This article is presented by Ridge Lending Group. Read our editorial guidelines for more information.
The year 2024 can feel like a confusing space to inhabit for rookie investors. You have the cash, you have the plan, and you’ve done your research. There remains one big issue: Interest rates that are currently much higher than the historically low rates we had pre-2022.
If you’ve done your research into investment financing, you know that investors pay even higher mortgage interest than regular homebuyers (typically between 0.75% and 1.5% higher). Right now, that is a daunting prospect, with regular mortgage rates still hovering just under 7%.
It may seem like a prudent choice to wait until the much-promised rate cuts, which many real estate experts predict will begin sometime in the summer of 2024 onward. But what if we told you that waiting is a bad idea despite current rates? Moreover, what if we told you that mortgage rates don’t matter all that much if you’re investing in real estate?
Here are five main reasons why.
1. Current Mortgage Rates Don’t Reflect the Value of Your Loan Over Time
When you take out a mortgage on your investment property, ask yourself: Will your mortgage loan be worth the same in a year? How about in five, 10, or 15 years?
The answer is a definite no. Inflation inevitably means that the dollar devalues over time, so the amount of money you borrow in 2024 will actually be worth less as time goes on. There are online tools and apps that can help you calculate the true value of your mortgage loan over the fixed 30-year term (QJO Investment Tool is one and will tell you how much you will actually pay over time). Trust us, you’ll be surprised.
When you see that your mortgage loan depreciates over time (unlike the value of your investment property), you will start to worry less about current interest rates. That seemingly horrendous current 8% just won’t be that big a deal once you’re past the five-year mark.
And we haven’t even touched on property appreciation yet. We’re just talking about the gradual devaluation of the loan.
2. Real Estate Investing Pays Off in the Long Run
Real estate investing is all about playing the long game. Even if you’re planning on flipping and selling properties, we’re still not talking about a get-rich-in-a-week scheme.
The fundamental fact that makes real estate a great investment is that it appreciates over time.
You have a tenant repaying your interest and your loan. Eventually, you sell at a profit. It’s as simple as that. Even if home values begin going down in the coming years, they are so high at the moment that, short of a catastrophic event, real estate will continue to be a profitable investment for the foreseeable future.
The idea here is not to repay the mortgage as quickly as possible, which is what you would want with your own home. You want the opposite: a long-term commitment and the maximum resale value.
U.S. properties are consistently growing in value year over year. Depending on where you’ve invested, home values are still going up by as much as 9%.
The mortgage interest really can’t trump that. An interest rate difference between 0.25% and 1% can work out to be as little as $10 per month, depending on the type and value of your loan. That is vastly insignificant in comparison with the final profit you will make due to appreciation. And don’t forget that as your rental property appreciates, your rental income will appreciate, too.
3. There’s Absolutely No Guarantee Rates Will Go Down Substantially This Year
If you’re waiting for interest rates to go back down to the sweet 4% they were pre-2022, you might be waiting a very long time. While rates are widely predicted to come down at some point in 2024, this could mean only a modest cut. The likelihood of rates reducing below 6% before the end of the year remains low.
In fact, most economists think rates won’t go below 6% before 2025. This is in line with what historically has tended to happen to rates: They go down much slower than they go up.
Think about all the months you could be getting rental revenue from your investment while building equity and having that loan repaid. Moreover, the sooner you buy your first investment property, the sooner you’ll be able to sell at a profit and diversify your portfolio by buying other properties.
4. When Rates Do Come Down, You’ll Be Competing With Regular Homebuyers
Right now, home sales activity is at a 28-year low. That’s actually pretty good news for an investor. It’s not that there aren’t any properties on the market; it’s just that not as many people are buying.
And why aren’t they buying? They’re waiting for interest rates to come down. If you can afford to invest in real estate now, you will have far less competition for affordable properties than you will once buyers feel more confident and create a feeding-frenzy environment.
5. Higher Interest Rates Aren’t Always a Bad Thing From a Tax Perspective
Again, you have to remember here that as an investor, you’ll sometimes have to think differently from a homeowner.
From a homeowner’s perspective, there’s no benefit to higher mortgage rates whatsoever, as the interest just eats further into their earnings. But if you are an investor, the mortgage interest is, in fact, tax-deductible as an expense on your rental income. If you need improved cash flow, those tax deductions from higher interest rates could provide it.
Conclusion
At the end of the day, mortgage rates will affect you differently, depending on how much you’re able to put down on your investment property and the local real estate market.
If you’re not sure how much consideration the rate should be given on a particular deal, it’s time to schedule a call with Ridge Lending Group. We have an extremely diverse menu of loan options for anyone looking to purchase property for themselves or as an investment. Our clients’ success is obviously at the center of all that we do, and we believe that the free education we provide emphasizes our commitment to them and their financial freedom.
This article is presented by Ridge Lending
Ridge Lending Group is a second-generation mortgage company specializing in investment real estate nationwide with an emphasis on education. We have an extremely diverse menu of loan options for anyone looking to purchase property for themselves or as an investment. Our clients’ success is obviously at the center of all that we do, and we believe that the free education we provide emphasizes our commitment to them and their financial freedom. From the extensive educational outlets, live events, videos, one-on-one strategy planning, and more- our clients are empowered with the information and direction necessary to achieve all their investing goals.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
