i'm going to show you how the federal reserve and its policies
affect real estate its prices and how we operate our business on a day-to-day
basis
what's going on guys this is Daniel, One half of the Kwak Brothers, now before we
go ahead and talk about how the federal reserve affects real estate don't forget
to like this video and subscribe to our channel guys
really helps us push this video out in the algorithm and it really helps us of
course get this information out to as many
people as possible so they can grow and learn just like you are right now
all right so let's go ahead and talk about how the federal reserve affects
real estate and what we do as investors on a day-to-day basis so
there's three things that we're gonna start with and i call it the big three
when it comes to monetary policy now monetary policy is pretty much how the
federal reserve affects kind of like our whole economy
and you and me on a day-to-day basis but there's plenty of videos out in the
youtube world on what that is and what monetary policy means to you
but the big three is me and you the consumers the banking system and also
last but not least our friendly neighborhood
federal reserve now the way this works is that the federal reserve
loans money out to the bank and that's what's known as the federal
lending interest rate now that is what typically makes the headlines right we
see it on wall street journal on forbes on cnbc
and you know we hear about it all the time and of course unless you've been
living in a cave you know that the federal interest rate right now is at
zero and obviously it's as low as we can go unless we go into
negative rates which that's a whole other topic for a whole another video so
right now the current federal interest rate is
at zero now obviously that interest rate is not the rate that we get from the
banks in the form of commercial loans or residential
mortgages or even helocs right i don't think i've ever heard of an
individual getting a zero percent 30-year mortgage that typically isn't
how it works the way it works is that the federal
reserve loans money out to the central banking system
at a rate which of course we discussed is zero and then in turn
the banking system lends money out to us which right now the average 30-year
residential mortgage is at 2.86 based on our last tuesday's
housing market update video so let's go ahead and put
this into practical terms in terms of real estate where rubber really meets
the road let's say we've got an 8 unit building right here
and we have four people interested in making an offer
on that building and let's say that each of those four people
have a cash flow goal of let's say two thousand dollars a month their hope is
that they're gonna cash flow two thousand dollars a month from that
eight unit building now yes or no will the mortgage payment that they make
to the bank affect their cash flow now obviously the answer is a big
whopping yes the less that payment is to the bank that debt service the mortgage
payment the more that guys like me and you the investors
put into our pockets so here's another question for you guys
if that interest rate is at six or if that interest rate is at three
right which one is more likely going to be
a smaller payment right a lower payment that we make to
the bank obviously the one with three percent
right so the lower the interest rate and this is an obvious truth the lower the
interest rate the lower our mortgage payment is to the
bank now let's say that the interest rate is
at six percent right obviously our payment is a lot higher and in order
for our mortgage payment to be lower what has to change the purchase
price right because the lower the price the lower our mortgage payment is going
to be to the bank so if that interest rate is really high
there's less money that we can offer because we have to meet our cash flow
goal of 2000 or at bare minimum it has to
cash flow positive every single month otherwise we're gonna
be in some pretty big trouble so what does that mean right if the
interest rate is really high and our offer has to be lower because our
mortgage payment has to be at a certain level for us to make money
with this eight unit building what happens if we flip it vice versa what if
the interest rate is really really low well that means
that we can afford to make a higher offer
to that individual with the eight unit building to still maintain
our cash flow goals so what happens when the interest rate
is a lot lower well it happens for all four of those people right all four of
those people are able to make a higher offer because
we're still able to meet our cash flow goal
of two thousand dollars a month well right now the interest rate is at zero
meaning what well it means that a lot of individuals are able to make an offer
that's a lot higher than normal well that's kind of what we're seeing
right now isn't it prices are overly inflated because it's the lowest that
we've ever seen our 30-year residential mortgage
we have a huge price inflation with our residential housing market
right now and the inventory is really really low
and it's the same thing with the example that we're using here with this eight
unit building because not only are those four people
able to offer a higher purchase price the low interest rate
increases what's known as the consumer purchase power
meaning there's more than four people that are going to be interested in that
eight unit building thus increasing the demand and whenever
we see the demand go up typically we see the supply being commoditized
meaning it's worth more because there's more demand surrounding it means more
people are interested so here's a really good
rule of thumb a rule that i use to pretty much help me gauge the
prices based on where the interest rate is at now obviously there's a lot of
factors that go into it but my rule of thumb is for every 0.25
percent that the federal interest rate goes up or down it changes the value of
an asset by 10 now obviously that depends on the
classification but that's pretty much my general rule
of thumb that i like to use especially for middle of the world
multi-family buildings such as class b or upper class c that i use to
pretty much gauge values of certain properties if
you're looking at an overall 10-year market cycle so
hopefully that helps you better understand how the federal reserve
affects real estate don't forget to subscribe to
our channel guys and like this video and share with your friends and family i'll
see you guys in the next