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May 23, 2024 | read

Navigating Lending & Interest Rates: Insights for Investors

Thomas Castelli

The latest episode of the Tax Smart REI Podcast proved to be an enlightening session, featuring Kenny Simpson, a seasoned independent residential mortgage broker and podcast host. The discussion spanned a range of crucial topics, from the intricacies of how lenders evaluate tax returns to strategic tax planning, the influence of depreciation on lending decisions, and the evolving dynamics of interest rates.

This blog post aims to encapsulate the wealth of knowledge shared during the episode, providing real estate investors with a deeper understanding of the lending process and actionable strategies to enhance their investment endeavors.

Comprehensive Analysis of Tax Returns by Lenders

Kenny kicked off the discussion by breaking down the lender’s perspective on evaluating tax returns. He underscored the variance in scrutiny based on the borrower’s profile – from straightforward assessments for W-2 earners to more intricate evaluations for self-employed individuals and real estate investors.

A key takeaway was the importance of net income and the role of depreciation and amortization in the lender’s analysis. Kenny’s insights illuminated the necessity for investors to meticulously prepare their tax documents, ensuring all potential income adjustments are correctly accounted for.

Demystifying Depreciation and Its Effects on Lending

A significant portion of the conversation was dedicated to unraveling the complexities surrounding depreciation.

Kenny clarified a common misconception among investors regarding depreciation’s negative impact on lendability. He explained that experienced lenders recognize depreciation as a non-cash expense and add it back to income.

This discussion reassures investors about employing cost segregation studies to maximize their depreciation deductions without fear of adverse lending outcomes.

Insight into the “Due on Sale” Clause and Subject to Financing

The episode also ventured into the nuances of the “due on sale” clause and its implications for investors considering ‘subject to’ financing strategies.

Kenny shared his expertise on navigating these legal frameworks, cautioning investors about the potential risks and emphasizing the importance of informed decision-making.

This discussion spotlighted the need for investors to remain vigilant and consult with professionals when exploring creative financing options.

The Federal Reserve’s Pivotal Role

Kenny underscored the central role the Federal Reserve plays in influencing interest rates, highlighting how its policies and pronouncements can sway market dynamics.

He discussed the Fed’s cautious approach towards rate adjustments, noting the complex interplay between economic indicators such as inflation, employment data, and global economic events.

Kenny pointed out that the Fed’s decisions on whether to raise, lower, or maintain interest rates directly impact the cost of borrowing, thereby affecting real estate investment profitability.

Interest Rate Predictions and Market Dynamics

Delving into the future of interest rates, Kenny provided a balanced view, acknowledging the challenges in making precise predictions. He outlined several scenarios influenced by economic data releases, such as the Personal Consumption Expenditures (PCE) and the Consumer Price Index (CPI), which the Fed closely monitors to gauge inflationary pressures. Kenny suggested that a combination of slowing inflation and economic softening could prompt the Fed to adjust its stance on interest rates.

Kenny also shed light on the potential for rate reductions, noting that any move by the Fed to cut rates would signal its intent to support economic growth.

However, he tempered expectations by explaining that a single rate cut would not dramatically lower mortgage interest rates overnight. Instead, it could lead to a gradual easing of borrowing costs, providing some relief to investors.

The Impact of Spread and Treasury Yields

An often-overlooked aspect that Kenny elaborated on is the spread between the 10-year Treasury yield and mortgage rates.

He explained that this spread represents the risk premium lenders require over the risk-free treasury rate. Historically, this spread averages around 1.75%, but recent market uncertainties have widened it.

Kenny posited that a normalization of this spread, combined with a potential decrease in Treasury yields, could lead to more favorable mortgage rates for investors.

Strategic Considerations for Investors

Kenny emphasized the importance of staying informed and adaptable in the face of interest rate volatility. He encouraged investors to consider their financing strategies in light of potential rate changes, advising a cautious approach to leveraging and a focus on securing favorable loan terms. For those contemplating refinancing or acquiring new properties, understanding the interplay between Federal Reserve policies, market dynamics, and loan terms becomes crucial.

Building a Strong Support Team

Kenny concluded the discussion by stressing the importance of building a robust team of professionals, including CPAs, realtors, loan officers, and others, to navigate the complexities of real estate investing successfully. This collaborative approach not only aids in addressing immediate financial and legal concerns but also sets the stage for long-term investment success.

Closing Thoughts

The conversation with Kenny Simpson on the Tax Smart REI Podcast offered invaluable insights into the lending landscape, equipping real estate investors with the knowledge to navigate their financial journeys more effectively.

From understanding how lenders view tax returns to strategizing around interest rates and assembling a strong support team, the episode underscored the multifaceted nature of real estate investing.

As the market continues to evolve, staying informed and engaged with experienced professionals will remain key to achieving and sustaining investment success.

Interested in building a strong support team? Contact us today.

Listen to this podcast episode below. 

Disclaimer: This podcast summary was partly generated by AI and may contain some errors or miss key points from the audio recording.