The Landlord Lens - Golden Handcuffs

Episode Date: January 14, 2024

Golden handcuffs are a term used to describe a situation in which someone is financially bound to a job or investment, even if they are unhappy with it. This can be a particular problem for real estate investors and property managers, who often have a lot of capital tied up in their properties.In this episode of Be A Better Landlord, we explain the concept of golden handcuffs in more detail and discuss how real estate investors and property managers can avoid falling into this trap. We also provide tips on how to break free from golden handcuffs if you are already in them.

I'm Jonathan, this is Krista, and we're here to help you be a better landlord. So Krista, there's a term that has been in the news a lot, Golden Handcuffs. What does this mean? Sure, so Golden Handcuffs is actually a term that originated back in the 70s. The idea then was that employers were offering such good benefits that someone might feel very hesitant to leave their job because they would risk losing these great things. nowadays, it's popped up again, mostly because of the housing market. So in this realm, Golden Handcuffs refers to the idea that you own a property and you like that property perhaps or maybe even you're ready to sell it, but you're hesitant because of the

high interest rates and high housing costs. Okay, so it refers to people who are locked in at a lower interest rate, and today's high interest rates mean that they can't move? Exactly. Typically, these folks want to do something with their property. Maybe they've outgrown it. Maybe they're moving themselves. But they feel very trapped, thus the golden handcuffs.

Yeah. So it's a double-edged sword. Some people who may not be able to afford a house may say, oh, boo-hoo. At least you have a property that you own. But for a lot of people, they don't know what to do with that, right? It's exactly true. And there are a variety of things that they could be doing, some of which we are very passionate about. Yes. Which include things like house hacking or, you know, using that established

property as a rental if you can get somewhere else and live there. Because if you have a fixed rate mortgage on that property, if you move out of it and turn it into a rental property, you still have that nice low rate. So at least you could maintain that. Yes, absolutely. And if you are building up your portfolio, it's important to think of interest rates differently. You had a really good perspective on this. Can you talk a little bit about interest rates and how an investor might view that across a spread of properties. Yeah. So as you build your portfolio, thinking of it as sort of an average interest rate across your entire portfolio. So say you have three properties locked in at that nice low, you know, under 3% interest rate that people would kill for nowadays. If you go to

buy a new property and today's rates are, you know, over 8%. That hurts. That definitely stings. But if you look at it as an average across all your properties, it stings a little less, especially if you still factor in rent prices and make sure those are cash flow positive. Good best. Because you can always refinance. That's true. Refinancing can feel very scary because, you know, you've already had this deal locked in. You might not want to change it.

You might be very hesitant. There are a couple of rules of thumb to consider, though. So typically people advise that you wait to refinance until the rate is at least one percentage point lower than what you have currently. However, even a reduction of half a percent is going to impact you positively in the long run and help your bottom line. So don't be restricted based on old ways of thinking. Make sure that you're communicating with your lender. They are on your team and let them know what you're trying to accomplish so that they can help you to that end. Absolutely.

Yeah. Lenders have a lot of really powerful tools. They can plug in all your financial information and tell you, does it make sense to refinance? depending on your loan size, like you said, 0.5% reduction in interest rates could actually be worth it, especially when you're looking at that full 30-year fixed rate. Yes, of course. And, you know, most of this conversation is based on fixed-rate mortgages because those are the things that folks are most comfortable with. If you are a gambler and you're doing something in more of the adjustable rate mortgage situation, more power to you.

That seems very scary to me right now. But, you know, still communicate with your lender. They will be able to figure out what works best for you in that kind of situation. Absolutely. Okay, the thing everybody wants to know, and I'm sure the thing that lenders and real estate agents are so tired of being asked is what's going to happen with interest rates? Are they going to go down? You know, it's hard to say. I checked my crystal ball, very foggy this morning.

Yesterday, interest rates averaged 8.58% for a 30-year fixed rate mortgage. can they sustain that level forever? I would argue not, but I can't see the future. So I don't think that that should hold people back unduly from moving forward with whatever they want to do, whether that's expand their portfolio, become a landlord. There's still so much you can accomplish,

even with this kind of hectic environment in terms of interest rates. And with this hectic environment, if you do have to move your primary residence, you know, that can't be avoided for a lot of people, whether it's for work or a growing family or whatever. but it does give you pause when you have a, let's say, 2.75% interest rate. We're likely not going to get back to that anytime soon. So if somebody wanted to escape the golden handcuffs, how do we need to do it?

