent amounts that
you're bringing in. Meaning every month you now have to pay to keep those payments is current cash
flow negative. Yikes. So what are your options? We just talked about why the rates are still going up.
We're talking about how this is going to impact you, potentially going to impact you, and then what are
your options? Now, I brainstormed quite a bit with Mike before I did this podcast. And we personally are
in this situation. We actually have several mortgages that are up for renewal. We're at the end of our
term, and so we are seeing a jump from around a 5% interest rate up to closer to seven. And so our notes
are jumping as well. I'm in this exact situation. And so it's a little bit frightening looking at this, going, oh
my gosh, how are we going to do this? And so what are your options? Well, if you are a landlord, can
you give proper notice to increase the rent on tenants? Proper notice. Now, how do you know this? You
go back to your local, state, province, territory, landlord tenant code or laws or residential tenancy act,
whatever is applicable in your local area, where your rental is located, not where you're located, where
your rental is located. And look, read how to properly give notice to increase the rent. Now, it's going to
say in there, if you have a fixed term lease, you can only increase the rent at the end of that fixed term
lease. Very likely. You can only do a rental increase once per year, potentially. But again, every state,
province, territory is different, and I'm talking for both the US. And Canada. So you've got to read in
your local area housing code what is applicable in your area. And then you've got to follow that. You've
got to give proper notice to your tenants. You've got to make sure that this is working. You've got to
do it right as a landlord. Now, here's one of the other things you can do. As you are renewing at these
higher interest rates, you're renewing these notes, you can potentially have an conversation with your
lender, with the lender that has the notes on these rentals. And Mike and I are doing this ourselves right
now. You could potentially approach the lender to consider shifting your amortization out to a longer
lead time again. So what do I mean with that? Okay. Remember when we said you bought the
property with a 30 year amortization, meaning you were going to make monthly payments over 30 years
and pay that principal off or 25 years, whatever is applicable. What you can potentially do is talk to the
lender and say, okay, lender, it's been five years or eight years since I bought the property and now I'm at,
let's say 21 years. I'm just throwing a number out there. It's been some time that you've paid the note
down and say, I'm willing to pay the higher interest rates, the interest rates that they're at now, 6%,
whatever it is. But I'm requesting that you kick the amortization back out to 25 years or 30 years,
whatever they would allow you to go back out. Now, some of you might say, Jen, I don't want to do that.
I want to keep it at 21 years. I don't want to do that. Okay, well, that's fine. You're going to be paying the
higher interest rate, you're going to be paying the higher payment, and you potentially are going to be in a
cash flow negative situation. However, if you can extend the amortization, you can pay that higher
interest rate over a longer period of time, it will bring your payments down a little bit and potentially you
will not be in a cash flow negative. Right. I'm trying to avoid this situation where you as a landlord are
not sure you're going to be able to keep this property. Right. So one of the other things you can do as a
landlord, you could potentially find other ways to generate revenue. Some of the options that you might
consider, you could rent out rooms to students. Some of you are considering, can I do an airbnb? A short
term rental versus a long term rental. We've got a podcast coming up talking about that decision. That
may not be the best decision. We'll talk about the goods and the bads about that. But if you've got to
raise your revenue, there are different ways that you can do that creative, other ways that you can
increase that income. And here's the other option that in the event it just is not going to work. Just plain
Jane isn't going to work. You can sell the property, you can list it for sale. Especially if the market rate in
your area is higher, you might be able to list it for sale. Now, here's the problem with listing it for sale. It
is very likely you might have a problem selling it. Why? What are the chances that the person that's
going to be considering buying your property has to get financing and they're going to go through the
exact same calculation that you are going, oh, my gosh. Now I have to pay close to 7% for now. The
purchase of the property with the rents in place. If they're fixed leases, fixed term leases, the calculations
that they're going to be doing are very similar to the calculations that you have already done. So it can get
a little bit concerning with the options with these interest rates in this podcast extra, 1s it's a little bit
concerning because we are talking about interest rates and inflation itself. 1s Why are the rates still going
up? And how will this impact me? And then what are my options? So here's your call to action. All you
landlords out there, if you are in a renewal situation, I challenge you to have that awkward conversation
with your lender. You need to go there. You don't want to have a problem with making sure that your
mortgage and your bills get paid for the these rental properties. So that's your call to action. Awkward
conversation with your lender. And in this interesting interest rates podcast, I hope you've learned
something. One other call to action. If you're interested, there is a YouTube video. In fact, I was just
thinking this, that 1s I need to look up. It's ray dalio. Let me take a look. Ray Dalio. Here we go. How the
Economic Machine Works by Ray Dalio. If you want to watch this, it's almost like a cartoon esque way
of exactly what I just discussed with you. It's about 31 minutes, it's very animated and it's in a very
simple way on how a fiat currency works, how inflation works. And if you've never watched this before
I've watched this jeez, probably a dozen or more times, I always learn something new. Because what
happens is you watch this video and you can jump in where you are in the video in time now, because
last time I watched this, the interest rates weren't going up, the inflation wasn't going up. Now when I
watch this video, it completely changes because now we're in an upswing. Inflation is hitting, the fiat
currency is raging at the moment. So again, Ray Dalio, how the economic machine works. I highly
recommend you watch it. But the call to action, pick up your phone, landlords, have that awkward
conversation with your lender. You have got to have that awkward conversation. You want to make sure
they're in the loop, especially if you're in concern of a cash flow, negative property or you are concerned
you're going to have to sell the rental. That's it for today. Thank you so much for watching, for listening.
Actually, this is getting recorded on YouTube. The channel is my life as a landlord. And if you want to
watch it, you can see actually my page of notes here. I've even got a little graph so you can see it on the
YouTube channel instead of listening on either Apple podcast or Spotify or directly from the website.
Whatever you're listening from. Thank you so much for joining me today in this podcast extra. See you next time.
Thank you for joining us this week. To view the complete show notes and all the links
mentioned in today's episode, visit our website at www.mylifeasalandlord.com. If you're looking for
educational resources for getting into real estate, investing, becoming a landlord, or even a better tenant,
then I have a page on my website to get you started looking for a solution to the pickle that you're in. I
have suggestions for that, too. You can throw your situation on my Facebook group, My Life as a
Landlord, and let our community help you with solutions. Also, before you go, make sure you subscribe
to the podcast so you can receive new episodes right when they're released. You can either subscribe
right now in the app you're listening to this podcast on, or you can sign up at www.mylifeasalandlord.
com. Thank you again for joining me, Dr. Jennifer Salisbury, in this episode of My Life as a Landlord.
I'll see you next time.