Sure. Luckily, there are a variety of things that you can try. So, for example, let's say you are moving. You're moving to Washington, D.C., because you are getting a job there. You could keep your primary property, turn it into a rental. So basically just make sure that you understand your landlord tenant laws for your area. Start looking at different tenants, screen them, get them in there so that they can pay the mortgage. You maintain that nice low interest rate, the mortgage is being paid, and you can find your own property in D.C.

If that isn't exactly the path you want to go down, maybe you want to live in your property, but you just want to become a landlord, you want to increase your revenue. Try house hacking. We have several blogs about house hacking, quite a bit of content because it is such a popular. idea. But if this is the first time you've heard of it, it's the thought that you are living in the same residence as your tenant or tenants, right? So it's really well suited to places that are spacious enough that you have two separate living quarters. If your house doesn't work for that for whatever reason, don't worry. There are still things that you can do. For example, maybe you want to buy more property, even though interest rates are a little bit scary. In order to

combat that, you could take out a HELOC. A HELOC is a home equity line of credit. And basically, you are using the money that you've already paid into your house, borrowing against it, and you can then take that, either do a down payment on another place. You could make renovations on your current place. Maybe you use that money to make it more of a house hacking friendly situation. However, if you do that, I do want to advise helocks are secured loans, meaning that if you default, the lender could foreclose on your property. Don't do that. There are also plenty of fees involved, so make sure you do your due diligence, understand what it would cost to originate the HELOC, any kind of annual fees that come along with it. And there are some rules regarding interest-only

payments that takes up, you know, a period of time. Those are lower payments. And then you can get really hit when that period ends. Payments really balloon. So be strategic. Talk this out with your lender, but that is one way that you can get more money to purchase property or fix up your current property to incur rental revenue. ADUs, accessory dwelling units, are also something that people have recently been adding to their properties, and we just did an episode on that that everyone should watch. Yeah, so you could, in theory, take out HELOC, use that money to build an ADU or to outfit a prefab ADU.

If this sounds like Greek to you, please watch that video. And then you have another source of rental income on the same line. you're bringing none in every month, start to escape the golden handcuffs in time. But in time is really the factor here, right? Unless you're doing something like following the burr method where you're constantly churning through different properties, which is another way to get around this, you should really think about real estate as a long game. This is a long-term investment.

Don't get scared. Just because the interest rates are really high now doesn't mean that they're always going to be. And as long as you have a good pulse on what's going on, when you can refinance, you'll be in a good financial position to either expand your portfolio or just live comfortably with what you have currently. Definitely. You mentioned the Burr method, which is B and 4Rs, and that stands for buy, rehab, rent, refinance,

and repeat. So why is this a good way for people to escape the golden handcuffs? Yeah. So typically people are buying distressed properties, things that are a lot more cost effective than your traditional house. So you get them at a lower cost from the jump, regardless of the interest rate. Then when you're going through, you're rehabilitating them, you're making sure that they're up to snuff. You get someone in there.

Then you refinance. So you are looking at the market, making sure that you're having a good deal in terms of changing over your interest rate. Then you do it all over again. So you are constantly churning and constantly moving, but you don't feel as trapped to one property because you're still filling it. You have people coming in, paying you that income, and you're looking to the next deal. Yeah, definitely a good method.

And one thing we should mention, I think we say it almost every episode, but a great place to start is our rent estimate tool, which is totally free. You can plug in your address. You can plug in your information, beds and baths. It looks at comparable properties and gives you a range that you could reasonably charge for rent. And it's a great place to start because you can look at that versus what your mortgage payment is and see how do we make this cash flow positive. All good information to have and that will make your decisions all the easier when you're trying to move forward. Okay, all this totally makes sense. For people trying to escape the golden handcuffs, I think the biggest thing, as you said, is that real estate investing is a long-term game.

There's a reason that the most popular mortgages are over 30 years. And if you look at house prices over 30 years, they've only gone up. They've gone up a lot. So golden handcuffs can feel like a trap in the short term, but in the long term, you're doing just fine. Absolutely. The longer you hold your real estate, the more value gives you. So don't get freaked out by the short term. The golden handcuffs are an illusion.

You are not trapped. Absolutely. Okay, if you out there have any thoughts about golden handcuffs, if you yourself are wearing golden handcuffs, let us know your thoughts below. Don't forget to subscribe. TurboTenant is the all-in-one platform for landlords to manage their rental properties. From vacancy to tenancy, we have you covered with industry-leading tools and expert advice. Landlord better from anywhere for free at turbotenant.com.